Tax Edge

By Robert Steere, Toolkit Staff Writer

The annual extension of the 0.2 percent surtax paid by employers pursuant to the Federal Unemployment Tax Act (FUTA) has been linked to another expansion of the Emergency Unemployment Compensation (EUC) program in HR 3548, passed by the House of Representatives on September 22. The legislation, entitled the Unemployment Compensation Extension Act of 2009, was introduced by Representative Jim McDermott of Washington, and passed in the House on a vote of 331 to 83.

Including the surtax of 0.2 percent, the overall FUTA tax rate stands at 6.2 percent instead of 6 percent. The surtax has routinely been extended from year to year since first being imposed in 1988. In actuality, the 0.2 percent surtax accounts for approximately 25 percent of FUTA tax collections. Because the federal tax is offset by a credit for state unemployment taxes paid up to 5.4% on the same wage base, the net FUTA rate is really 0.8 percent with the surtax included. The cost of the 0.2 percent surtax to employers is equal to $14 per employee, and it provides nearly $2 billion in revenue annually.

HR 3548 expands the existing EUC program to provide up to 13 more weeks of emergency unemployment compensation benefits for unemployed workers in high unemployment States. This brings the total amount of potential EUC benefits for unemployed workers to 46 weeks--this in addition to the 26 weeks of basic unemployment insurance (UI) benefits and 13 to 20 weeks of extended UI benefits. This means that in high unemployment States, unemployed workers could be eligible for up to 92 weeks of unemployment benefits--doubling the number of benefit weeks allowed prior to enactment of the EUC program on June 30, 2008.

High unemployment States are defined (for purposes of this measure) as those having a seasonally-adjusted, three-month average total unemployment rate of 8.5 percent, or a 13-week insured unemployment rate above 6 percent. At this time, the legislation affects the District of Columbia, Puerto Rico and 27 states: Alabama, Arizona, California, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Maine, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Carolina, New York, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Washington, West Virginia and Wisconsin. More states could soon be included in the program as unemployment rates continue to rise.

Passage of the measure would immediately benefit an estimated 314,000 unemployed workers will exhaust their unemployment benefits by the end of September. By the end of 2009, estimates indicate that as many as one million unemployed workers will run out of unemployment benefits if no action is taken.

According to a summary provided on Representative McDermott's web site, the legislation will not add to the deficit, as the one-year extension of the FUTA surtax more than offsets the $1.4 billion in added costs for expanding EUC benefits. This is a specious argument, however, as the surtax is routinely extended and is needed more than ever to cover the already exploding costs for unemployment benefits under both the original UI program and the EUC program. To suggest that it is available to cover the cost of new spending is illogical.

So far, the measure has not drawn significant partisan opposition. There is an expectation among many that it will pass the Senate, given current economic circumstances. The nation's unemployment rate continues to rise, the economy continues to shed jobs, and the total number of jobs lost since the recession began in late 2007 is nearing 7 million.

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Posted October 3, 2009.