Government Affairs Albany Update
UC Trust Fund Continues to Improve; Department of Labor Projects Solvency Through 2006 and Reduction of Federal UC Tax Rate for NY Employers
New York's Unemployment Compensation Trust Fund balance continues to improve -- mirroring the economic upturn that commenced in the second half of 2003. The Fund's closing balance in 2005 was over $300 million higher than 2004's closing balance. More importantly, the New York Department of Labor anticipates a positive balance at the close of 2006 thereby reducing private sector New York employers' Federal UC tax rate to 0.8% (from 1.4%) via restoration of the full (5.4%)FUTA credit.
How does the interlocking Federal/New York UC Tax System work? And who pays the Federal and New York taxes?
- The UC Trust Fund - and its debt - are the responsibility of PRIVATE SECTOR employers SOLELY.
- Private sector employers in NY pay a STATE UC tax to Albany and they pay a FEDERAL UC tax to the Federal government. NY - as well as the other 49 states - collect their state UC taxes and ship to Washington to be held in trust by the Feds for each of the states to cover their UC claimant checks.
- Whenever a state's UC Trust Fund has insufficient monies to cover its UC claimant checks, the Feds advance to that state the necessary monies from its own Federal tax collections.
- If a state's UC Trust Fund has a negative balance on two consecutive December 31s, then Federal law will require a PARTIAL payback of the arrears. The amount of the partial payback is a small automatic increase of 3/10ths of 1% in the FEDERAL tax rate on the Federal taxable payrolls of private sector employers in the affected state for the upcoming year; but the law does not require actual payment until January 31 of the year after the upcoming year.
- This FEDERAL UC tax increase (due 13 months after a state's second consecutive negative UC Trust Fund balance on December 31) can be avoided if the state -- in this case, New York -- were to increase its own State UC tax on private sector employers to wipe out the ENTIRE amount of arrears by the eleventh of November of the upcoming year.
THIS IS THE IMPORTANT FACT: IT IS THE VERY SAME GROUP THAT PAYS BOTH THE FEDERAL UC AND THE NEW YORK UC TAXES -- namely, PRIVATE SECTOR EMPLOYERS IN NEW YORK.
New York's UC Trust Fund balance was negative on December 31, 2002 and on December 31, 2003. New York could have enacted during the 2004 Legislative session a State UC tax increase of some $1 billion on NY private sector employers payable by 11/11/2004 to have avoided the Federal UC tax increase of $135 million on NY private sector employers due on 1/31/2005.
New York's UC Trust Fund balance was negative on December 31, 2004. New York could have enacted during the 2005 Legislative session a State UC tax increase of some $600 million on NY private sector employers payable by 11/11/2005 to have avoided the Federal UC tax increase of $280 million on NY private sector employers due on 1/31/2006.
Remember, in both cases it is the SAME entity paying the taxes: private sector employers in New York. In one case, the private sector employer pays out of her/his left pocket marked "Federal", and, in the other case, the employer pays out of her/his right pocket marked "New York".
In both years, it made economical sense for New York's private sector employers to pay the LOWER Federal UC tax increase LATER, rather than the HIGHER State UC tax increase SOONER.