Panel Paper: Tax Policy and the Solvency of State Unemployment Insurance Trust Funds

Friday, November 3, 2017
Wrigley (Hyatt Regency Chicago)

*Names in bold indicate Presenter

Stephen Woodbury, Michigan State University and Kenneth Kline, W.E. Upjohn Institute for Employment Research

During the Great Recession, 36 of the 53 state unemployment insurance (UI) trust funds became insolvent, requiring these programs to borrow from the U.S. Treasury to finance regular UI benefits. Treasury loans to the states peaked at $41 billion in 2012, and to speed the repayment of these loans, states either raised UI payroll taxes or reduced weekly benefit amounts and benefit durations (or both), imposing a greater burden on employers during a slow recovery and reducing the adequacy of UI benefits. This paper applies micro-simulation methods using employer-level tax records from Missouri (2004–2013) and Washington (2005–2014) to understand whether and how the payroll tax that funds UI could be modified in ways that would avert future UI trust fund insolvency. We examine increases in the UI payroll tax base, increases in the tax schedule, and modifications to the tax schedule (such as "uncapping"). We find that the effectiveness of different policies depends on the method of experience rating used by a state to set its payroll tax rates. Under reserve ratio experience rating, increases in the payroll tax base are effective in increasing revenue. But under benefit ratio experience rating, the tax base and tax rates must be increased simultaneously to generate adequate revenues. Uncapping the payroll tax schedule is found to be a relatively ineffective means of increasing tax revenues, regardless of the method of experience rating.