Cleveland Fed researchers examine the ways that states managed their unemployment insurance systems in the wake of the recession
The fiscal stability of the unemployment insurance (UI) system in a particular state depends not only on the unemployment rate in that state, but also on the way the state has managed the funding of its UI programs, say researchers at the Federal Reserve Bank of Cleveland.
The US unemployment insurance system is jointly funded by federal and state payroll taxes, but most employers get a sizeable rebate of the federal taxes for paying on time. However, if a state’s Unemployment Trust Fund account becomes insolvent for more than two consecutive Januarys, it will suffer a federal tax “credit reduction,” meaning the rebate will be reduced, placing a bigger tax burden on employers.
The researchers divided states into three groups: states that were never insolvent, states that were insolvent but did not incur the federal tax credit reduction, and states that became insolvent and ended up incurring a tax credit reduction. (Three of the states within the Cleveland Fed’s district -- Ohio, Pennsylvania, and Kentucky -- became insolvent and incurred a tax credit reduction; the fourth, West Virginia, never became insolvent.) Among the researchers’ findings:
- Unemployment rates were substantially higher in the states that incurred federal tax credit reductions.
- Of the states that did not incur a tax credit reduction, some faced insolvency while others did not. A striking difference between the two groups, say the researchers, is the size of their statutory taxable wage base (the amount of an individual’s income on which a tax is levied) which, for solvent states, was almost double that of insolvent states.