ETS Tax Intelligence: SUI Tax Rates in 2018 and Beyond
State unemployment insurance (“SUI”) tax rate risk can be broken down into two primary components, those that employers can control and those that employers cannot. For those factors that employers can control (i.e., unemployment claims and tax rate management programs), they should make every effort to do so. For those uncontrollable factors, employers should attempt to understand the impact such factors can have on future SUI tax rates. Forecasting SUI tax rates beyond the next rate year is difficult because of the number of factors associated with 53 different taxing jurisdictions. This issue of Tax Intelligence will focus on the macro-economic factors potentially having influence on SUI tax rates in 2018 and beyond.
SUI tax rates have moderated in the last few years and this trend is expected to continue in the near-term. However, the U.S. unemployment insurance system continues to be seriously underfunded due to the large amount of unemployment benefits paid during the Great Recession. This factor coupled with the normal U.S. recessionary cycle which occurs about every five to seven years could contribute to increases in unemployment tax rates in 2018 and beyond.
For the past five years, the average SUI tax rate in the U.S. has been on the decline (from 3.48% in 2012 to 2.51% in 2016)1. With the average SUI tax rate at an estimated 2.51% in 20161, rates are expected to flatten out around this range until the unemployment or jobless rate begins to rise. The expectation is that the average SUI tax rate will not revert back to the average rate of 2.24% experienced in 20081. Even as SUI tax rates flatten out, economic and taxable payroll growth from new hiring and rising wages has increased the amount of tax revenues going into the state unemployment trust funds. This has enabled several states with significant federal loans (i.e., “Title XII” loans) to repay the federal government and begin restoring SUI trust fund levels.
The most impactful macro-economic factor that drives SUI tax rates is the U.S. unemployment rate. If a recession were to occur in early 2017, by way of example, we would expect rates to increase in 2018 and beyond to fund the payment of unemployment benefits. The extent of any increase would be dependent on the intensity of the recession during the first half of 2017 (just prior to when most SUI tax rates are calculated) and expectations of the recession’s length. However, it is expected that taxing jurisdictions will react more quickly than they did with the Great Recession due to the current solvency levels of the SUI trust funds. Thirty-five taxing jurisdictions had an average high cost multiple (“AHCM”) below 1.01 per the 2nd Quarter 2016 Unemployment Insurance Data Summary published by the U.S. DOL. The AHCM is used by the U.S. DOL as an indicator of a taxing jurisdiction’s ability to pay benefits for one year of an average recession. An AHCM of 1.0 indicates a state is deemed “fully funded.” As a result, a number of states have tied their SUI tax rates to the AHCM.
The direction of SUI tax rates in 2018 and beyond is but one component of an employer’s unemployment tax costs. Other factors must be taken into consideration when attempting to forecast where overall unemployment tax costs will be in the near-term:
- The average annual SUI taxable wage base has been on the rise and is expected to continue at an estimated rate of 2.50% per year.
- Special add-ons to SUI tax rates or separate assessments can increase an employer’s overall tax costs.
- The repayment of Title XII loans has significantly reduced unemployment tax costs by eliminating an employer’s requirement to pay additional federal unemployment tax known as “FUTA credit reductions.”
- Taxing jurisdictions have been reducing maximum durations and average weekly benefits to assist in meeting trust fund solvency goals.
- “UI Integrity” laws have been put in place in an attempt to reduce improper payment of benefits to assist in meeting solvency goals.
When attempting to predict or forecast where SUI tax rates will be in the near and intermediate-term, it is prudent for employers to focus on each taxing jurisdiction in which the employer has significant payroll—where there is the greatest exposure to SUI tax rate volatility. Equifax can assist employers in keeping informed on uncontrollable macro-economic factors that can impact future SUI tax rates as well as implement controllable claims and tax rate management programs. 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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