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BACKGROUND
PAPER
October 2011, Number 61
Unemployment Insurance Taxes:
Options for Program Design and
Insolvent Trust Funds
Businesses Face Higher Taxes as States Exhaust Trust Funds and
Incur Interest Payments
By
Joseph D. Henchman
Joseph Henchman is the Vice President of Legal & State Projects at the Tax Foundation. He would like to thank Dr.
William Conerly for his prior work on the subject and his advice, as well as Elsie Watters, the author of our 1981 study
on unemployment insurance. He would also like to acknowledge the valuable research assistance of Sarah Hyon and
Frederick Hubach.
Key Findings
• Unemployment insurance (UI) is a social insurance program jointly operated by
the federal and state government. Employers pay federal and state UI taxes that
fund benefits, with employers paying different tax rates based on their layoff history
(“experience rating”).
• High rates of unemployment and benefits lasting up to 99 weeks have led 34 states to
borrow over $37 billion from the federal government to pay benefits. States are not
expected to repay these amounts for some time and must begin paying interest on their
balances in 2011.
• Businesses are in danger of facing higher UI taxes at a time when private sector hiring
is already at a low level. Some states are already reducing UI benefits or raising taxes.
• States routinely cut UI taxes in good economic times and raise them in bad economic
times, undermining the argument that the program is countercyclical.
• Modest UI reforms should be considered, including eliminating the “firewall” between
administrative costs and benefits, reducing cross-subsidies to high-layoff employers, and
relying more on face-to-face training and advising. More significant reforms that could
be considered include adopting elements of state workers’ compensation programs and
experimenting with individual accounts.
• Economic evidence suggests that extending unemployment benefits increases
unemployment by encouraging “excessive search.”
• States sh