Unemployment Insurance: States' Tax Financing Systems Allow Costs to Be Shared among Industries

In 2006, the Unemployment Insurance (UI) program is expected to collect over $37 billion in taxes from employers to pay $34 billion in benefits to unemployed workers. Under state UI programs, employers' tax contributions are experience-rated--that is, they reflect the extent to which they laid off workers who then collected benefits. To examine the equity of this system, we met with officials from five states, reviewed prior studies, and examined state data to determine (1) how states ensure that employers pay UI taxes based on their experience with unemployment, and the aspects of state unemployment insurance systems that limit experience rating; (2) the extent to which employers pay unemployment insurance taxes commensurate with unemployment benefits paid to their former employees; and how this varies by industry; and (3) steps states could take to increase the degree of experience rating. We provided a draft of this report to the Department of Labor (Labor) for its review. Overall, Labor agreed with our findings.