ETS Tax Intelligence: SUI Economic Update
State unemployment insurance (“SUI”) tax rates change year-over-year based on such factors as employer-specific experience, M&A activity, benefit payment inefficiencies, and overall economic conditions. With the issuance of 2016 SUI tax rates now complete, evaluating trends in economic conditions can provide an employer insight into where SUI tax rates are headed in 2017 and beyond.
The average high cost multiple (“AHCM”) is a measure of trust fund solvency as defined by the U.S. Department of Labor. An AHCM of 1.0 indicates that a state has sufficient funds to pay one year of unemployment benefits during an average recession. Thirty-five (35) jurisdictions are not considered adequately funded as of January 1, 2016. If jurisdictions are unable to improve their solvency prior to the next recession, they run the risk of having to borrow from the federal government, potentially subjecting employers to increased FUTA tax liabilities, related surcharges, and increased SUI tax rates. As of January 1, 2016, only three jurisdictions (CA, OH, and VI) continued to have outstanding federal “Title XII” loans, down from 30 jurisdictions as of January 1, 2011.
State Trust Fund: Tax Revenue Expectations
States rely on taxable wage growth after a recession to increase tax revenues for the purpose of paying down federal “Title XII” loans, outpacing unemployment benefit payments, and rebuilding trust fund solvency levels. Although the U.S. has been, and is expected to continue, experiencing overall taxable wage growth due to improvements in the jobless rate (5.0% in March of 2016), increases in state and local minimum wages, and increases in annual taxable wage bases (9.1% average increase from 2012 to 2016), overall tax revenues have been declining over the past four calendar years. When taxable wages are increasing, but SUI tax revenues are decreasing, this suggests employers have been experiencing lower overall SUI tax rates during this post-recessionary period.
States also rely on reductions in the payment of unemployment benefits to improve the solvency of the unemployment trust funds. Average weekly benefit amounts (AWBA) have been steadily increasing (from $303.85 in Q1 of 2012 to $335.17 in Q4 of 2015). However, this increase has been more than offset by reductions in the number of initial claims (from 640,000 in Q2 of 2009 to 260,000 in Q2 of 2016), reductions in the duration of unemployment benefits (20.1 weeks in Q1 2010 versus 15.5 weeks in Q4 2015), and reductions in inefficiencies causing the overpayment of unemployment benefits.
If the current trend in the payment of unemployment benefits continues, states should have a chance to improve the solvency of their trust funds. However, should unemployment benefit payments begin to rise, perhaps because of a recession, states may find themselves borrowing again from the federal government in the form of “Title XII” loans. Employers should continue to monitor SUI economic indicators as they can be used to assess the risk of increasing future tax rates. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog for information on other employment tax matters that might impact your organization.
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