A new report from the Tax Foundation examines each of the 50 state’s unemployment insurance (SUI) tax structures based on how “economically damaging” they are, shedding light on how SUI taxes will be impacted in 2021.
The index compares and rates 5 different categories of tax systems, including corporate taxes, individual income taxes, sales taxes, property taxes, and unemployment insurance taxes – which have gone from a relatively unknown tax to a defining factor in how states will be affected by the COVID-19 pandemic.
In the past 15 years, the average SUI tax rate on total payroll across the United States has been close to 0.75 percent, and the average tax cost per employee has been around $350, according to the U.S. Bureau of Labor Statistics.
Highest scoring vs. lowest scoring states
The highest-scoring states identified in the Tax Foundation’s Unemployment Insurance ratings have rate structures with lower minimum and maximum rates, and a wage base equal to the federal level. They also have simpler experience-rating formulas and no surtaxes or benefit add-ons.
The highest rated states with the “least damaging” SUI taxes are:
The lowest-scoring states identified by the Tax Foundation have rate structures with high minimum and maximum rates and wage bases above the federal level. They have more complicated experience-rating formulas and have added benefits and surtaxes to their systems.
The lowest rated states with the “most damaging” SUI taxes are:
How do unemployment insurance taxes work?
State unemployment insurance is a social insurance program operated by both the federal and state governments. Taxes, which vary by state, are paid by employers and used to fund benefits for the recently unemployed.
The Federal Unemployment Tax Act (FUTA) sets a minimum baseline and requires that at least the first $7,000 of each employee’s wages are utilized by the unemployment insurance system. But the real taxed amount varies dramatically state-by-state.
Each state’s SUI system operates differently and determines tax rates for employers on a yearly basis based on multiple factors — including the status of the SUI trust fund and the number of employees a particular employer lays off.
Employers are classified as a “new” (or nonrated) employer for a period of 1 to 3 years and are assigned a new employer rate before becoming eligible for a rate based on experience. At this point, tax rates are calculated based on the employer’s layoff rates.
The practice of determining rates based on layoffs is known as “experience rating,” and it can be a vicious catch-22 — particularly during a pandemic where financially challenged employers depend on layoffs in order to stay afloat.
As employers layoff staff in an attempt to cut costs, they face increased SUI taxes which cause them to fail sooner, a phenomena known as “the shutdown effect.”
State-by-state tax rates:
The report’s ratings are based on the two factors that determine SUI rates: rate structure and taxable wage base.
Minimum Tax Rates: Tax rates determine how heavily an employee’s wages will be taxed. Hawaii, Iowa, Kansas, Missouri, and Nebraska all have zero percent minimum tax rates, while Pennsylvania’s 2.39 percent tax rate is the highest minimum in all the states.
Maximum Tax Rates: The maximum tax rates in effect for 2020 span from 5.4 percent in Alaska, Florida, Idaho, Nebraska, Nevada, New Jersey, and Oregon up to highest of 14.37 percent in Massachusetts.
Taxable wage base: The unemployment taxable wage base is the maximum amount of earned income upon which employers must pay unemployment insurance taxes on. It varies from state to state but must be at least $7,000 as determined by FUTA.
For example, California’s taxable wage base is $7,000, in line with the federal taxable wage base. This means that an organization doing business in California only pays SUI taxes on the first $7,000 of each employee’s wages. Washington on the other hand has the highest taxable wage base, requiring employers to pay SUI taxes on the first $52,700 earned by each employer.
About the Author
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others.