Revenues
Increase Taxes That Finance the Federal Share of the Unemployment Insurance System
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | |||||||||||||
| Increase the net FUTA rate to 0.8 percent | 1.1 | 1.4 | 1.4 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 6.8 | 14.4 | |
| Increase the FUTA base to $14,000, index the base to future wage growth, and decrease the net FUTA rate to 0.33 percent | 4.0 | 8.2 | 2.5 | -2.8 | -0.6 | -2.6 | 0.1 | 0.2 | 0.3 | 0.4 | 11.2 | 9.6 | |
Notes: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.
FUTA = Federal Unemployment Tax Act.
The unemployment insurance system is a partnership between the federal government and state governments that provides a temporary weekly benefit—consisting of a regular benefit and, often during economic downturns, extended and emergency benefits—to qualified workers who lose their job through no fault of their own. Funding for the federal portion of the unemployment insurance system is drawn from payroll taxes imposed on employers under the Federal Unemployment Tax Act (FUTA). FUTA taxes are levied on each worker’s wages up to $7,000 and then deposited into several federal accounts. That amount is not adjusted, or indexed, for inflation and has remained unchanged since 1983. The FUTA tax rate is 6.0 percent, reduced by a credit of 5.4 percent for state taxes paid, for a net tax rate of 0.6 percent—or $42 for each employee earning at least $7,000 annually. On January 1, 1976, a surtax of 0.2 percent went into effect, raising the total FUTA tax rate, net of the state tax credits, to 0.8 percent—for a maximum of $56 per employee. However, that surtax expired on July 1, 2011.
This option includes two alternative approaches that would increase revenues from unemployment insurance taxes by roughly the same amount over the next decade. The first approach would leave the FUTA tax base unchanged but would raise the net FUTA tax rate by reinstating and permanently extending the 0.2 percent FUTA surtax. The second approach would expand the FUTA tax base but decrease the tax rate. Specifically, the approach would raise the amount of wages subject to the FUTA tax from $7,000 to $14,000 in 2015 (and then index that threshold to the growth in future wages), and it would reduce the net FUTA tax rate, after the 5.4 percent credit for state taxes paid, to 0.33 percent.