Legislative Memo


S.6484 (Vellella, et al.)



Unemployment Compensation: no tax imposition



March 18, 2002


Senate bill number 6484 (Velella, et al.) would charge ALL (private sector taxable and non-taxable) unemployment compensation claimant check amounts paid to claimants receiving payments as a direct result of the terrorist attack on the World Trade Center to the General Account of the Unemployment Compensation Trust Fund rather than separate employer accounts as provided by law.


Unemployment Compensation benefits in New York are fully funded by employers themselves, that is, there is no employee contribution nor government subsidy.

Non-profit organizations and governments have the option to elect NOT to pay UC tax, rather, they reimburse the UC Trust Fund for the benefit checks actually paid to their former employees. Generally, non-profits and governments universally make the election NOT to pay UC tax. This is so because it fundamentally is a cheaper option to reimburse since UC taxes are designed both to: 1) force private sector, for-profit employers to OVERpay in their "experience-rated" tax rate, i.e., pay a UC "experience-rated" tax rate notwithstanding that the private sector employer has a positive account balance (paid in more in "experience-rated" dollars than its former employees have collected in benefits) and 2) require private sector, for-profit employers to pay ADDITIONALLY a "subsidiary tax" for which the employer receives no credit to its UC account. {This akin to walking into a bank with two deposit slips -- one deposit to be credited your own savings account and the other deposit to be used for the general welfare of the bank.}

New York's UC Trust Fund essentially is comprised of two parts:

1) the aggregate of all individual employer accounts and

2) the General Account.

The aggregate of all individual employer accounts is quite positive; however, the General Account is bankrupt and awash in red ink (some multiple billion dollars negative).

The General Account is funded by the additional "Subsidiary Tax" which is imposed on private sector employers. While the Subsidiary Tax has a range of tax rates, its overwhelming bankruptcy (with no hope of solvency) has set the Subsidiary Tax rate at the maximum for the past decade.

This enormous bankruptcy of the General Account has eroded the overall Trust Fund balance to the 0.5% -0.99% level on December 31, 2001. This low level triggered the four-tenths increase ($34/person employed) in the "experience-rated" tax rates for 2002. Notwithstanding the "experience-rated" tax increase, the cyclical nature of the Trust Fund led to New York taking a cash advance from the Federal government in February in order to meet benefit payout. Moreover, it is projected that the UC Trust Fund will have a yet lower balance on December 31, 2002 triggering a further increase in "experience-rated" tax rates and the possibility of further cash advances from the Federal government.

When UC benefit checks are given to a claimant, the check amounts are charged back to the former employer; if a taxable employer, then to that employer's UC account which, in turn, drives that employer's "experience-rated" tax rate; if a non-taxable employer, then for reimbursement to the UC Trust Fund by that employer.


Charging benefits to the General Account, as proposed by S.6484, is an unsound and questionable accounting procedure. A proper auditor would not advocate a futile paper transaction charge against an account that is overwhelmingly bankrupt and whose funding source -- the Subsidiary Tax -- is maxed out (that is, there is no money in the account to cover the charge and the charge can not generate additional Subsidiary Tax monies into the bankrupt General Account). What this non-charging of the employers' accounts WILL DO is depress (lower) the tax rates of some of these employers which reduces "experience-rated" tax collections -- at a time when UC tax monies are highly needed -- and lowers the balance of the UC Trust Fund which could trigger yet another column shift and an additional "experience-rated" tax rate increase of 0.2% ($17). The real solution is to await the Federal government honoring New York's request to be reimbursed by the Federal government for the estimated $266 million in benefit payout directly due to the attack on the United States of America -- not a futile paper charge against a bankrupt account that will reduce necessary revenues into New York's UC Trust Fund.