In the never-ending stream of reasons why Ohio’s broke and broken unemployment insurance (UI) system needs fixed, one more has been added to the list—employers in states with low state UI trust fund balances could face higher federal unemployment taxes (FUTA). In President Trump’s FY 2019 Budget, there is a proposal that would increase FUTA taxes over a ten-year period by about $22 billion. This proposal would mainly target employers in states with low balances in their state’s UI trust fund and require higher UI taxes in those states. Ohio would likely be one of those states due to our UI trust fund levels and the fact that meaningful changes to address problems in the system have not been made.
Ohio’s UI system is based on two taxes. The state unemployment tax (SUTA) and the federal unemployment tax (FUTA). The FUTA is a flat tax that all employers pay on each employee that is a percentage of the first $7,000 in wages. The FUTA rate is 6% but employers in states that are in good standing, no outstanding federal debt or compliance issues, receive a credit of 5.4%. This makes the effective rate for employers when the state is in good standing .6% of the first $7,000 in wages, or $42. However, that credit begins to ratchet down when there are problems. For example, during the last recession, Ohio took out $3.4 billion in loans to pay benefits and did not repay the loans within the two-year grace period. This led to a ratcheting down of the FUTA until, at its highest, the rate was 2.1% or $147 per employee. This would apply to all employers whether they laid an individual off or not as opposed to the SUTA, which is based on prior experience and utilization of the system.
The proposal would reduce the offset credit in states that have low UI trust fund balances, similar to what happened after the last recession, to force states to build up trust funds that would be more in line with the Department of Labor’s (DOL) recommended solvency guidelines. Thus, it is imperative that Ohio fix its UI system woes. To do this, there needs to be a balanced approach that addresses both what is paid into the system by employers and what is paid out in benefits. So far, HB 382, would institute permanent tax increases on employers and all working Ohioans while providing only temporary benefit reductions. In total, this HB 382 would equal, through 2030, a tax increase of $2.8 billion on employers, a newly instituted tax of $1.6 billion on all working Ohioans, and only $1.3 billion in mostly temporary benefit reductions. So, $4.4 billion in tax increases and $1.3 billion in temporary benefit reductions isn’t very balanced.