Brookings Institute: State and Federal Unemployment Taxes are Regressive so Let’s Raise Them

Two weeks ago in a roundtable talk sponsored by The National Academy of Social Insurance Gary Burtless of the Brookings Institute said the unemployment payroll tax is a scandalously regressive tax on workers.

He’s right, except for one tiny problem: The unemployment tax is not a tax on workers at all.

Burtless glosses over this critical fact in his diatribe against what he calls the unemployment insurance payroll tax (UI) scandal:

Most of you know that employers pay a statutory UI tax for each employee on their payrolls. In principle, this tax is related to the worker’s earnings. Employers pay a tax on wages below an annual ceiling called the “taxable wage base”. The tax base is so low that it is equivalent to a poll tax on each employee rather than an earnings-related tax.

Right now the federal minimum wage is $7.25  per hour. That means a minimum-wage worker who works 2,000 hours a year earns $14,500 a year. How many states have a “taxable wage base” lower than the annual earnings of a minimum-wage worker? The answer is 32. In other words, in two-thirds of American states employers pay exactly the same UI tax for a minimum-wage worker as they do for their CEO.

In seven states, employers pay the maximum UI tax for minimum-wage workers who are on half-time schedules. That is, a person earning the minimum wage who works an average of just 20 hours a week pays the maximum UI tax.

It is fair to say a tax that is identical for a minimum-wage worker and a CEO is a seriously regressive tax.

It takes him a while, but Burtless finally explains why he considers the UI tax to be a tax borne by employees and not employers (parentheses his, emphasis mine):

(More precisely, the worker’s employer pays the tax in the worker’s behalf. However, most labor economists, including me, believe that all (or nearly all) of the burden of the UI payroll tax falls on workers. In the absence of the UI program and the UI tax that funds it, employers would pay their workers a higher wage, and the increase in employees’ wages would be approximately the same as the current UI tax.)

Here, Burtless admits, albeit parenthetically, that the UI tax is a tax imposed on employers, but he dilutes that admission by saying that employers pay the tax “in the workers’ behalf.”

He’s wrong. The employer pays the unemployment tax in its own behalf because it’s a tax on employers, not employees.

He further qualifies his admission later in his speech when he says,

As the taxable wage cap has fallen in relation to the average wage, a larger and larger percentage of the tax is falling on the wages of workers with the lowest wages.

This, too, is misleading as it implies that the workers themselves are being burdened with the UI tax. They are not.

Finally, listen to what the state of Florida has to say about who pays the UI tax:

• You, the employer, pay for unemployment compensation through a tax managed by the Florida Department of Revenue.
• It is one of your business costs.
• Workers do not pay unemployment tax.
• Employers must not make payroll deductions for this purpose.
• The consumer bears this cost in the price of the goods or services you sell.

Unemployment Tax Calculation: Florida Example

Let me give you an example of the way the unemployment tax works in Florida:

Greed Incorporated has eight full and part time employees and a total payroll of $320,000 as follows:

Florida’s UI tax wage base is $7,000. All but one of Greed’s eight employees make more than $7,000, therefore Greed must pay unemployment tax to the state in an amount equal to it’s UI tax rate (experience rate) multiplied by $49,000 (7 employees x $7,000). In addition, Greed must pay a tax attributable to Aaron Henry’s actual (because they are less than the $7,000 wage base) wages of $5,000.

Thus, assuming Greed’s UI rate is 3%, it will have to pay the state of Florida unemployment taxes calculated as follows:

Unemployment Tax and Setting Wage Levels

Burtless says that were it not for the regressive nature of the UI tax “employers would pay their workers a higher wage.”¹

Let’s examine this charge.

At a 3% UI rate Greed’s annual cost of hiring a part time worker whose annual wages will be $7,000 (the amount of the UI tax wage base) is $210. If Greed pays this worker the federal minimum wage of $7.25 an hour, that means the worker would have worked 965 hours during the year.

The $210 Greed must pay in unemployment taxes on this employee comes to a whopping 21 cents an hour ($210/965.5).

Mr. Burtless makes the preposterous claim that employers consciously reduce the hourly wages of their low wage employees by the amount of the unemployment tax attributable to their wages. The truth is, employers who pay minimum wage to their employees pay that wage because they can’t pay them less, not becuase they can’t pay them more.

And who says employers will automatically give the unemployment tax savings to their low income workers?² When an employer’s postage costs are reduced it is not required to use those savings for the purchase of more postage or for the purchase of more expensive postage. The employer can, and is very likely to, use those savings for other purposes. Likewise, when an employer’s unemployment taxes are reduced, it is by no means a given that the savings it realizes will be given to employees in the form of increased wages. In fact, I think it’s more likely that employers will use the savings for one of the following purposes:

1. To increase officers wages or shareholder dividends and distributions; or
2. To reduce the price of its products

The Low UI Wage Base is an Incentive to Raise Existing Wages v. Hire New Workers

Burtless is off base when he claims that employers pay their low income employees less because of the low UI tax wage base. Once an employee gets to the $7,000 wage threshold, every dollar paid to him after that is UI tax free.

If Burtless is correct (and I don’t think he is) that employers factor in the UI tax in setting the wages of their low income workers, it would be cost efficient for them to increase the hours and the wages of an existing worker who is paid, say, $7,000, rather than to hire a new worker.

In short, raising the wages of an existing worker who is already paid more than the wage base will not increase the amount of UI tax the employer must pay, but adding the wages of a new worker will.

Burtless’ Solution: Raise Taxes

Of course, Burtless’ has a solution to this problem he’s invented. It’s an unsurprising one. He wants to raise unemployment taxes:

The federal government should raise its own UI taxable wage base from $7,000 to one-half the wage base for Social Security, bringing it up to about $53,000 a year. It should then automatically raise the wage base every year in line with the percentage increase in the Social Security wage base. At the same time, it should require states to have a wage base that is no lower than the federal UI wage base.

Huh?

Burtless’ remedy raises a ton of questions, including the following:

• How would an increase in the total amount of UI taxes collected by the government make employers give raises to their low income workers?
• Isn’t it more likely to have the reverse effect of lowering wages because the employer would then have less money available to pay workers?
• If Burtless’ concern truly is the regressivity of the unemployment insurance payroll tax, why does he propose a solution that increases the amount of the tax?
• Why suggest an increase in the amount of revenue raised from the imposition of a tax burden when your stated concern is the distribution of that tax burden?

Just what is Burtless talking about?

I’m not sure, but my Ernest Hemingway built-in bull shit detector tells me it’s further proof that some folks are less committed to lowering the tax burden on low-income workers than they are to increasing the tax burden on high-income earners?³

Footnotes:

¹  This argument could be applied with equal vigor to any cost that an employer incurs. If an employer’s telephone bill goes up, that means there is less money available to pay to workers. Likewise, if it’s income tax bill increases, there is less money available for workers.

²  If Burtless is right and increasing business owners’ supply of capital trickles down to low income workers in the form of increased wages, then he is a supply-sider and an advocate of trickle down economics. As such, I would expect that he would favor across-the-board tax cuts for corporations, small businesses and the rich.

³  Increasing the wage base on which UI taxes are calculated results in a tax increase on employers. This is a roundabout way of imposing a direct tax on high income, small business owners who, typically, are also the highest earning employees of their companies.

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