The White House has a problem: State unemployment funds are shrinking. And the Obama administration has decided that an increase in the wage base for the Federal Unemployment Tax Act tax is the way to fix the problem.
In a nutshell, the White House is proposing that the wage base for FUTA tax paid by employers be increased from $7,000 to $15,000.
Under current law, employers pay 6.2% in taxes on the first $7,000 of earnings paid to each worker — a level that’s been in effect since 1983. If the proposal becomes law, an employer’s maximum FUTA contribution per employee would increase from $434 to $930. The increase would go into effect in 2014.
Even with the delayed effective date, several congressional Republicans said an increased cost for employers could hurt the economy and job growth. House majority leader Eric Cantor of Virginia suggested immediately suspending the FUTA tax and making up the difference — $7 billion — with spending cuts.
How bad is the problem?
At least 30 states have exhausted their unemployment funds and have had to borrow $41 billion from the federal government. The biggest borrowers:
- California
- Illinois
- Michigan
- New York
- Pennsylvania
If Congress and the administration make no changes in current law, the borrowing states will start paying interest on the loans in September. Where will they find the money? Most states don’t want to raise taxes on workers, so employers likely would see a special assessment — meaning it’s a pick-your-poison predicament for businesses: pay the state or pay Uncle Sam.
Would the increase be temporary? Economists say it’ll take about decade for states to climb out of the hole.