UI Tax Rates, Federal Borrowing and 2013 Reforms
February 18, 2015
Contact: Lev Ginsburg
We have received a number of calls from Business Council members regarding their recent unemployment insurance tax bills. This memo provides background on the state’s UI fund, the 2013 UI reform legislation, and how this should affect future UI tax levels for New York employers.
In short, these increased taxes are for repayment of borrowing by the state’s UI fund. And while no tax increase is welcomed news for an employer, this particular increase is temporary and will reduce overall costs in the near term.
Despite its reputation for high taxes, New York historically had one the lowest UI taxable wage bases of any state and fairly low UI tax rates. These lower rates ultimately resulted in insufficient revenues to the state’s UI trust fund to finance benefits during the 2009 national recession. The result was $3.5 billion in borrowing from the federal government starting in January of 2009.
This was not a problem unique to New York, as numerous states joined us in borrowing money from the federal government to cover UI benefits. By 2011, states collectively owed more than $47 billion. States are charged interest for the borrowed money, although the interest payments were waived through 2010. The interest rate for 2014 was 2.38 percent.
Typically, these federal borrowings are repaid through the federal UI tax paid by employers. The Federal Unemployment Tax Act (FUTA) rate is 6.0% and employers can typically deduct up to 5.4% when they pay state unemployment taxes. However, when a state owes money to the federal UI trust fund for more than three years, employers in that state see their FUTA credit reduced, and may face additional federal UI tax surcharges, with the extra tax payments used to repay the federal UI debt. While New York successfully applied for and received a waiver for the surcharge for 2014, employers will still see a reduction in the FUTA credit and will pay at a FUTA tax rate of 1.8% for 2014, which is .6% less than it otherwise would have been.
Because of the increased tax payment resulting from the reduced FUTA credit, it was projected that New York’s federal UI debt would be repaid, with interest, by 2018.
In an effort to expedite repayment of New York’s federal UI debt, ultimately reducing the interest and surcharge costs borne by employers, Governor Cuomo proposed and passed legislation in the FY 2014 budget to increase the taxable wage base and eliminate the six lowest tax brackets in the state's UI tax table. The wage base increased to $10,300 in 2014 and will increase incrementally to $13,000 in 2026, and to 16 percent of the average annual wage in subsequent years.
The Business Council supported this plan as a reasonable compromise that would speed up loan repayment while moderating state-level UI tax payments and protecting business’ short-term cash flow, ultimately resulting in lower aggregate repayment costs.
As a result, New York’s federal UI debt will be repaid several years early, in 2016, saving employers an estimated $200 million in reduced interest payments. Once the federal loan is repaid, New York employers will again receive their full FUTA tax credit; and once the state’s UI fund regenerates a positive balance, state UI tax rates will be reduced across the board.
The 2013 reform package also increased the minimum weekly UI benefit from $64 to $100 and the maximum benefit from $405 to $420. These amounts gradually increase each year.
These benefit increases will be offset by additional reforms supported by The Business Council, including:
- an increase in the income required to become eligible for UI benefits;
- elimination of charges to an employer's UI account in instances where they terminated an employee for misconduct or an employee voluntarily resigns, and that person is laid off from a subsequent job;
- increased earnings necessary to requalify for UI benefits when an employee voluntarily separates from employment without good cause, is terminated for misconduct, or who refuses a reasonable offer of employment; and
- expanded work search requirements that require claimants collecting benefits to conduct weekly work search activities.
Overall, this UI reform package was projected to provide $400 million in total program savings for employers.
We have continued to work with the Administration to improve the UI system for employers. Most notably, the Business Council took a lead role in reforming the rules for unemployment insurance hearings to make them fairer for employers who contest a claimant’s unemployment insurance eligibility.
Please feel free to contact me with any questions or comments on this issue. I can be reached at 518.465.7511, x 207 or email@example.com. Thanks.