As Congress considers tax cuts, it should consider repealing a payroll tax increase enacted last year, say Heritage Foundation analysts. The Taxpayer Relief Act of 1997 extended a little-known payroll surtax in the Federal Unemployment Tax Act (FUTA) that was scheduled to expire at the end of 1998.

Last year, Congress extended the FUTA surtax through 2007 and raised the ceiling on federal trust funds. As a result, the tax burden on American workers has hit an all-time high, and unneeded surplus unemployment taxes are piling up. Like Social Security payroll tax revenue, FUTA revenue in federal trust funds is spent as general revenues; the money is not set aside for the federal Unemployment Insurance (UI) system.

The current FUTA tax rate of 0.8 percent on the first $7,000 of wages consists of a permanent tax rate of 0.6 percent and a temporary surtax of 0.2 percent. The surtax was passed in 1976 to restore depleted UI trust funds and was set to expire in 1987.

• Since 1987, however, it has been extended five times -- despite having accomplished its goal -- and is now set to expire at the end of 2007.

• As a result, federal UI trust fund balances ballooned from $4.9 billion in 1987 to $19.1 billion in 1997.

• And because of last year's extension of the surtax, trust fund balances are forecast to explode to $41.6 billion at the end of fiscal year 2003.

Legislation to repeal the surcharge and reform the UI system would let workers and businesses keep $8.1 billion more of their money over the next five years -- just 1.6 percent of the projected budget surplus.

Source: Mark Wilson, "How Congress Can Lower the Cost of American Jobs," Backgrounder No. 1213, August 14, 1998, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.