NCPA - National Center for Policy Analysis

The Federal Job Tax And Unemployment Insurance

September 26, 2002

State unemployment insurance (UI) taxes pay cash benefits to workers and the states administer the UI programs. The federal government collects an additional unemployment insurance tax (FUTA, after the Federal Unemployment Tax Act) of 0.8 percent that is supposed to be returned to the states to pay administrative expenses, the "federal share" of extended unemployment benefits and loans to states that run short.

However, less than half the FUTA tax funds are returned to the states.

  • Only 46 percent of the dollars collected from workers by the federal government were expended for unemployment programs in 2000, the most recent year for which data are available.
  • The states collected more than $20 billion in unemployment insurance taxes in 2000.
  • The additional FUTA tax comprises nearly a third of the total funds that could be made available for state programs. [See Figure II.]
  • Over the years, the federal government has diverted $30 billion of FUTA funds to other spending.

If the tax were repealed, the states could cover their own administrative expenses with a tax averaging only 0.4 percent of wages. (The exact amount of the tax would vary from state to state.) And the states could fund extended unemployment benefits themselves.

Under current law, states cannot make trade-offs between administrative and benefit funds. Without FUTA, states could more rationally allocate resources to help the unemployed -- and reduce the cost of unemployment insurance.

Source: William B. Conerly, "Repeal The Federal Job Tax," NCPA Brief Analysis No. 418, September 26, 2002, National Center for Policy Analysis.


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