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entitled 'Unemployment Insurance: States' Tax Financing Systems Allow 
Costs to Be Shared among Industries' which was released on August 2, 
2006. 

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Report to the Chairman, Subcommittee on Human Resources, Committee on 
Ways and Means, House of Representatives: 

United States Government Accountability Office: 

GAO: 

July 2006: 

Unemployment Insurance: 

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

Unemployment Insurance: 

GAO-06-769: 

GAO Highlights: 

Highlights of GAO-06-769, a report to the Chairman, Subcommittee on 
Human Resources, Committee on Ways and Means, House of Representatives 

Why GAO Did This Study: 

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. 

What GAO Found: 

All state Unemployment Insurance-financing systems are experience-
rated, but several aspects of these systems limit the connection 
between an employer's tax contributions and the employer’s experience 
with unemployment. For example, a state’s maximum tax rate limits the 
size of an employer’s tax payment, regardless of the costs an employer 
may have imposed on the system. Similarly, a minimum tax rate ensures 
that an employer’s tax rate will not drop below a specified floor, no 
matter how much its experience rating improves. Other aspects of state 
systems allow the cost of some benefits to be charged to all employers 
rather than to a single employer. These shared costs include, for 
example, benefits paid to unemployed workers of a firm that has gone 
out of business. When the cost of benefits is shared in this way, it 
reduces experience rating and imposes additional costs on all 
employers. 

A series of studies that examine experience rating in state UI systems 
show that a number of industries used more in benefits than they paid 
in taxes to finance the system. Certain industries, such as 
construction and agriculture, forestry, and fisheries, as a whole, 
consistently received such subsidies, while other industries, such as 
finance, insurance, and real estate tended to pay subsidies. Newer 
firms that are not yet experience-rated, regardless of industry, also 
tend to pay subsidies. Our analysis of more recent data from three 
states found a similar pattern of subsidies. 

States could increase experience rating and reduce subsidies by 
adjusting aspects of the unemployment insurance tax structure, such as 
the maximum tax rate. However, each of these adjustments has trade-offs 
that would have to be considered by a state because the adjustments 
would raise costs for some employers or reduce costs for others. In 
addition, such adjustments would have to be evaluated based on the 
implications for other policy objectives established for a state’s 
unemployment insurance program. 

Figure: Unemployment Insurance Benefits Charged and Taxes Paid by 
Selected Industries in Washington State from 1999 to 2004: 

[see PDF for Image] 

Source: GAO analysis of data from the Washington State Employment 
Security Department. 

[End of Figure] 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-769]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Sigurd R. Nilsen at (202) 
512-7215 or nilsens@gao.gov 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

States' Unemployment Insurance Financing Systems Limit the Degree of 
Experience Rating: 

State UI Tax Policies Result in Persistent Cross-subsidization among 
Firms and Industries: 

Measures to Improve Experience Rating and Reduce Subsidies Must Be 
Balanced against Other Goals: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Example of a State's Unemployment Insurance Tax Products: 

Appendix III: Comments from the Department of Labor: 

Appendix IV: GAO Contacts and Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Comparison of Reserve Ratio and Benefit Ratio Approaches: 

Table 2: Minimum Tax Rates, Maximum Tax Rates, and Taxable Wage Bases 
of State Unemployment Insurance Programs: 

Table 3: Summary of Findings of Cross-subsidization among Industries 
from Literature Review: 

Table 4: Cross-subsidization among Industries in Washington State, 1989 
to 1999: 

Table 5: Industries Ranked by Benefit-Tax Ratio for Selected States: 

Table 6: California Unemployment Insurance Tax Schedules: 

Table 7: Basis for Rate Schedule Used: 

Figures: 

Figure 1: Tax Rates and Reserve Ratios in California: 

Figure 2: Unemployment Insurance Benefits Charged and Taxes Paid by 
Selected Industries in Washington State from 1999 to 2004: 

Abbreviations: 

ERI: Experience Rating Index: 

FUTA: Federal Unemployment Tax Act: 

GAO: Government Accountability Office: 

NAICS: North American Industry Classification System: 

SIC: Standard Industrial Classification System: 

UI: Unemployment Insurance: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 26, 2006: 

The Honorable Wally Herger: 
Chairman: 
Subcommittee on Human Resources: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Chairman: 

Unemployment compensation is a social insurance program designed to 
partially replace the lost wages of individuals who become 
involuntarily unemployed and to stabilize the economy in times of 
economic recession. In partnership with the federal government, 
individual states administer the Unemployment Insurance (UI) program 
and fund benefits through payroll taxes levied on employers. In 2006, 
employers are projected to make state unemployment tax contributions of 
over $37 billion, and an estimated $34 billion will be paid in benefits 
to unemployed workers. 

All state UI systems are experience-rated so that employers' 
contribution rates are risk-based, and nearly all vary according to how 
much or how little their workers received unemployment benefits. In 
principal, this means that an employer who lays off many workers that 
claim unemployment insurance benefits will pay more in taxes than an 
employer that lays off fewer workers that claim benefits. However, very 
limited federal guidance governs how states are to implement the 
experience-rating provision. Further, because unemployment programs 
serve as social insurance programs, it is generally recognized that 
some high-layoff employers may, over time, pay less in taxes than 
benefits paid to their former workers, while other employers may pay 
more. 

Wanting to know about the equity of state systems of unemployment 
insurance financing, you asked that we explore how the taxes that pay 
for the system are distributed among employers. Specifically, we 
addressed the following questions: 

1. How have states ensured that individual employers pay unemployment 
insurance taxes based on their experience with unemployment, and what 
aspects of state unemployment insurance systems limit such experience 
rating? 

2. To what extent do employers pay unemployment insurance taxes 
commensurate with unemployment benefits paid to their former employees, 
and how does this vary by industry? 

3. What steps could states take if they wished to ensure that the taxes 
paid by individual firms more closely matched the benefits paid to the 
former employees of each firm? 

To answer the first and third questions, we reviewed pertinent 
literature and interviewed Department of Labor (Labor) officials and 
officials of national organizations representing the perspectives of 
business, labor, and state unemployment insurance agencies, as well as 
nationally recognized experts on unemployment insurance. We also 
conducted in-depth interviews with representatives of unemployment 
insurance agencies in five states--California, Illinois, Michigan, 
Texas, and Washington. We selected these states because they are 
relatively populous and geographically dispersed, and because they take 
different approaches to ensuring experience rating. We discussed each 
state's approach to financing unemployment insurance benefits, and the 
implications that various aspects of these systems had for experience 
rating and the existence of cross-subsidies. In addition, we reviewed 
pertinent documents describing the unemployment insurance-financing 
systems in each of these five states. To answer the second question, we 
identified and reviewed 10 studies published between 1972 and 2000 that 
measured how closely taxes paid by firms and industries matched the 
benefit costs they imposed. We confirmed with the Department of Labor 
and national experts on unemployment insurance that these 10 studies 
constituted the definitive work done to date on this subject. To 
supplement these studies, we obtained data on tax and benefits payments 
by industry type from three of the five selected states. We determined 
that the data were sufficiently reliable for our purposes. See appendix 
I for more details on scope and methodology. 

We conducted our work between September 2005 and June 2006 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

All states have established experience-rated unemployment insurance 
financing systems, but several aspects of these systems limit the 
connection between an employer's tax contributions and the employer's 
experience with unemployment. In nearly all states, unemployment 
insurance taxes are based on some measure of benefits paid to a firm's 
former workers. However, over time, taxes may not equal benefits for 
several reasons. Some aspects of state systems limit firms' tax 
payments. For example, a state's maximum tax rate limits the size of an 
employer's tax payment, regardless of the costs an employer may have 
imposed on the system. Similarly, minimum tax rates ensure that an 
employer's tax rate will not drop below a specified floor, no matter 
how much its experience rating improves. Other aspects of state systems 
cause significant portions of total benefit payments to become 
"shared"--that is, to become a common cost of all firms. For example, 
under some conditions, states pay benefits but do not attribute those 
benefits to a specific employer. One type of such a "noncharge" is a 
benefit payment made that is finally reversed, but not recovered. Such 
shared benefit costs reduce experience rating and impose additional 
costs on all employers. The manner in which states distribute the cost 
of these benefits, in order to recoup them, also affects the match 
between taxes paid and benefits charged to each employer. 

Studies performed since the 1970s show that considerable cross- 
subsidization exists among firms and industries in states' unemployment 
insurance systems. Certain industries, such as construction and 
agriculture, forestry, and fisheries, as a whole, consistently pay less 
in unemployment insurance taxes than in benefits received by their 
former employees, which is likely due to the cyclical or seasonal 
nature of these industries. In some cases, the differences between 
taxes paid and benefits received can be substantial. For example, our 
analysis of 1999-to-2004 data from Illinois shows that firms in the 
construction industry paid more than $1 billion less in unemployment 
insurance taxes than the unemployment benefit costs charged to them. 
Other industries, in particular finance, insurance, and real estate, 
tend to have more stable or growing employment and pay overall 
subsidies. Yet studies using firm-level data have also found that there 
is a considerable amount of cross-subsidization within industries. For 
example, although construction is found to be the most consistently 
subsidized industry, an intra-industry analysis using data from Texas 
finds that the majority of firms within that industry are paying more 
in taxes than in benefits received by their former employees. In 
addition, newer firms that are not yet experience-rated, regardless of 
industry, tend to pay subsidies. 

States could increase experience rating and reduce cross-subsidies by 
adjusting aspects of the unemployment insurance tax structure, such as 
the maximum tax rate and the taxable wage base. However, each of these 
adjustments has trade-offs that would have to be evaluated by a state 
because these adjustments would raise costs for some employers or 
reduce costs for others, and have implications for other policy 
objectives established for a state's unemployment insurance program. 
For example, according to officials of the California Employment 
Development Department, the state's current unemployment insurance- 
financing system was explicitly developed so that high-unemployment 
industries important to the state's economy--specifically, construction 
and agriculture--would not bear the full cost of benefits paid to 
workers in those industries. Consequently, while raising the maximum 
tax rate would make these employers pay a more equitable share, it 
could conflict with other state policy goals. 

We provided a draft of this report to the Department of Labor for its 
review. Overall, Labor agreed with our findings. 

Labor also provided technical comments on the draft report, which we 
have incorporated where appropriate. 

Background: 

The unemployment insurance program was established in 1935 to (1) give 
workers temporary and partial insurance against income loss during 
unemployment for which they are not at fault, and (2) to help stabilize 
the nation's economy in economic downturns by maintaining workers' 
purchasing power. The program operates as a partnership between the 
states and the federal government.[Footnote 1] Under this arrangement, 
Labor provides broad policy guidance and program direction, while the 
states design and implement specific program details. Within certain 
limits, states have broad autonomy in carrying out their basic program 
operations. They decide the requirements that unemployed workers must 
meet for eligibility, the amount of benefits, and the length of time 
they will pay benefits. They also decide on the tax rates employers 
must pay on their payrolls. Further, states can and do make changes in 
these and other aspects of their unemployment insurance system. As a 
result, state eligibility requirements, benefit levels, payroll tax 
rates, and trust fund balances vary, reflecting variations in program 
decisions and the economic fortunes of each state. 

Federal and state payroll taxes on employers finance the UI program. 
The federal government uses the proceeds from its payroll tax to (1) 
pay for all program administrative costs and one-half of extended 
benefit payments and (2) maintain a loan account from which financially 
troubled states can borrow funds to pay UI benefits.[Footnote 2] The 
gross federal tax rate is 6.2 percent on the first $7,000 paid annually 
by employers on each employee. If a state meets federal requirements, 
and has no delinquent federal loans, however, its employers are 
eligible for up to a 5.4 percent credit, making the net federal tax 
rate 0.8 percent. To receive the maximum federal tax credit, states 
must, among other things, establish a taxable wage base for state UI 
taxes at least equal to the federal wage base--currently $7,000. 

Most of the funds used to pay UI benefits come from the states, which 
levy a payroll tax on employers to finance regular UI benefits and one- 
half of extended benefits. States generally structure their UI taxes to 
include several tax rate components or schedules. In accordance with 
federal law, within a tax schedule, an employer's tax rate will vary 
according to the firm's experience in laying off workers who 
subsequently receive UI benefits, commonly called their experience 
rating.[Footnote 3] Those firms with many unemployed workers receiving 
UI benefits will generally pay a higher UI tax rate than firms with few 
workers receiving unemployment insurance. These tax rate schedules also 
vary according to some measure of a state's trust fund balance, with 
the highest tax schedules generally applying when state fund balances 
have fallen below a specified level. Each state maintains its own trust 
fund with the U.S. Treasury that is used for depositing program income 
and from which UI benefits are paid. 

The experience-rating aspect of the unemployment insurance systems is 
unique in the world--the United States is the only nation that finances 
its UI system though an experience-rated tax. The objectives of 
experience rating are (1) the prevention of unemployment by inducing 
employers to stabilize their operations and thus their employment, so 
as to reduce their tax rates, and (2) the equitable allocation of costs 
of unemployment benefits. 

States' Unemployment Insurance-Financing Systems Limit the Degree of 
Experience Rating: 

Although all state and territorial unemployment insurance programs base 
an employer's tax rates on its experience with unemployment, the design 
of each state's financing system also limits the degree of experience 
rating. Nearly all state programs, for example, base tax rates on some 
measure of benefits paid to a firm's former workers. However, all 
states have a maximum tax rate that limits the financial liability of 
an employer, regardless of the amount of benefits paid to a firm's 
former employees. As a result, some employers will, over time, pay less 
than the full costs of benefits attributed to them. Also, some benefits 
are paid but not charged to an individual employer, partly because the 
employer is not at fault. These and other design features allow an 
employer's total tax payments to vary from total attributed benefits, 
over time. 

Nearly All States Base Experience-Rated Tax Rates on Benefits Paid to a 
Firm's Former Workers: 

All state unemployment insurance programs adjust the tax rates of 
individual firms on the basis of their experience with unemployment, 
and 50 of the 53[Footnote 4] systems do so based on one of two basic 
systems--the reserve ratio system or the benefit ratio system. 

In these 50 states, when unemployment insurance benefits are paid to a 
worker, the value of those benefits is "charged" to the worker's former 
employer or employers.[Footnote 5] Under both systems, benefits 
payments charged to a firm over a defined period of time become a key 
basis for an employer's experience rating. However, the reserve ratio 
system and the benefits ratio system also have important differences. 

Under the reserve ratio system--used by 33 state and territorial 
unemployment insurance programs--states set up an account for each 
experience-rated employer. All taxes paid by an employer are credited 
to this account, and benefits to a firm's former employees are debited 
from this account. Ordinarily, this balance--or "reserve"--is carried 
forward from year to year.[Footnote 6] The balance of this account is 
positive if cumulative tax payments are larger than cumulative benefits 
charged, and negative if cumulative tax payments are smaller than 
cumulative benefits charged. In each year, each employer's experience 
rating--the reserve ratio--is developed by dividing the firm's reserve 
balance by a measure of the wages paid by the firm--in most cases, an 
aggregate or average of 3 years' taxable wages. Table 1 illustrates the 
calculation of an experience rating using the reserve ratio method. 

Table 1: Comparison of Reserve Ratio and Benefit Ratio Approaches: 

Reserve ratio[A]: Formula: Taxes paid minus benefits charged Average of 
3 years' wages;  
Benefit ratio[B]: Benefits charged over 4 years Total wages over 4 
years. 

Reserve ratio[A]: Relationship to tax rates: The lower the reserve 
ratio, the higher the tax rate;
Benefit ratio[B]: The higher the benefit ratio, the higher the tax 
rate; 

Reserve ratio[A]: Reserve ratio range: Examples: Maximum tax  Below -
0.11: 
Tax rates: 5.4; 
Benefit ratio[B]: Benefit ratio range: Maximum tax: Above 0.0575. 
 
Reserve ratio[A]: Reserve ratio range: Midpoint: 0.01 to 0.02; 
Tax rates: 4.0; 
Benefit ratio[B]: Benefit ratio range: Midpoint: 0.0225 to 0.02375 

Reserve ratio[A]: Reserve ratio range: Minimum tax: 0.2 or more; 
Tax rates: 0.7; 
Benefit ratio[B]: Benefit ratio range: Minimum tax: below 0.000001; 

Source: GAO analysis of California and Washington state UI financing 
systems. 

[A] The reserve ratio example is from one of the tax schedules used in 
California. In California, different schedules may be used from year to 
year, depending on the balance of the UI reserve fund. In California, 
the formula also includes some credits to an employer's account in 
addition to taxes paid, and some deductions in addition to benefits 
charged. 

[B] The benefit ratio example is from the tax rate schedule used by 
Washington state. In Washington, a single schedule is used, but rates 
can be adjusted each year by factors that account for the size of 
social costs or fund solvency. 

[End of table] 

The benefit ratio approach, used by 17 of the 53 state and territorial 
UI systems, does not consider employers' tax contributions, but only 
benefits charged over a defined period, usually 3 years. As with the 
reserve ratio system, benefit charges are divided by a measure of the 
firm's total wages, such as payroll over 3 years. Table 1 illustrates 
the calculation of an experience rating using the benefit ratio method. 

Once a state has established an employer's experience rating as 
measured by the reserve ratio or the benefit ratio for a tax year, 
these experience ratings are used to determine an employer's tax rate. 
In general the basic tax rate is determined through use of a tax rate 
schedule, and in some states through use of a formula. The basic 
experience-rated tax rate can also be adjusted in response to other 
considerations, such as the solvency and financial health of the trust 
fund or to cover shared costs. As table 1 illustrates, employers with 
high reserve ratios pay relatively low tax rates, and those with low 
reserve ratios, especially employers with negative reserve ratios, pay 
relatively high taxes. Conversely, the higher a benefit ratio, the 
higher an employer's tax rate. 

Each year, an employer's tax payment is calculated by multiplying the 
tax rate by the employer's taxable wage base. Under federal law, the 
taxable payroll must be at least the first $7,000 in wages paid to each 
employee, but state taxable payrolls vary from this minimum up to 
$32,300. 

In any given year, both the reserve ratio and the benefit ratio systems 
allow for considerable differences between tax payments and benefit 
charges. In theory, unemployment insurance programs rely on a forward- 
funded approach. Typically, the trust fund is replenished when tax 
payments exceed benefit payments during times of low unemployment. 
Conversely, trust funds are depleted during times of high unemployment 
because benefit payments exceed tax revenue. By design, higher tax 
payments lag behind increased benefit payments, in part so that 
employers are not burdened with higher tax rates during times of 
economic difficulty. Because the reserve ratio is based on the full 
history of an employer's benefit charges and tax payments, it will 
change less abruptly because of an increase or decrease in benefit 
payment than the benefit ratio. However, both are designed to partly 
recoup charged benefits and ensure some degree of equity among 
employers over multiple years. 

Several Aspects of State UI Systems Limit the Linkage between Tax Rates 
and Benefits Paid to a Firm's Former Workers: 

Although the large majority of state UI systems have implemented 
experience-rated systems that ensure a linkage between taxes paid and 
benefits charged, several aspects of state UI systems limit this 
linkage. As a result, state UI systems are only partly experience- 
rated, and a firm's UI tax payments can be substantially determined by 
factors other than benefits charged.[Footnote 7] 

Benefit Write-offs and the Time Value of Money: 

Although benefit ratio and reserve ratio systems establish, for each 
employer, a basis for a tax rate linked to benefits charged, they both 
have important limitations in this regard. First, benefit ratio and 
some reserve ratio systems do not have perfect memories of benefits 
charged. Typically, benefit ratio systems consider benefit payments 
over the previous 3 years. For example, benefit payments, charged to a 
firm in years prior to the 3-year range, even if not fully recaptured 
in tax payments, are not considered in calculation of taxes for future 
years. Similarly, while reserve ratio systems generally are supposed to 
reflect the balance between all benefits charged and all taxes paid 
since enactment of a state's unemployment insurance law, this does not 
always occur in practice. Six of the 33 states that use the reserve 
ratio system have provisions for effectively writing off benefit 
charges if the firm's reserve balance or reserve ratio sinks below a 
certain level.[Footnote 8] For example, the California unemployment 
insurance program writes off benefit charges if an employer has a 
negative balance that would otherwise exceed 21 percent of average 
taxable payroll during the last 3 calendar years. When these negative 
balances are forgiven, the benefit charges are effectively erased from 
the record of an individual firm. In both the case of a reserve ratio 
or a benefit ratio system, benefits that were once attributable to an 
individual firm become the common burden of all employers. 

A second major factor that limits the degree of experience rating is 
that these systems do not take into account the time value of money. 
For example, employers in a state using the reserve ratio approach may-
-by consistently paying less in taxes than the amount of chargeable 
benefits paid to former workers--carry a significant and growing 
negative balance for many years. Because states maintain records in 
nominal dollars, such negative balances understate the real cost that 
such employers have imposed on the state's unemployment insurance trust 
fund. Conversely, employers that consistently maintain significant 
positive account balances are not compensated for these balances--the 
nominal balance understates the real contribution such employers have 
made to the state's trust fund.[Footnote 9] The same effect may occur 
in states using the benefit ratio system, but because of the 3-year 
time horizon on the benefits that affect the tax rates, there is less 
potential for this practice to have a large cumulative effect. 

Maximum Tax Rates: 

While all states vary an employer's tax rate on the basis of experience 
rating, all states have also established maximum tax rates that limit 
an employer's tax liability. In accordance with federal guidelines, 
states must have a maximum tax rate of at least 5.4 percent. However, 
as table 2 indicates, maximum tax rate policies differ markedly from 
state to state--ranging from 5.4 percent in 13 states to 15.4 percent 
in Massachusetts.[Footnote 10] 

Table 2: Minimum Tax Rates, Maximum Tax Rates, and Taxable Wage Bases 
of State Unemployment Insurance Programs: 

State: Alabama; 
Minimum tax: 0.65; 
Maximum tax: 6.8; 
Taxable wage base: $8,000; 
State: Nebraska; 
Minimum tax: [Empty]; 
Maximum tax: 5.4; 
Taxable wage base: $7,000. 

State: Alaska; 
Minimum tax: 1.0; 
Maximum tax: 5.4; 
Taxable wage base: $27,900; 
State: Nevada; 
Minimum tax: 0.25; 
Maximum tax: 5.4; 
Taxable wage base: $22,900. 

State: Arizona; 
Minimum tax: 2.85; 
Maximum tax: 5.4; 
Taxable wage base: $7,000; 
State: New Hampshire; 
Minimum tax: 2.8; 
Maximum tax: 6.5; 
Taxable wage base: $8,000. 

State: Arkansas; 
Minimum tax: 0.9; 
Maximum tax: 10.8; 
Taxable wage base: $10,000; 
State: New Jersey; 
Minimum tax: 1.2; 
Maximum tax: 7.0; 
Taxable wage base: $24,900. 

State: California; 
Minimum tax: 1.3; 
Maximum tax: 5.4; 
Taxable wage base: $7,000; 
State: New Mexico; 
Minimum tax: 2.7; 
Maximum tax: 5.4; 
Taxable wage base: $17,200. 

State: Colorado; 
Minimum tax: 1.0; 
Maximum tax: 5.4; 
Taxable wage base: $10,000; 
State: New York; 
Minimum tax: 0.9; 
Maximum tax: 8.9; 
Taxable wage base: $8,500. 

State: Connecticut; 
Minimum tax: 1.5; 
Maximum tax: 6.9; 
Taxable wage base: $15,000; 
State: North Carolina; 
Minimum tax: 0; 
Maximum tax: 5.4; 
Taxable wage base: $16,700. 

State: Delaware; 
Minimum tax: 0.1; 
Maximum tax: 9.5; 
Taxable wage base: $8,500; 
State: North Dakota; 
Minimum tax: 0.1; 
Maximum tax: [Empty]; 
Taxable wage base: $19,400. 

State: District of Columbia; 
Minimum tax: 1.9; 
Maximum tax: 7.4; 
Taxable wage base: $9,000; 
State: Ohio; 
Minimum tax: 0.1; 
Maximum tax: 6.7; 
Taxable wage base: $9,000. 

State: Florida; 
Minimum tax: 0.001; 
Maximum tax: 6.4; 
Taxable wage base: $7,000; 
State: Oklahoma; 
Minimum tax: 0.5; 
Maximum tax: 5.5; 
Taxable wage base: $13,800. 

State: Georgia; 
Minimum tax: 0.05; 
Maximum tax: 10.8; 
Taxable wage base: $8,500; 
State: Oregon; 
Minimum tax: 2.2; 
Maximum tax: 5.4; 
Taxable wage base: $27,000. 

State: Hawaii; 
Minimum tax: 2.4; 
Maximum tax: 5.4; 
Taxable wage base: $32,300; 
State: Pennsylvania; 
Minimum tax: 1.0225; 
Maximum tax: 10.59; 
Taxable wage base: $8,000. 

State: Idaho; 
Minimum tax: 2.4; 
Maximum tax: 6.8; 
Taxable wage base: $28,000; 
State: Puerto Rico; 
Minimum tax: 2.5; 
Maximum tax: 5.4; 
Taxable wage base: $7,000. 

State: Illinois; 
Minimum tax: .2; 
Maximum tax: 9.0; 
Taxable wage base: $10,500; 
State: Rhode Island; 
Minimum tax: 1.9; 
Maximum tax: 10.0; 
Taxable wage base: $16,000. 

State: Indiana; 
Minimum tax: 1.1; 
Maximum tax: 5.6; 
Taxable wage base: $7,000; 
State: South Carolina; 
Minimum tax: 1.24; 
Maximum tax: 6.1; 
Taxable wage base: $7,000. 

State: Iowa; 
Minimum tax: 0; 
Maximum tax: 9.0; 
Taxable wage base: $20,400; 
State: South Dakota; 
Minimum tax: 1.5; 
Maximum tax: 10.5; 
Taxable wage base: $7,000. 

State: Kansas; 
Minimum tax: 0.01; 
Maximum tax: 7.4; 
Taxable wage base: $8,000; 
State: Tennessee; 
Minimum tax: 0.5; 
Maximum tax: 10.0; 
Taxable wage base: $7,000. 

State: Kentucky; 
Minimum tax: 1.0; 
Maximum tax: 10.0; 
Taxable wage base: $8,000; 
State: Texas; 
Minimum tax: 0; 
Maximum tax: 6.0; 
Taxable wage base: $9,000. 

State: Louisiana; 
Minimum tax: 0.3; 
Maximum tax: 6.0; 
Taxable wage base: $7,000; 
State: Utah; 
Minimum tax: 0.1; 
Maximum tax: 9.0; 
Taxable wage base: $23,200. 

State: Maine; 
Minimum tax: 2.4; 
Maximum tax: 7.5; 
Taxable wage base: $12,000; 
State: Vermont; 
Minimum tax: 1.3; 
Maximum tax: 8.4; 
Taxable wage base: $8,000. 

State: Maryland; 
Minimum tax: 2.3; 
Maximum tax: 9.5; 
Taxable wage base: $8,500; 
State: Virginia; 
Minimum tax: 0.3; 
Maximum tax: 6.4; 
Taxable wage base: $8,000. 

State: Mass; 
Minimum tax: 1.58; 
Maximum tax: 15.4; 
Taxable wage base: $14,000; 
State: Virgin Islands; 
Minimum tax: 0.1; 
Maximum tax: 9.5; 
Taxable wage base: $18,600. 

State: Michigan; 
Minimum tax: 1.0; 
Maximum tax: 10.0; 
Taxable wage base: $9,000; 
State: Washington; 
Minimum tax: 2.47; 
Maximum tax: 5.4; 
Taxable wage base: $30,500. 

State: Minnesota; 
Minimum tax: 0.6; 
Maximum tax: 9.5; 
Taxable wage base: $23,000; 
State: West Virginia; 
Minimum tax: 1.5; 
Maximum tax: 8.5; 
Taxable wage base: $8,000. 

State: Mississippi; 
Minimum tax: 0.1; 
Maximum tax: 5.4; 
Taxable wage base: $7,000; 
State: Wisconsin; 
Minimum tax: 0.27; 
Maximum tax: 8.9; 
Taxable wage base: $10,500. 

State: Missouri; 
Minimum tax: 0; 
Maximum tax: 8.7; 
Taxable wage base: $11,000; 
State: Wyoming; 
Minimum tax: 0; 
Maximum tax: 8.5; 
Taxable wage base: $16,400. 

State: Montana; 
Minimum tax: 1.67; 
Maximum tax: 6.37; 
Taxable wage base: $21,000; 
State: [Empty]; 
Minimum tax: [Empty]; 
Maximum tax: [Empty]; 
Taxable wage base: [Empty]. 

Source: Comparison of State Unemployment Laws, 2005, U.S. Department of 
Labor. 

Note: In those cases where cells are empty, no state data were 
available. The maximum and minimum tax rates in this table are based on 
the "least favorable" scenario, that is, the highest maximums and 
minimums. Depending on the condition of the state's trust fund and 
other factors, in a given year, the actual maximum and minimum tax 
rates may be lower than these rates. For example, 28 states have higher 
maximum tax rates on the least favorable schedule than on the most 
favorable schedule. The differences range from less than a percentage 
point to more than 7 percentage points.

The maximum tax rate may cause a departure from experience rating in 
certain circumstances for two reasons. First, as a result of maximum 
tax rates, firms with very different experience ratings will be 
assessed the same tax rate. For example, an employer that is just at 
the threshold of the maximum tax rate will pay the same tax rate as an 
employer whose experience rating indicates a much greater propensity to 
lay off workers. Figure 1 illustrates this effect using an example from 
California. According to one of the tax schedules used in that state, 
all employers with reserve ratios of -0.11 or less pay at the maximum 
tax rate of 5.4 percent. Consequently, an employer with a reserve ratio 
of -0.20 or worse will pay the same tax rate as an employer with a 
reserve ratio of -0.11. 

[End of table] 

Figure 1: Tax Rates and Reserve Ratios in California: 

[See PDF for image] 

Source: California Employment Development Department, tax schedule C. 

[End of figure] 

The second departure from experience rating occurs because the maximum 
tax rate causes some firms to pay considerably less in taxes than 
benefits charged. Because of the maximum tax rate, it is possible that 
an employer will continue to pay less in taxes than benefits charged 
year after year. For example, an Illinois firm with 100 employees at a 
maximum tax rate of 9.0 percent and a taxable wage base of $10,500 per 
employee will pay a total of $94,500 in taxes in a year. Assuming this 
employer laid off 15 workers who each earned $673 per week, each worker 
would qualify for unemployment insurance benefits of about $8,400, or a 
total of about $126,000.[Footnote 11] In a single year, the employer's 
workers would receive about $31,500 more in benefits than taxes paid by 
the employer. If this pattern continues for multiple years, the maximum 
tax rate would prevent the employer's tax contributions from 
increasing, and the difference between benefits charged and taxes paid 
may become a permanent subsidy to the employer. 

In conjunction with the maximum tax rate, employers' tax contributions 
are also limited by the level of the taxable wage base set by the 
state. Because an employer's tax rate is multiplied by its taxable wage 
base to determine its tax payments, an employer paying at a given tax 
rate will pay less tax than an employer at the same tax rate with a 
higher taxable wage base. While federal law requires a $7,000 minimum 
taxable wage base, table 2 shows that taxable wage bases vary 
significantly from state to state, ranging from the $7,000 minimum in 
nine states to $32,300 in Hawaii. 

Minimum Tax Rates: 

Just as states set maximum tax rates, most states also set minimum tax 
rates greater than zero. Minimum tax rates ensure that an employer's 
tax rate will not drop below a specified floor, no matter how much its 
experience rating improves. Consequently, employers with significantly 
different experience ratings may have the same tax rate. Figure 1 
illustrates that employers with a reserve ratio greater than 0.20 would 
pay at the minimum rate of 0.7 percent. As table 2 shows, minimum tax 
rates even at the highest rate schedules vary widely among the states-
-from zero in five states to 2.85 percent in Arizona. 

Tax Rate Increments: 

The method states use to assign an employer a tax rate, and the range 
of possible tax rates between the minimum and the maximum tax, also 
affects the degree to which a state UI system is experience-rated. Some 
states use tax schedules to assign employers whose benefit ratio or 
reserve ratio falls within a particular range a particular tax rate. 
Such schedules--if they have relatively few tax rates and broad 
intervals between the rates--can limit experience rating because 
employers with different experience ratings will pay at the same tax 
rate. Also, if the difference between one tax rate and the next is 
substantial, employers with nearly identical experience ratings may pay 
significantly different tax rates. As Labor noted in 1983 guidance to 
states, within the limits of the maximum and minimum rates, the smaller 
the intervals between the variant rates, the greater the effect of 
individual employer experience on the employer's tax rate.[Footnote 12] 
Further, numerous differential rates make the transition from one tax 
rate to another more equitable because two employers with almost 
identical experience ratings could have different tax rates if they are 
on either side of the border between two rates. More tax rates will 
help ensure that the difference between one rate and the next is 
smaller. 

Some Costs Are Shared among All Employers, a Fact That Contributes to 
Differences between Benefits Charged and Taxes Paid: 

State unemployment insurance funds bear some costs that cannot be 
recovered from the individual employer that might otherwise be 
considered responsible for such benefit costs. Such costs become the 
common burden of all employers, and for this reason can be referred to 
as shared costs. Such shared costs fall into three general categories: 
(1) benefits that are charged to a specific active employer but are not 
fully recovered from that firm in tax revenue, (2) benefits paid to 
former employees of firms that have gone out of business and cannot 
make additional tax payments, and (3) benefit payments made to workers 
that are not charged to a specific employer. 

Charged Benefits That Are Not Covered by Responsible Employers' Tax 
Payments. 

Some aspects of state unemployment insurance programs prevent the tax 
payments of some employers from matching charged benefits. For example, 
if over multiple years, an employer's benefits charges amount to 
$50,000 but because of a maximum tax rate, the firm pays only $43,000 
in taxes, the state must raise revenue to cover the costs of this 
difference. As a result, such costs become the common burden of all 
firms in the unemployment insurance system. 

This aspect of shared costs can be a substantial portion of total 
benefits paid. Labor publishes one measure of such costs, referred to 
as ineffective charges.[Footnote 13] In 2004, the most recent year for 
which data are available, such ineffective charges ranged from 2.5 
percent of total benefits paid in North Dakota to 38.7 percent in 
Arizona. In other words, only 2.5 percent of total benefits payments in 
North Dakota were charged to active employers who did not pay taxes to 
cover these benefit costs. In Arizona, 38 percent of all benefit 
payments were charged to active employers, but not matched by 
commensurate tax revenue. 

One of the states we contacted--California--has an alternate measure of 
such shared costs. Under the state's reserve ratio method of experience 
rating, the California Employment Development Department keeps track of 
annual increases in negative balances for employers that have negative 
balances. Each year, these increases to the negative balance are 
totaled and are distributed to all firms in the UI system. 

Benefits Charged to Inactive Firms: 

State unemployment programs also pay benefits to unemployed workers 
whose former employer has gone out of business. In the event that the 
state cannot collect commensurate tax revenue from these firms, the 
costs of such benefit payments--known as inactive charges--must be 
borne by the UI system, and ultimately by all other active firms. In 
2004, inactive charges ranged from 0.2 percent of benefits in 
Massachusetts to 19.5 percent of benefits in Nevada. 

Noncharged Benefits: 

In some situations, state unemployment insurance programs will pay 
noncharged benefits, that is, benefits paid to unemployed individuals 
but not charged to the firms for whom the employees had worked. Because 
these benefit payments are not associated with an individual employer, 
they become the common burden of employers in state UI systems. 
Noncharged benefit payments are allowed partly because of the belief 
that an employer should not be charged for unemployment for which the 
employer was not responsible. For example, many states pay unemployment 
benefits to a worker who voluntarily quits a job and has not found 
another job after some interval, or under certain conditions, such as 
compelling personal reasons not attributable to the employer. Policies 
regarding noncharging of benefit payments vary from state to 
state.[Footnote 14] In addition to voluntary resignations, common types 
of noncharges include benefits paid to employees who were discharged 
for misconduct and benefit payments made in situations where the 
benefit award is finally reversed. A few states will not charge 
unemployment benefits paid to a worker hired to replace a member of the 
armed services called into active duty and laid off upon the service 
person's return. 

Noncharged benefits can amount to a significant portion of total 
benefit payments. In 2004, noncharged benefits in the states ranged 
from about 3 percent of total benefit payments in Colorado and New York 
to about 32 percent in Maine. In 2004, noncharged benefits exceeded 10 
percent of total benefit payments in 34 states and over 20 percent of 
total benefits in 7 states. Nationally, from 2001 to 2004, noncharges 
averaged between 10.0 percent and 13.3 percent of all benefits paid. 

Method of Assessing Solvency and Social Cost Surcharges Affects 
Experience Rating: 

In order to maintain the solvency of the state unemployment insurance 
fund, state unemployment insurance agencies must collect tax payments 
to cover shared costs, and must implement some technique of 
distributing this tax burden among employers that pay in to the fund. 
States have considerable flexibility in doing so, and our contacts with 
5 states indicated that practices may differ widely. Four of the 5 
states that we contacted--California, Michigan, Texas, and Washington-
-implement tax rate adjustments specifically designed to distribute and 
recapture shared costs, and each of the 5 implement adjustments in 
response to changes in the state UI fund. 

Tax rate adjustments--whether to recoup shared costs or to ensure fund 
solvency--can have an effect on the degree of experience rating. For 
example, Illinois makes two adjustments to employers' experience-rated 
tax rates--the state experience factor and the fund-building 
rate.[Footnote 15] Because the state experience factor is multiplied by 
the employer's basic tax rate as determined by an employer's benefit 
ratio, the relationship of the tax rates among all employers does not 
change. On the other hand, Illinois also adds a fund-building 
surcharge--in 2005 the fund-building rate was 0.9 percent (or $94.50 
per employee)--to each employer's tax rate. Because this amount is a 
flat add-on to the adjusted tax rate, it distorts experience rating in 
that it changes an employer's experience-rated rate relative to those 
of other employers. For example, an employer with a tax rate of 3 
percent would now have a tax rate of 3.9 percent, an effective 30 
percent increase. On the other hand, an employer with a 5 percent tax 
rate would, with the fund-building component added, now have a tax rate 
of 5.9 percent--an 18 percent increase. A similar effect could occur in 
Michigan, which adds a flat 1 percent to the tax rate of each employer 
to recoup the costs of nonchargeable benefits. 

State UI Tax Policies Result in Persistent Cross-subsidization among 
Firms and Industries: 

Studies conducted over the past 34 years indicate that some industries 
persistently pay less in unemployment insurance taxes than benefits 
paid to their former workers, while others persistently pay more. The 
studies we reviewed found that such cross-subsidies favor seasonal and 
cyclical industries, such as construction and agriculture, forestry, 
and fisheries, whereas firms in the finance, insurance, and real estate 
industry regularly pay subsidies. Our analysis of more recent data from 
several states finds similar evidence of cross-subsidization, with 
sometimes substantial differences between taxes paid and benefits 
received. In addition, research shows that there is a considerable 
amount of cross-subsidization among firms within the same industry. 
Studies have also found that new firms that are not yet experience- 
rated, regardless of industry, tend to pay subsidies. 

Cross-subsidization Typically Favors Firms in Seasonal and Cyclical 
Industries Such as Construction and Agriculture: 

A series of studies examining data from the 1950s to the late 1990s 
have found consistent cross-subsidization among industries in state UI 
systems.[Footnote 16] The studies we reviewed refer to an excess in 
benefits received by former workers compared to taxes paid by an 
employer as a subsidy.[Footnote 17] Though these studies used varying 
methodologies, they have all compared total unemployment insurance 
taxes paid by firms in a broad industry group to total benefits paid to 
UI recipients from those industries over time.[Footnote 18] As table 3 
indicates, in many cases, studies of different states and time periods 
show the same industries pay or receive subsidies. 

Table 3: Summary of Findings of Cross-subsidization among Industries 
from Literature Review: 

Study: O'Leary and others 2000; 
Data: 28 states, 1998; 
Receive subsidies: Industry: 
* Construction; 
Pay subsidies: Industry: 
* Financial service providers; 
* Low-wage manufacturing. 

Study: Vroman 1999; 
Data: Washington state, 1989-1999; 
Receive subsidies: Industry: 
* Construction; 
* Agriculture, forestry, and fisheries; 
* Manufacturing; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate. 

Study: Tannenwald and O'Leary 1997; 
Data: Massachusetts, 1988-1996; 
Receive subsidies: Industry: 
* Construction; 
Pay subsidies: Industry: 
* Transportation, communications, and public utilities; 
* Trade; 
* Finance, insurance, and real estate; 
* Services. 

Study: Anderson and Meyer 1993a; 
Data: 6 states, 1978-1984; 
Receive subsidies: Industry: 
* Construction; 
* Manufacturing; 
* Mining; 
* Agriculture, forestry, and fisheries; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate; 
* Retail trade; 
* Services; 
* Transportation; 
* Wholesale trade. 

Study: Anderson and Meyer 1993b; 
Data: 22 states, approximately 1980- 1991; 
Receive subsidies: Industry: 
* Construction; 
* Manufacturing; 
* Mining; 
* Agriculture, forestry, and fisheries; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate; 
* Trade; 
* Services. 

Study: Laurence 1993; 
Data: Texas, 1978-1982; 
Receive subsidies: Industry: 
* Construction; 
* Manufacturing; 
* Services; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate; 
* Mining and quarrying. 

Study: Munts and Asher 1980; 
Data: 21 states, 1968-1975; 
Receive subsidies: Industry: 
* Construction; 
* Manufacturing; 
* Agriculture, forestry, and fisheries; 
* Mining; 
* Services; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate; 
* Trade. 

Study: Topel 1983; 
Data: 6 states, 1971-1975; 
Receive subsidies: Industry: 
* Miscellaneous manufacturing; 
* Apparel; 
* Construction; 
Pay subsidies: Industry: 
* Primary and fabricated metals; 
* Retail trade. 

Study: Becker 1972; 
Data: 15 states, 1957-1967; 
Receive subsidies: Industry: 
* Construction; 
* Mining; 
* Agriculture, forestry, and fisheries; 
Pay subsidies: Industry: 
* Finance, insurance, and real estate. 

Source: GAO analysis of relevant studies. 

Notes: Data from states in Anderson and Meyer study (1993b) vary within 
this time frame. Topel (1983) and O'Leary and others (2000) did not 
include all major industrial categories in their studies. 

[End of table] 

According to the studies, certain industries, such as construction and 
agriculture, consistently received subsidies, which can be substantial. 
Across different states and time periods studied, the construction 
industry most consistently paid less in taxes than benefits paid to its 
former employees. For example, one study examined industry groups over 
a 12-year period, from 1980 to 1991, for 22 states and found that the 
construction industry received the largest subsidy.[Footnote 19] To 
compare the relative size of subsidies, the study calculated a summary 
benefit-tax ratio for each industry averaged across states by dividing 
benefits received by total UI taxes paid.[Footnote 20] The ratio of 
1.68 averaged across 22 states indicates a large subsidy to the 
construction industry--as a whole, employers in this industry paid 
about $1 for every $1.68 in benefits received by their former workers. 
A more recent study of Washington state's UI program also examined 
cross-subsidization among industries over an 11-year period and found 
the construction industry received the largest subsidy, as indicated by 
the benefit-tax ratios reported in table 4.[Footnote 21] The total 
taxes paid by construction firms covered 77 percent of charged benefits 
over this time period. 

Table 4: Cross-subsidization among Industries in Washington State, 1989 
to 1999: 

Dollars in millions. 

Industry: Agriculture, forestry, and fisheries; 
Benefits charged: 318.6; 
Taxes paid: 282.7; 
Benefit-tax ratio: 1.13. 

Industry: Mining; 
Benefits charged: 19.5; 
Taxes paid: 18.4; 
Benefit-tax ratio: 1.06. 

Industry: Construction; 
Benefits charged: 916.4; 
Taxes paid: 701.7; 
Benefit-tax ratio: 1.31. 

Industry: Manufacturing; 
Benefits charged: 982.4; 
Taxes paid: 1334.9; 
Benefit-tax ratio: 0.74. 

Industry: Transportation, communication, and utilities; 
Benefits charged: 251.4; 
Taxes paid: 381.2; 
Benefit-tax ratio: 0.66. 

Industry: Wholesale trade; 
Benefits charged: 315.8; 
Taxes paid: 481.1; 
Benefit- tax ratio: 0.66. 

Industry: Retail trade; 
Benefits charged: 398.5; 
Taxes paid: 735.0; 
Benefit-tax ratio: 0.54. 

Industry: Finance, insurance, and real estate; 
Benefits charged: 199.0; 
Taxes paid: 338.2; 
Benefit-tax ratio: 0.59. 

Industry: Services; 
Benefits charged: 677.8; 
Taxes paid: 1027.0; 
Benefit-tax ratio: 0.66.  

Source: Wayne Vroman, Unemployment Insurance Tax Equity in Washington, 
Report No. 3, Washington, D.C.: The Urban Institute, January 1999. 

Note: The benefit-tax ratio is equal to charged benefits divided by 
total taxes paid. 

[End of table]

Although cross-subsidization is found to most consistently favor firms 
in the construction industry, other industries also tend to benefit. 
The majority of these studies found that firms in agriculture, 
forestry, and fisheries receive subsidies. As shown in table 4, for 
instance, the study of Washington state found that this industry 
received the second largest subsidy from 1989 to 1999. Charged benefits 
exceeded total taxes paid by about 13 percent.[Footnote 22] In 
addition, several of the studies report that firms in manufacturing and 
mining industries also tend to receive subsidies. For example, the 
mining and manufacturing industries on average received 37 percent and 
9 percent more in benefits than in taxes paid, respectively, according 
to the study of 22 states. 

Conversely, other industries, in particular finance, insurance, and 
real estate consistently pay more in taxes than their former employees 
receive in UI benefits, according to studies reviewed. Data from all of 
the studies that examine cross-industry subsidies and include the 
finance, insurance, and real estate sector indicate that firms in this 
industry pay a subsidy, which is often substantial. The study which 
used data from 22 states to calculate a combined average benefit-tax 
ratio for each industry concluded that the finance, insurance, and real 
estate industry received about half the taxes it paid in benefits to 
its former workers, which was the largest subsidy paid by any industry. 
While firms in the finance, insurance, and real estate industry most 
consistently pay a subsidy to the UI program, overall, many other 
industries also tend to pay subsidies, although not in every state and 
time period studied. These industries include wholesale trade, 
services, retail trade, transportation, communications, and public 
utilities. 

While some industries tend to receive or pay subsidies over time and in 
different states, other industries do not show a consistent pattern. An 
industry may receive a subsidy in one state and pay a subsidy in 
another state because of differences in the structure of states' UI 
programs or the regional economy. For example, evidence for the service 
industry may be inconsistent across states.[Footnote 23] One study 
using data for 21 states from 1968 to 1975 found that the service 
industry tends to receive a net subsidy, while a more recent study 
using data for 22 states from 1980 to 1991 found that the service 
industry paid almost 32 percent more in taxes than in benefits received 
by its former workers.[Footnote 24] There is also mixed evidence for 
the mining industry. Although several studies have found that mining 
receives an overall subsidy, a study of the Texas UI program found that 
this industry had the highest percentage of firms that are 
subsidizers.[Footnote 25] 

More recent tax data obtained from three of the five states we 
contacted largely parallels the findings of earlier studies.[Footnote 
26] (See table 5.) In two of the three states, as in the previous 
studies, construction, as well as agriculture, forestry, and fisheries 
received subsidies. For example, in Washington, the taxes paid by 
construction firms covered approximately 70 percent of charged benefits 
paid to their former employees. In Illinois, the subsidy to the 
construction industry was substantial--from 2001 to 2004, firms in the 
construction industry, as a whole, paid more than $1 billion less in 
unemployment insurance taxes than the unemployment benefit costs 
charged to them.[Footnote 27] In Texas, the construction industry had 
the highest ratio of benefits to taxes, indicating that benefits 
charged were high relative to taxes paid compared with other industries 
for the 2-year period. However, the construction industry actually paid 
a subsidy in Texas from 2004 to 2005.[Footnote 28] During this time all 
industries in Texas paid more in taxes than in benefits charged to 
their former employees. Officials from Texas indicated this was to 
repay a trust fund deficit, which the state covered with a bond 
issuance in 2003. 

Table 5: Industries Ranked by Benefit-Tax Ratio for Selected States: 

Benefit-tax ratio: Highest: 
Illinois (2001-2004): Industry: Construction; 
Illinois (2001-2004): Benefit-tax ratio: 2.48; 
Texas (2004-2005): Industry: Construction; 
Texas (2004-2005): Benefit-tax ratio: 0.92; 
Washington (1999-2004): Industry: Construction; 
Washington (1999-2004): Benefit-tax ratio: 1.42. 

Benefit-tax ratio: Highest: 
Illinois (2001-2004): Industry: Mining; 
Illinois (2001-2004): Benefit-tax ratio: 1.67; 
Texas (2004-2005): Industry: Educational services; 
Texas (2004-2005): Benefit-tax ratio: 0.89; 
Washington (1999-2004): Industry: Manufacturing; 
Washington (1999-2004): Benefit-tax ratio: 1.08. 

Benefit-tax ratio: Highest; 
Illinois (2001-2004): Industry: Agriculture, forestry, fishing, and 
hunting; 
Illinois (2001-2004): Benefit-tax ratio: 1.62; 
Texas (2004-2005): Industry: Utilities; 
Texas (2004-2005): Benefit-tax ratio: 0.75; 
Washington (1999-2004): Industry: Agriculture, forestry, fishing, and 
hunting; 
Washington (1999-2004): Benefit-tax ratio: 1.06. 

Benefit-tax ratio: Highest; 
Illinois (2001-2004): Industry: Professional, scientific, and technical 
services; 
Illinois (2001-2004): Benefit-tax ratio: 1.54; 
Texas (2004-2005): Industry: Agriculture, forestry, fishing, and 
hunting; 
Texas (2004-2005): Benefit-tax ratio: 0.74; 
Washington (1999-2004): Industry: Information; 
Washington (1999-2004): Benefit-tax ratio: 1.05. 

Benefit-tax ratio: Highest; 
Illinois (2001-2004): Industry: Administrative and support, and waste 
management and remediation services; 
Illinois (2001-2004): Benefit-tax ratio: 1.51; 
Texas (2004-2005): Industry: Administrative and support, and waste 
management and remediation services; 
Texas (2004-2005): Benefit- tax ratio: 0.74; 
Washington (1999-2004): Industry: Professional, scientific, and 
technical services; 
Washington (1999-2004): Benefit-tax ratio: 1.02. 

Benefit-tax ratio: Lowest; 
Illinois (2001-2004): Industry: Management of companies and 
enterprises; 
Illinois (2001-2004): Benefit-tax ratio: 0.74; 
Texas (2004- 2005): Industry: Mining; 
Texas (2004- 2005): Benefit-tax ratio: 0.44; 
Washington (1999-2004): Industry: Utilities; 
Washington (1999-2004): Benefit-tax ratio: 0.49. 

Benefit-tax ratio: Lowest; 
Illinois (2001-2004): Industry: Health care and social assistance; 
Illinois (2001-2004): Benefit-tax ratio: 0.84; 
Texas (2004-2005): Industry: Accommodation and food services; 
Texas (2004-2005): Benefit-tax ratio: 0.44; 
Washington (1999-2004): Industry: Health care and social assistance; 
Washington (1999-2004): Benefit-tax ratio: 0.51. 

Benefit-tax ratio: Lowest; 
Illinois (2001-2004): Industry: Accommodation and food services; 
Illinois (2001-2004): Benefit-tax ratio: 0.84; 
Texas (2004-2005): Industry: Wholesale trade; 
Texas (2004-2005): Benefit-tax ratio: 0.54; 
Washington (1999-2004): Industry: Accommodation and food services; 
Washington (1999-2004): Benefit-tax ratio: 0.59. 

Benefit-tax ratio: Lowest; 
Illinois (2001-2004): Industry: Educational services; 
Illinois (2001-2004): Benefit-tax ratio: 0.91; 
Texas (2004-2005): Industry: Information; 
Texas (2004-2005): Benefit-tax ratio: 0.57; 
Washington (1999-2004): Industry: Retail trade; 
Washington (1999-2004): Benefit-tax ratio: 0.62. 

Benefit-tax ratio: Lowest; 
Illinois (2001-2004): Industry: Utilities; 
Illinois (2001-2004): Benefit-tax ratio: 0.96; 
Texas (2004-2005): Industry: Arts, entertainment, and recreation; 
Texas (2004-2005): Benefit-tax ratio: 0.58; 
Washington (1999-2004): Industry: Finance and insurance; 
Washington (1999-2004): Benefit-tax ratio: 0.63. 

Benefit-tax ratio: Average; 
Illinois (2001-2004): Industry: [Empty]; 
Illinois (2001-2004): Benefit-tax ratio: 1.27; 
Texas (2004-2005): Industry: [Empty]; 
Texas (2004-2005): Benefit-tax ratio: 0.66; 
Washington (1999-2004): Industry: [Empty]; 
Washington (1999-2004): Benefit-tax ratio: 0.85. 

Source: GAO analysis. 

Note: The average benefit-tax ratio for each state is based on all 
major North American Industry Classification System codes, but does not 
include public administration or unclassified employers. 

[End of table] 

Figure 2: Unemployment Insurance Benefits Charged and Taxes Paid by 
Selected Industries in Washington State from 1999 to 2004: 

[See PDF for image] 

[End of figure] 

The persistence of subsidies to firms in industries such as 
construction and agriculture, forestry, and fisheries may be caused by 
the industries' susceptibility to seasonal or economic cycles that 
result in layoffs and push firms to the maximum tax rate. As one study 
of UI programs in New England notes, "firms enjoying the largest 
subsidies tend to face highly cyclical or seasonal demand for their 
products."[Footnote 29] If this susceptibility causes firms in 
industries such as construction or agriculture to chronically be at the 
maximum tax rate, the subsidies they receive may not be recovered by 
the state. There is at least one anomaly with regard to this 
explanation: The retail trade industry is also seasonal in nature but, 
according to some studies, pays subsidies. According to one study, a 
possible explanation may be that many unemployed workers in this 
industry were not eligible for UI benefits.[Footnote 30] If unemployed 
workers in the retail trade industry were only employed for a short 
time, they may be unable to receive benefits and their former employer 
would not be charged. Aside from the retail trade industry, firms in 
industries like finance, insurance, and real estate may consistently 
pay more in taxes than benefits paid, because they tend to have more 
stable or growing employment and pay the minimum tax rate. 

Studies Reveal That Subsidy Patterns for Broad Industries Do Not Apply 
to All Firms in an Industry, and New Firms Tend to Pay Subsidies: 

Using more detailed data, some studies have found cross-subsidization 
within industries. While, at the broad level, some industries receive 
or pay subsidies, not all subcategories or firms within these 
industries fit the pattern of the overall industry. For example, one 
study found that within the manufacturing industry, apparel 
manufacturing receives a subsidy that is three to four times as great 
as the benefit-tax ratio of other manufacturing subgroups.[Footnote 31] 
Another study, using data from Texas, found that, even though the 
construction industry as a whole receives the second largest subsidy, 
the majority of firms within the construction industry paid more in 
taxes than benefits received by their former employees.[Footnote 32] In 
that study, approximately 52 percent of construction firms paid a net 
subsidy. 

Research has also shown that the likelihood an individual firm will 
receive a subsidy can vary by the age of the firm. In particular, young 
firms that are not yet experience-rated are found to pay more in taxes 
than benefits received by their former workers.[Footnote 33] Typically, 
firms with less than 3 years of employment history are assigned a 
standard tax rate or the average industry rate. One study, using data 
from Texas, reports that the majority of such new firms pay a subsidy, 
although a few of these firms receive large subsidies.[Footnote 34] 
Among firms less than 5 years old, approximately 67 percent pay a 
subsidy, which is the highest rate of all age groups. Overall, the 
author found that young firms and old firms tend to subsidize firms in 
the 11-to 20-year age group. In addition, our analysis of recent data 
from Illinois also indicates that firms that are not yet experience- 
rated pay a relatively large subsidy. In Illinois, new employers paid 
21 percent more in taxes than benefits received by their former workers 
from 2001 to 2004, to the amount of more than $84 million. 

Measures to Improve Experience Rating and Reduce Subsidies Must Be 
Balanced against Other Goals: 

States could take various actions to improve experience rating and 
reduce subsidies, but state officials and experts indicated that such 
changes should be considered in light of other program goals and 
considerations. For example, higher maximum tax rates would better 
balance tax payments and benefit charges for employers whose former 
employees impose high costs on a state's program. However, according to 
state officials and experts, states may also wish to limit the 
financial liability of firms under the unemployment insurance system 
and that for some firms and industries, higher tax rates might be 
difficult to bear. 

Increasing Tax Payments of Subsidized Firms Could Reduce Subsidies but 
Increase Financial Strain on Some Businesses and Have Other Undesirable 
Effects: 

State unemployment insurance programs could improve experience rating 
and reduce cross-subsidies by increasing the unemployment insurance 
taxes paid by firms that receive subsidies. Among the several ways 
states could improve experience rating, some of the key adjustments 
would be to raise the maximum tax rate, increase the taxable wage base, 
or adopt some combination of these two modifications.[Footnote 35]A 
2003 analysis of the Massachusetts unemployment insurance program 
indicates that making an adjustment can have a substantial effect on 
closing the gap between benefits charged to and taxes paid by firms 
that get a subsidy.[Footnote 36] Using a simulation analysis, the study 
found that using a new tax rate schedule with higher maximum rates 
reduces ineffective charges from $978.4 million to $801.3 million, an 
18 percent decrease.[Footnote 37] Further, an increase in the taxable 
wage base from $10,800 to $18,000 was found to reduce ineffective 
charges--that is, benefit charges to active firms that are not matched 
in tax revenue from those firms--from $978.4 million to $773.6 million, 
a 21 percent decrease. 

U.S. Department of Labor and state officials, as well as unemployment 
insurance experts, have noted that measures to improve experience 
rating or reduce cross-subsidies involve trade-offs that states would 
need to consider. Several unemployment insurance officials and experts 
have stated that full experience rating is not desirable, in part 
because some firms could not afford to pay the full costs of benefits 
their former employees incur. Commenting on the possibility of higher 
maximum tax rates, an official with the Texas Workforce Commission told 
us that firms that now pay at the highest tax rates include seasonal 
employers and employers whose business activities are being taken over 
by overseas firms and other declining companies. He noted that some of 
these companies are already under financial stress, and some may well 
have adjusted their business models based on the assumption of the 
maximum tax rate. An increase in the rate could seriously hurt such 
firms. 

States may also face political resistance to such increases. An 
Illinois official said that increases to the maximum tax rate would be 
portrayed by affected businesses that are already paying at the maximum 
tax rate as creating a bad business climate; some might say that such a 
change would drive them out of business or force them to relocate out 
of the state. Similarly, in a 1996 report to the President and 
Congress, the Advisory Council on Unemployment Compensation noted that 
some employers--especially small ones--that need to lay off workers may 
find that their tax rates increase so dramatically as a result of those 
layoffs that that additional layoffs become necessary. The report 
further noted that no research has been conducted on the potential 
negative effects of experience rating. 

Reducing subsidies by raising the maximum tax rates or the taxable wage 
base may also conflict with particular policy objectives of a state. 
For example, officials of the California Employment Development 
Department told us that the California unemployment insurance system 
was intentionally developed to subsidize two industries important to 
the California economy--agriculture and construction. The officials 
explained that the California agricultural sector includes not just 
farms, but canneries and other associated industries that have large 
seasonal fluctuations in demand for labor. When the state's UI system 
last underwent major revision in 1985, there was an emerging need to 
provide alternative sources of income so that workers would be 
available from season to season. Unemployment benefits paid during the 
off-season became an essential part of an agricultural worker's annual 
income. The officials stated that a pattern of a working season, 
followed by a period of subsisting on unemployment benefits, followed 
by another working season, has become the norm for many of these 
workers. 

Improving experience rating by increasing the taxable wage base might 
involve offsetting effects on experience rating. As noted by the 
Advisory Council on Unemployment Compensation, a change in the taxable 
wage base most directly affects the degree of experience rating by 
changing the distribution of employers' tax rates.[Footnote 38] Raising 
the taxable wage base increases the degree of experience rating for 
employers at the maximum tax rate before the increase, and below it 
afterward. However, if the tax rate schedule was not adjusted at the 
same time, raising the taxable wage base could also reduce experience 
rating, as it would increase tax payments by employers who already pay 
subsidies into the unemployment insurance system. If the tax rate 
schedule was modified, some employers might move to the minimum tax 
rate, a change that would also limit experience rating. 

Reducing Noncharged Benefits Would Restrict UI Eligibility or Impose 
Additional Costs on Employers: 

Noncharged benefits--benefits payments that are not charged to a 
specific employer--detract from experience rating because they are 
shared--that is, they are borne to some degree by all employers, thus 
adding to the costs of employers who had no responsibility for the 
unemployment. Noncharges could be reduced either by reducing benefit 
payments in such cases or by charging such benefits to the recipient's 
previous employer or employers. However, each approach has its 
drawbacks. 

Eliminating noncharged benefits would restrict the breadth of coverage 
of state unemployment insurance programs. For example, nearly all 
states will, in some situations, pay benefits to unemployed workers who 
voluntarily quit their last job. Elimination of such benefit payments 
would leave such workers uncovered by the unemployment insurance 
system. Elimination of benefit payments in some noncharge situations 
would also restrict a state's ability to promote broader policy 
objectives though the unemployment insurance system. For example, an 
official of the Illinois Department of Employment Security told us that 
during a 2003 debate over statutory changes to the state's unemployment 
insurance system, organized labor advocated for a noncharge in the 
event that a person became unemployed because of domestic violence. A 
person might, for example, be unable to go to his or her former place 
of work because the abuser might stalk that person there. In 
considering how to reduce noncharges, states are faced with the choice 
of paying these noncharges or denying benefits to individuals in such a 
situation. 

On the other hand, charging many noncharges to employers could be seen 
as contrary to the experience-rating principle, because, in theory, the 
employer was not responsible for the unemployment. Further, state 
officials told us that such an action would likely be strongly resisted 
by employers. For example, in describing the domestic violence 
noncharge mentioned above, an Illinois official said that employers 
concurred with the change, but on the condition that individual 
employers should not be charged because responsibility for the 
unemployment would not be theirs. 

Other Actions to Improve Experience Rating: 

States could take various other measures to improve experience rating 
and reduce cross-subsidies. For example, they could improve experience 
rating by lowering or eliminating minimum tax rates. This would improve 
experience rating for firms that impose little to no cost on the trust 
fund. However, a very low minimum tax rate--especially a zero tax rate-
-could also have drawbacks. For example officials of the Michigan 
Unemployment Insurance Agency noted that the tax rate in their state 
could be too low, given that shared costs need to be recovered, and 
that the current minimum rate may not be sufficient to ensure that 
firms at the minimum rate pay their share. Others have noted that a 
zero tax rate would not be consistent with the notion of social 
insurance, which requires that an entity receiving coverage pay some 
premium, even if the entity imposes no costs on the system. 

States could also make other adjustments to improve experience rating, 
such as taking into account the time value of money or, in the case of 
the reserve ratio state, eliminating the practice of writing off 
negative balances. Such actions would better ensure that a firm's 
experience rating reflects the full costs it has imposed on the UI 
system. However, such actions might have little effect on the actual 
tax payments of firms that are at the maximum tax rate and receive 
subsidies year after year. Further, California officials told us that 
the practice of writing off negative balances prevented negative 
balance employers from falling into too deep a deficit position. 
Without such write-offs, the employer would have no incentive to 
improve its experience rating by reducing its number of layoffs. 

Concluding Observations: 

Cross-subsidies in state unemployment insurance systems are a long- 
standing part of the system, and the subsidies occur because 
unemployment insurance taxation systems are not fully experience-rated-
-a fully experience-rated system would ensure that, over time, the 
costs that an employer imposed on the unemployment insurance programs 
were equal to the taxes it paid. As with other insurance systems, such 
as automobile insurance, many of the potential beneficiaries may never 
receive benefits, understanding that the premiums paid protect them 
should the need for benefits arise. Several aspects of state 
unemployment insurance systems cause this shortfall from full 
experience rating, and states could improve experience rating and 
reduce these cross-subsidies by adjusting these aspects. 

In considering measures to increase the experience rating of state UI 
systems, it is important to note that stabilizing employment through 
experience rating is one of several goals of unemployment insurance. 
The program was also established to provide temporary, partial wage 
replacement for unemployed workers, and to stabilize the economy though 
maintenance of consumer purchasing power in time of high unemployment. 
Further, federal law and regulations provide very limited guidance 
regarding the degree of experience rating or the acceptable size of a 
cross-subsidy. Instead, they have left it to the states to design 
financing systems that are experience-rated to one degree or another. 

States could nonetheless increase experience rating and reduce 
subsidies, but they have chosen to balance these considerations against 
other policy goals. For example, all states have chosen to limit the 
financial liability of employers by establishing a maximum tax rate. It 
is possible that the subsidies arising from these policies provide 
benefits that extend beyond those directly subsidized. Subsidized 
industries may be large employers in a given state or represent core 
parts of a state's economy. Subsidies may have other intended effects. 
For example, they may encourage employers to continue contributing to 
the system, even if they provide only a part of the contribution they 
should make. Under the current framework, state policy makers decide 
the appropriate balance between experience rating and the other policy 
objectives of a state's unemployment insurance program. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of Labor for its 
review. Overall, Labor agreed with our findings, and noted that the 
report provided a succinct analysis of the issues we sought to address. 
Labor also cautioned that an emphasis on "full experience rating" may 
obscure the fact that employers in the United States pay an amount much 
closer to the benefits assigned to them than do employers in any other 
country. We concur with this view, and it is in fact consistent with 
our conclusions. We also modified the report slightly to reflect these 
issues more explicitly. Labor's formal comments are reproduced in 
appendix III. 

Labor also provided technical comments on the draft report, which we 
have incorporated where appropriate. 

As arranged with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 7 days 
from the date of this letter. At that time, we will send copies to 
interested congressional committees and members, and the Secretary of 
Labor. We will also make copies available to others upon request. In 
addition, our report will be available at no charge on GAO's Web site 
at [Hyperlink, http://www.gao.gov]. 

Contact points for our Office of Congressional Relations and Office of 
Public Affairs may be found on the last page of this report. GAO staff 
that made major contributions to this report are listed in appendix IV. 

Sincerely yours, 

Signed by: 

Sigurd R. Nilsen, Director: 
Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to address the following questions: 

1. How have states ensured that individual employers pay unemployment 
insurance taxes based on their experience with unemployment, and what 
aspects of state unemployment insurance systems limit such experience 
rating? 

2. To what extent do employers pay unemployment insurance taxes 
commensurate with unemployment benefits paid to their former employees, 
and how does this vary by industry? 

3. What steps could states take if they wished to ensure that the taxes 
paid by individual firms more closely matched the benefits paid to the 
former employees of each firm? 

To answer the first and third questions, we reviewed pertinent 
literature and interviewed Department of Labor officials, and officials 
of national organizations representing the perspectives of business, 
labor, and state unemployment insurance agencies, as well as nationally 
recognized experts on unemployment insurance. We also conducted in- 
depth interviews with representatives of unemployment insurance 
agencies in 5 states--California, Illinois, Michigan, Texas, and 
Washington. We selected these states because they are relatively 
populous and geographically dispersed, and because they take different 
approaches to ensuring experience rating. We discussed each state's 
approach to financing unemployment insurance benefits, and the 
implications that various aspects of these systems had for experience 
rating and the existence of cross-subsidies. We also reviewed pertinent 
documents describing the unemployment insurance financing systems in 
each of these 5 states. In addition, we obtained and analyzed the 
Department of Labor's experience-rating index, an annual measure of 
experience rating in the state and territorial unemployment insurance 
programs. 

To answer the second question, we identified and reviewed 10 studies 
published between 1972 and 2000 that measured how closely taxes paid by 
firms and industries matched the benefit costs they imposed. These 
studies used a variety of techniques to measure whether some categories 
of employers consistently pay more or less in taxes than benefits paid 
to their former workers. Two GAO economists reviewed these studies and 
determined that they were sufficiently reliable to use in this report. 
We confirmed with the U.S. Department of Labor and national experts on 
unemployment insurance that these 10 studies constituted the definitive 
work done to date on this subject. To supplement these studies, we 
asked the 5 states that we contacted to provide data on tax and 
benefits payments by industry type according the North American 
Industry Classification System (NAICS). Three of the 5 selected states-
-Illinois, Texas, and Washington--provided such data for all or some of 
the years from 1999 to 2004. We interviewed officials knowledgeable 
about these data and determined that the data were sufficiently 
reliable to include in this report. Using these data, we developed 
updated comparisons of the balance between taxes paid and benefits 
received for industry groups.[Footnote 39] 

[End of section] 

Appendix II: Example of a State's Unemployment Insurance Tax Schedules: 

Table 6: California Unemployment Insurance Tax Schedules: 

Reserve ratio: Exceeds or equals: Less; 
Reserve ratio: Less  than: -0.20; 
Contribution rate schedules stated as a percentage: AA: 5.4; 
Contribution rate schedules stated as a percentage: A: 5.4; 
Contribution rate schedules stated as a percentage: B: 5.4; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.20; 
Reserve ratio: Less than: -0.18; 
Contribution rate schedules stated as a percentage: AA: 5.2; 
Contribution rate schedules stated as a percentage: A: 5.3; 
Contribution rate schedules stated as a percentage: B: 5.4; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.18; 
Reserve ratio: Less than: -0.16; 
Contribution rate schedules stated as a percentage: AA: 5.1; 
Contribution rate schedules stated as a percentage: A: 5.2; 
Contribution rate schedules stated as a percentage: B: 5.4; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.16; 
Reserve ratio: Less than: -0.14; 
Contribution rate schedules stated as a percentage: AA: 5.0; 
Contribution rate schedules stated as a percentage: A: 5.1; 
Contribution rate schedules stated as a percentage: B: 5.3; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.14; 
Reserve ratio: Less than: -0.12; 
Contribution rate schedules stated as a percentage: AA: 4.9; 
Contribution rate schedules stated as a percentage: A: 5.0; 
Contribution rate schedules stated as a percentage: B: 5.3; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.12; 
Reserve ratio: Less than: -0.11; 
Contribution rate schedules stated as a percentage: AA: 4.8; 
Contribution rate schedules stated as a percentage: A: 4.9; 
Contribution rate schedules stated as a percentage: B: 5.2; 
Contribution rate schedules stated as a percentage: C: 5.4; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.11; 
Reserve ratio: Less than: -0.10; 
Contribution rate schedules stated as a percentage: AA: 4.7; 
Contribution rate schedules stated as a percentage: A: 4.8; 
Contribution rate schedules stated as a percentage: B: 5.1; 
Contribution rate schedules stated as a percentage: C: 5.3; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.10; 
Reserve ratio: Less than: -0.09; 
Contribution rate schedules stated as a percentage: AA: 4.6; 
Contribution rate schedules stated as a percentage: A: 4.7; 
Contribution rate schedules stated as a percentage: B: 5.1; 
Contribution rate schedules stated as a percentage: C: 5.3; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.09; 
Reserve ratio: Less than: -0.08; 
Contribution rate schedules stated as a percentage: AA: 4.5; 
Contribution rate schedules stated as a percentage: A: 4.6; 
Contribution rate schedules stated as a percentage: B: 4.9; 
Contribution rate schedules stated as a percentage: C: 5.2; 
Contribution rate schedules stated as a percentage: D: 5.4; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.08; 
Reserve ratio: Less than: -0.07; 
Contribution rate schedules stated as a percentage: AA: 4.4; 
Contribution rate schedules stated as a percentage: A: 4.5; 
Contribution rate schedules stated as a percentage: B: 4.8; 
Contribution rate schedules stated as a percentage: C: 5.1; 
Contribution rate schedules stated as a percentage: D: 5.3; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.07; 
Reserve ratio: Less than: -0.06; 
Contribution rate schedules stated as a percentage: AA: 4.3; 
Contribution rate schedules stated as a percentage: A: 4.4; 
Contribution rate schedules stated as a percentage: B: 4.7; 
Contribution rate schedules stated as a percentage: C: 5.0; 
Contribution rate schedules stated as a percentage: D: 5.3; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.06; 
Reserve ratio: Less than: -0.05; 
Contribution rate schedules stated as a percentage: AA: 4.2; 
Contribution rate schedules stated as a percentage: A: 4.3; 
Contribution rate schedules stated as a percentage: B: 4.6; 
Contribution rate schedules stated as a percentage: C: 4.9; 
Contribution rate schedules stated as a percentage: D: 5.2; 
Contribution rate schedules stated as a percentage: E: 5.4; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.05; 
Reserve ratio: Less than: -0.04; 
Contribution rate schedules stated as a percentage: AA: 4.1; 
Contribution rate schedules stated as a percentage: A 4.2; 
Contribution rate schedules stated as a percentage: B: 4.5; 
Contribution rate schedules stated as a percentage: C: 4.8; 
Contribution rate schedules stated as a percentage: D: 5.1; 
Contribution rate schedules stated as a percentage: E: 5.3; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.04; 
Reserve ratio: Less than: -0.03; 
Contribution rate schedules stated as a percentage: AA: 4.0; 
Contribution rate schedules stated as a percentage: A: 4.1; 
Contribution rate schedules stated as a percentage: B: 4.4; 
Contribution rate schedules stated as a percentage: C: 4.7; 
Contribution rate schedules stated as a percentage: D: 5.0; 
Contribution rate schedules stated as a percentage: E: 5.3; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.03; 
Reserve ratio: Less than: -0.02; 
Contribution rate schedules stated as a percentage: AA: 3.9; 
Contribution rate schedules stated as a percentage: A: 4.0; 
Contribution rate schedules stated as a percentage: B: 4.3; 
Contribution rate schedules stated as a percentage: C: 4.6; 
Contribution rate schedules stated as a percentage: D: 4.9; 
Contribution rate schedules stated as a percentage: E: 5.2; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.02; 
Reserve ratio: Less than: -0.01; 
Contribution rate schedules stated as a percentage: AA: 3.8; 
Contribution rate schedules stated as a percentage: A: 3.9; 
Contribution rate schedules stated as a percentage: B: 4.2; 
Contribution rate schedules stated as a percentage: C: 4.5; 
Contribution rate schedules stated as a percentage: D: 4.8; 
Contribution rate schedules stated as a percentage: E: 5.1; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: -0.01; 
Reserve ratio: Less than: 0.00; 
Contribution rate schedules stated as a percentage: AA: 3.7; 
Contribution rate schedules stated as a percentage: A: 3.8; 
Contribution rate schedules stated as a percentage: B: 4.1; 
Contribution rate schedules stated as a percentage: C: 4.4; 
Contribution rate schedules stated as a percentage: D: 4.7; 
Contribution rate schedules stated as a percentage: E: 5.0; 
Contribution rate schedules stated as a percentage: F: 5.4; 
Contribution rate schedules stated as a percentage: *F+: 6.2. 

Reserve ratio: Exceeds or equals: 0.00; 
Reserve ratio: Less than: 0.01; 
Contribution rate schedules stated as a percentage: AA: 3.4; 
Contribution rate schedules stated as a percentage: A: 3.6; 
Contribution rate schedules stated as a percentage: B: 3.9; 
Contribution rate schedules stated as a percentage: C: 4.2; 
Contribution rate schedules stated as a percentage: D: 4.5; 
Contribution rate schedules stated as a percentage: E: 4.8; 
Contribution rate schedules stated as a percentage: F: 5.1; 
Contribution rate schedules stated as a percentage: *F+: 5.9. 

Reserve ratio: Exceeds or equals: 0.01; 
Reserve ratio: Less than: 0.02; 
Contribution rate schedules stated as a percentage: AA: 3.2; 
Contribution rate schedules stated as a percentage: A: 3.4; 
Contribution rate schedules stated as a percentage: B: 3.7; 
Contribution rate schedules stated as a percentage: C: 4.0; 
Contribution rate schedules stated as a percentage: D: 4.3; 
Contribution rate schedules stated as a percentage: E: 4.6; 
Contribution rate schedules stated as a percentage: F: 4.9; 
Contribution rate schedules stated as a percentage: *F+: 5.6. 

Reserve ratio: Exceeds or equals: 0.02; 
Reserve ratio: Less than: 0.03; 
Contribution rate schedules stated as a percentage: AA: 3.0; 
Contribution rate schedules stated as a percentage: A: 3.2; 
Contribution rate schedules stated as a percentage: B: 3.5; 
Contribution rate schedules stated as a percentage: C: 3.8; 
Contribution rate schedules stated as a percentage: D: 4.1; 
Contribution rate schedules stated as a percentage: E: 4.4; 
Contribution rate schedules stated as a percentage: F: 4.7; 
Contribution rate schedules stated as a percentage: *F+: 5.4. 

Reserve ratio: Exceeds or equals: 0.03; 
Reserve ratio: Less than: 0.04; 
Contribution rate schedules stated as a percentage: AA: 2.8; 
Contribution rate schedules stated as a percentage: A: 3.0; 
Contribution rate schedules stated as a percentage: B: 3.3; 
Contribution rate schedules stated as a percentage: C: 3.6; 
Contribution rate schedules stated as a percentage: D: 3.9; 
Contribution rate schedules stated as a percentage: E: 4.2; 
Contribution rate schedules stated as a percentage: F: 4.5; 
Contribution rate schedules stated as a percentage: *F+: 5.2. 

Reserve ratio: Exceeds or equals: 0.04; 
Reserve ratio: Less than: 0.05; 
Contribution rate schedules stated as a percentage: AA: 2.6; 
Contribution rate schedules stated as a percentage: A: 2.8; 
Contribution rate schedules stated as a percentage: B: 3.1; 
Contribution rate schedules stated as a percentage: C: 3.4; 
Contribution rate schedules stated as a percentage: D: 3.7; 
Contribution rate schedules stated as a percentage: E: 4.0; 
Contribution rate schedules stated as a percentage: F: 4.3; 
Contribution rate schedules stated as a percentage: *F+: 4.9. 

Reserve ratio: Exceeds or equals: 0.05; 
Reserve ratio: Less than: 0.06; 
Contribution rate schedules stated as a percentage: AA: 2.4; 
Contribution rate schedules stated as a percentage: A: 2.6; 
Contribution rate schedules stated as a percentage: B: 2.9; 
Contribution rate schedules stated as a percentage: C: 3.2; 
Contribution rate schedules stated as a percentage: D: 3.5; 
Contribution rate schedules stated as a percentage: E: 3.8; 
Contribution rate schedules stated as a percentage: F: 4.1; 
Contribution rate schedules stated as a percentage: *F+: 4.7. 

Reserve ratio: Exceeds or equals: 0.06; 
Reserve ratio: Less than: 0.07; 
Contribution rate schedules stated as a percentage: AA: 2.2; 
Contribution rate schedules stated as a percentage: A: 2.4; 
Contribution rate schedules stated as a percentage: B: 2.7; 
Contribution rate schedules stated as a percentage: C: 3.0; 
Contribution rate schedules stated as a percentage: D: 3.3; 
Contribution rate schedules stated as a percentage: E: 3.6; 
Contribution rate schedules stated as a percentage: F: 3.9; 
Contribution rate schedules stated as a percentage: *F+: 4.5. 

Reserve ratio: Exceeds or equals: 0.07; 
Reserve ratio: Less than: 0.08; 
Contribution rate schedules stated as a percentage: AA: 2.0; 
Contribution rate schedules stated as a percentage: A: 2.2; 
Contribution rate schedules stated as a percentage: B: 2.5; 
Contribution rate schedules stated as a percentage: C: 2.8; 
Contribution rate schedules stated as a percentage: D: 3.1; 
Contribution rate schedules stated as a percentage: E: 3.4; 
Contribution rate schedules stated as a percentage: F: 3.7; 
Contribution rate schedules stated as a percentage: *F+: 4.3. 

Reserve ratio: Exceeds or equals: 0.08; 
Reserve ratio: Less than: 0.09; 
Contribution rate schedules stated as a percentage: AA: 1.8; 
Contribution rate schedules stated as a percentage: A: 2.0; 
Contribution rate schedules stated as a percentage: B: 2.3; 
Contribution rate schedules stated as a percentage: C: 2.6; 
Contribution rate schedules stated as a percentage: D: 2.9; 
Contribution rate schedules stated as a percentage: E: 3.2; 
Contribution rate schedules stated as a percentage: F: 3.5; 
Contribution rate schedules stated as a percentage: *F+: 4.0. 

Reserve ratio: Exceeds or equals: 0.09; 
Reserve ratio: Less than: 0.10; 
Contribution rate schedules stated as a percentage: AA: 1.6; 
Contribution rate schedules stated as a percentage: A: 1.8; 
Contribution rate schedules stated as a percentage: B: 2.1; 
Contribution rate schedules stated as a percentage: C: 2.4; 
Contribution rate schedules stated as a percentage: D: 2.7; 
Contribution rate schedules stated as a percentage: E: 3.0; 
Contribution rate schedules stated as a percentage: F: 3.3; 
Contribution rate schedules stated as a percentage: *F+: 3.8. 

Reserve ratio: Exceeds or equals: 0.10; 
Reserve ratio: Less than: 0.11; 
Contribution rate schedules stated as a percentage: AA: 1.4; 
Contribution rate schedules stated as a percentage: A: 1.6; 
Contribution rate schedules stated as a percentage: B: 1.9; 
Contribution rate schedules stated as a percentage: C: 2.2; 
Contribution rate schedules stated as a percentage: D: 2.5; 
Contribution rate schedules stated as a percentage: E: 2.8; 
Contribution rate schedules stated as a percentage: F: 3.1; 
Contribution rate schedules stated as a percentage: *F+: 3.6. 

Reserve ratio: Exceeds or equals: 0.11; 
Reserve ratio: Less than: 0.12; 
Contribution rate schedules stated as a percentage: AA: 1.2; 
Contribution rate schedules stated as a percentage: A: 1.4; 
Contribution rate schedules stated as a percentage: B: 1.7; 
Contribution rate schedules stated as a percentage: C: 2.0; 
Contribution rate schedules stated as a percentage: D: 2.3; 
Contribution rate schedules stated as a percentage: E: 2.6; 
Contribution rate schedules stated as a percentage: F: 2.9; 
Contribution rate schedules stated as a percentage: *F+: 3.3. 

Reserve ratio: Exceeds or equals: 0.12; 
Reserve ratio: Less than: 0.13; 
Contribution rate schedules stated as a percentage: AA: 1.0; 
Contribution rate schedules stated as a percentage: A: 1.2; 
Contribution rate schedules stated as a percentage: B: 1.5; 
Contribution rate schedules stated as a percentage: C: 1.8; 
Contribution rate schedules stated as a percentage: D: 2.1; 
Contribution rate schedules stated as a percentage: E: 2.4; 
Contribution rate schedules stated as a percentage: F: 2.7; 
Contribution rate schedules stated as a percentage: *F+: 3.1. 

Reserve ratio: Exceeds or equals: 0.13; 
Reserve ratio: Less than: 0.14; 
Contribution rate schedules stated as a percentage: AA: 0.8; 
Contribution rate schedules stated as a percentage: A: 1.0; 
Contribution rate schedules stated as a percentage: B: 1.3; 
Contribution rate schedules stated as a percentage: C: 1.6; 
Contribution rate schedules stated as a percentage: D: 1.9; 
Contribution rate schedules stated as a percentage: E: 2.2; 
Contribution rate schedules stated as a percentage: F: 2.5; 
Contribution rate schedules stated as a percentage: *F+: 2.9. 

Reserve ratio: Exceeds or equals: 0.14; 
Reserve ratio: Less than: 0.15; 
Contribution rate schedules stated as a percentage: AA: 0.7; 
Contribution rate schedules stated as a percentage: A: 0.9; 
Contribution rate schedules stated as a percentage: B: 1.1; 
Contribution rate schedules stated as a percentage: C: 1.4; 
Contribution rate schedules stated as a percentage: D: 1.7; 
Contribution rate schedules stated as a percentage: E: 2.0; 
Contribution rate schedules stated as a percentage: F: 2.3; 
Contribution rate schedules stated as a percentage: *F+: 2.6. 

Reserve ratio: Exceeds or equals: 0.15; 
Reserve ratio: Less than: 0.16; 
Contribution rate schedules stated as a percentage: AA: 0.6; 
Contribution rate schedules stated as a percentage: A: 0.8; 
Contribution rate schedules stated as a percentage: B: 1.0; 
Contribution rate schedules stated as a percentage: C: 1.2; 
Contribution rate schedules stated as a percentage: D: 1.5; 
Contribution rate schedules stated as a percentage: E: 1.8; 
Contribution rate schedules stated as a percentage: F: 2.1; 
Contribution rate schedules stated as a percentage: *F+: 2.4. 

Reserve ratio: Exceeds or equals: 0.16; 
Reserve ratio: Less than: 0.17; 
Contribution rate schedules stated as a percentage: AA: 0.5; 
Contribution rate schedules stated as a percentage: A: 0.7; 
Contribution rate schedules stated as a percentage: B: 0.9; 
Contribution rate schedules stated as a percentage: C: 1.1; 
Contribution rate schedules stated as a percentage: D: 1.3; 
Contribution rate schedules stated as a percentage: E: 1.6; 
Contribution rate schedules stated as a percentage: F: 1.9; 
Contribution rate schedules stated as a percentage: *F+: 2.2. 

Reserve ratio: Exceeds or equals: 0.17; 
Reserve ratio: Less than: 0.18; 
Contribution rate schedules stated as a percentage: AA: 0.4; 
Contribution rate schedules stated as a percentage: A: 0.6; 
Contribution rate schedules stated as a percentage: B: 0.8; 
Contribution rate schedules stated as a percentage: C: 1.0; 
Contribution rate schedules stated as a percentage: D: 1.2; 
Contribution rate schedules stated as a percentage: E: 1.4; 
Contribution rate schedules stated as a percentage: F: 1.7; 
Contribution rate schedules stated as a percentage: *F+: 2.0. 

Reserve ratio: Exceeds or equals: 0.18; 
Reserve ratio: Less than: 0.19; 
Contribution rate schedules stated as a percentage: AA: 0.3; 
Contribution rate schedules stated as a percentage: A: 0.5; 
Contribution rate schedules stated as a percentage: B: 0.7; 
Contribution rate schedules stated as a percentage: C: 0.9; 
Contribution rate schedules stated as a percentage: D: 1.1; 
Contribution rate schedules stated as a percentage: E: 1.3; 
Contribution rate schedules stated as a percentage: F: 1.5; 
Contribution rate schedules stated as a percentage: *F+: 1.7. 

Reserve ratio: Exceeds or equals: 0.19; 
Reserve ratio: Less than: 0.20; 
Contribution rate schedules stated as a percentage: AA: 0.2; 
Contribution rate schedules stated as a percentage: A: 0.4; 
Contribution rate schedules stated as a percentage: B: 0.6; 
Contribution rate schedules stated as a percentage: C: 0.8; 
Contribution rate schedules stated as a percentage: D: 1.0; 
Contribution rate schedules stated as a percentage: E: 1.2; 
Contribution rate schedules stated as a percentage: F: 1.4; 
Contribution rate schedules stated as a percentage: *F+: 1.6. 

Reserve ratio: Exceeds or equals: 0.20; 
Reserve ratio: Less than: or more; 
Contribution rate schedules stated as a percentage: AA: 0.1; 
Contribution rate schedules stated as a percentage: A: 0.3; 
Contribution rate schedules stated as a percentage: B: 0.5; 
Contribution rate schedules stated as a percentage: C: 0.7; 
Contribution rate schedules stated as a percentage: D: 0.9; 
Contribution rate schedules stated as a percentage: E: 1.1; 
Contribution rate schedules stated as a percentage: F: 1.3; 
Contribution rate schedules stated as a percentage: *F+: 1.5. 

Source: California Employment Development Department. 

[End of table] 

California determines which of the eight tax schedules to use based on 
the balance in the trust fund as a percentage of gross wages reported 
by all employers. This calculation establishes the rate schedule used 
as outlined in table 7. 

Table 7: Basis for Rate Schedule Used: 

In percent. 

Greater than: 1.8; 
Equal to or Less than: [Empty]; 
Contribution rate schedules: AA. 

Greater than: 1.6; 
Equal to or less than: 1.8; 
Contribution rate schedules: A. 

Greater than: 1.4; 
Equal to or less than: 1.6; 
Contribution rate schedules: B. 

Greater than: 1.2; 
Equal to or less than: 1.4; 
Contribution rate schedules: C. 

Greater than: 1.0; 
Equal to or less than: 1.2; 
Contribution rate schedules: D. 

Greater than:  0.8(or equal to); 
Equal to or less than: 1.0; 
Contribution rate schedules: E. 

Greater than:  0.6(or equal to); 
Equal to or less than: 0.799; 
Contribution rate schedules: F. 

Greater than: [Empty];  
Equal to or less than: : (less than) 0.6; 
Contribution rate schedules: : F+. 

Source: California Employment Development Department. 

[End of table] 

[End of section] 

Appendix III: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for Employment and Training: 
Washington, D.C. 20210: 

Jul - 6 2006: 

Mr. Sigurd R. Nilsen Director: 
Education, Workforce and Income Security Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Nilsen: 

The Department of Labor's Employment and Training Administration (ETA) 
is in receipt of the draft Government Accountability Office (GAO) 
report entitled, "States' Tax Financing Systems Allow Costs to Be 
Shared among Industries" (GAO 06-769). 

The report provides a much needed look at the experience rating of 
state unemployment insurance (UI) taxes, which is an often under- 
appreciated and misunderstood aspect of the UI system. The U.S. is the 
only country in the world that assigns UI tax rates to participants 
(employers) based on their experience with unemployment. While all 
other countries with UI programs charge a single flat rate to all 
participants, the U.S. applies the common insurance concept of 
experience rating to its UI premiums (taxes). The implications and 
impact of this system are important issues for policy makers. 

The report provides a succinct analysis in response to certain 
questions regarding "limits" on experience rating, the extent to which 
an employer's taxes are "commensurate with" UI benefits paid to former 
employees and how this varies by industry, and steps states could take 
to ensure UI taxes "more closely matched the benefits paid to the 
former employees" of the employer. 

While these are important questions for policy makers, we believe it is 
also important to recognize that the experience rating system is not, 
as these questions seem to imply a financing system that is akin to a 
reimbursement system, where all benefits are meant to be fully repaid 
by a responsible employer. Instead, the experience rating provisions of 
Federal law simply allow states to give an employer a reduction in its 
tax rate by considering its experience with unemployment. Federal law 
does not, in fact, refer to benefit costs. 

As noted in the report, for various reasons related to public policy, 
all state UI tax structures contain a liability cap for the highest- 
cost participants. As a result, high-cost employers will not repay the 
exact amount of benefit charges as they would under a reimbursement 
system. Moreover, the insured event (unemployment) is not easy to 
measure, which leads to difficulty in equitably assigning the costs of 
the unemployment. 

For example, when an individual has worked for multiple recent 
employers, is it equitable to charge the employer who actually laid-off 
the individual for the full 26 weeks of UI when that employer may have 
employed the individual for only 13 weeks? Conversely, is it equitable 
to charge a past employer when the individual may have quit over a year 
earlier to work for another employer? As a result of the difficulty in 
determining which employers should be liable for certain benefits in 
these situations, it is difficult to determine what is an acceptable 
degree of experience rating. 

We are concerned that by emphasizing limitations to "full experience 
rating," some readers may lose sight of the fact that U.S. employers 
pay an amount much closer to the benefits assigned to them than do 
employers in any other country. In fact, the system of experience 
rating has led to a majority of employers paying much lower taxes than 
a flat-rated tax system. Seen from this perspective, experience rating, 
as implemented in the U.S., reduces subsidies rather than causing 
subsidies. 

Finding an optimum level of benefit charging is a difficult issue that 
receives little attention. This report is valuable in clarifying a 
number of the relevant issues and in identifying some of the imposed 
limitations to a system of increased benefit charging. 

To improve understanding of state tax systems and their impacts, we 
will soon begin publishing a new state tax structure report. This 
annual report will contain a number of newly published variables that 
will allow users to better evaluate state tax structures and make more 
valid comparisons on the impact of experience rating across states than 
previously published data. 

Thank you for the opportunity to comment on this interesting report. If 
you have any questions, please don't hesitate to call me at 693-2700. 

Signed by: 

Emily Stover DeRocco: 

[End of section] 

Appendix IV: GAO Contacts and Acknowledgments: 

GAO Contact: 

Sigurd R. Nilsen, Director, (202) 512-7215, nilsens@gao.gov. 

Staff Acknowledgments: 

Patrick di Battista, Assistant Director, and Michael Hartnett, managed 
this assignment. Others who made key contributions throughout the 
assignment include Sharon Hermes and Dan Meyer. Dan Schwimer, Pauline 
Seretakis, Scott Spicer, and Shana Wallace provided key support. 

[End of section] 

Related GAO Products: 

Unemployment Insurance: Enhancing Program Performance by Focusing on 
Improper Payments and Reemployment Services. GAO-06-696T. Washington, 
D.C.: May 4, 2006. 

Improper Payments: Federal and State Coordination Needed to Report 
National Improper Payment Estimates on Federal Programs. GAO-06-347. 
Washington, D.C.: April 14, 2006. 

Financial Management: Challenges Continue in Meeting Requirements of 
the Improper Payments Information Act. GAO-06-581T. Washington, D.C.: 
April 5, 2006. 

Unemployment Insurance: Factors Associated with Benefit Receipt. GAO- 
06-341. Washington, D.C.: March 7, 2006. 

Trade Adjustment Assistance: Most Workers in Five Layoffs Received 
Services, but Better Outreach Needed on New Benefits. GAO-06-43. 
Washington, D.C.: January 31, 2006. 

Workforce Investment Act: Labor and States Have Taken Actions to 
Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. 
Washington, D.C.: November 14, 2005. 

Unemployment Insurance: Better Data Needed to Assess Reemployment 
Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. 

Unemployment Insurance: Information on Benefit Receipt. GAO-05-291. 
Washington, D.C.: March 17, 2005. 

Trade Adjustment Assistance: Reforms Have Accelerated Training 
Enrollment, but Implementation Challenges Remain. GAO-04-1012. 
Washington, D.C.: September 22, 2004. 

Workforce Investment Act: States and Local Areas Have Developed 
Strategies to Assess Performance, but Labor Could Do More to Help. GAO- 
04-657. Washington, D.C.: June 1, 2004. 

Financial Management: Fiscal Year 2003 Performance and Accountability 
Reports Provide Limited Information on Governmentwide Improper 
Payments. GAO-04-631T. Washington, D.C.: April 15, 2004. 

Workforce Training: Almost Half of States Fund Employment Placement and 
Training through Employer Taxes and Most Coordinate with Federally 
Funded Programs. GAO-04-282. Washington, D.C.: February 13, 2004. 

Workforce Investment Act: One-Stop Centers Implemented Strategies to 
Strengthen Services and Partnerships, but More Research and Information 
Sharing Is Needed. GAO-03-725. Washington D.C.: June 18, 2003. 

Multiple Employment and Training Programs: Funding and Performance 
Measures for Major Programs. GAO-03-589. Washington, D.C.: April 18, 
2003. 

Unemployment Insurance: States' Use of the 2002 Reed Act Distribution. 
GAO-03-496. Washington, D.C.: March 6, 2003. 

Unemployment Insurance: Increased Focus on Program Integrity Could 
Reduce Billions in Overpayments, GAO-02-697 Washington, D.C.: July 12, 
2002. 

Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is 
Limited. GAO-01-181. Washington, D.C.: December 29, 2000. 

FOOTNOTES 

[1] We use the term "states" to refer to the administrative entities of 
the 53 unemployment insurance programs that cover the 50 states, the 
District of Columbia, Puerto Rico, and the Virgin Islands. 

[2] The federal tax includes a 0.2 percent surtax to reimburse the 
general fund for extended or supplemental benefits paid in the 1974- 
1975 recession. Repayment was completed in 1987, but the surtax has 
been extended through 2007. 

[3] Under federal law, states are not granted the 5.4 percent credit on 
the federal tax unless their UI system is experience-rated. 
Specifically, the law states that a state may not offer reduced tax 
rates to an employer "except on the basis of his (or their) experience 
with respect to unemployment or other factors bearing a direct relation 
to unemployment risk during not less than the three consecutive years 
immediately preceding the computation date" (26 U.S.C. § 3303(a)(1)). 
States may also have reduced rates for newly subject employers on a 
reasonable basis. 

[4] Two states--Delaware and Oklahoma--use a system known as the 
benefit-wage-ratio system, and Alaska uses a system known as the 
payroll variation plan. 

[5] States have different practices regarding the charging of benefits-
-some states charge benefit payments only to the most recent employer; 
others charge multiple employers, either in reverse chronological order 
or in proportion to the wages paid during the base period. Further, in 
some situations, benefits are paid but are not charged to a specific 
employer. 

[6] In some states, the contributions and benefits taken into account 
are limited to those since a certain date. For example, in Rhode 
Island, they are limited to those since October 1, 1958. 

[7] To some extent, these departures from experience rating are an 
outgrowth of various changes that have been made to state systems over 
the years that have typically been established based on negotiations 
between business and labor interests. 

[8] Pennsylvania uses both a reserve ratio and a benefit ratio 
component in determining employer tax rates. The state also writes off 
benefit charges for the reserve ratio component. 

[9] According to Labor, South Dakota does charge interest to negative 
balance employers. Further, 16 states credit interest earned on their 
trust find balances back to employers in some way. 

[10] The actual maximum tax rate in a state can change from one year to 
the next, because of the use of different schedules or changes in 
factors used to calculate a tax rate by formula. 

[11] In Illinois, a worker generally receives benefits equal to about 
48 percent of base period wages. This scenario assumes that each worker 
collects benefits for the full 26 weeks permitted. 

[12] Unemployment Insurance Program Letter to States, General 
Principles of Experience Rating under Section 3303(a)(1), FUTA (Federal 
Unemployment Tax Act), U.S. Department of Labor, June 23, 1983. 

[13] Labor reports ineffective charges as part of an overall measure of 
experience rating known as the experience rating index, or ERI. The ERI 
has important limitations as a measure of experience rating. In 
particular, the measure of ineffective charges is made only for a 
single year. It does not take into account that current-year benefits 
for some employers lead to higher future tax payments. 

[14] States that allow certain general categories may differ in the 
specific provisions of such noncharges. For example, California and 
Nevada pay benefits to persons who quit their last job to accompany a 
military spouse, while some other states do not. 

[15] Illinois' state experience factor is designed to increase or 
decrease experience-rated tax rates based on recent net gains or losses 
in the state's UI fund. In 2005, for example, because benefits paid 
considerably exceeded net revenues for the preceding 3-year period, the 
2005 state experience factor was 139 percent. The fund building rate is 
intended to build up adequate reserves in the trust fund. This rate is 
set statutorily, and was set at 0.9 percent in 2005, and at 0.8 percent 
for 2006 and 2007. 

[16] In general, the studies we reviewed performed their analysis using 
two digit Standard Industrial Classification (SIC) codes. 

[17] The studies we examined calculate subsidies in slightly different 
ways, and the differing ways affect the size of the subsidy estimates. 
Typically, studies estimated the size of the subsidy by comparing 
charged UI benefits to total UI taxes paid by a firm. Other studies 
compared the total of charged and noncharged benefits to taxes paid in 
their measures of subsidies. 

[18] It is important to examine subsidies over multiple years, instead 
of only for a single year, because the UI system is designed to recoup 
costs from employers over multiple years. Single-year data may 
overestimate the extent of cross-subsidization, particularly when the 
use of UI is related to an unemployment shock and not persistent job 
turnover or layoffs. 

[19] Patricia M. Anderson and Bruce D. Meyer, "The Unemployment 
Insurance Payroll Tax and Inter-industry and Interfirm Subsidies," in 
Tax Policy and the Economy, Ed., James M. Poterba, Cambridge, 
Massachusetts: MIT Press, 1993, pp. 111-144. 

[20] A benefit-tax ratio equal to 1 means that an employer is paying 
exactly the amount of taxes as benefits received by their former 
workers. Similarly, an employer or industry with a benefit-tax ratio 
greater than 1 is receiving a subsidy, while an employer or industry 
with a ratio less than 1 is paying a subsidy. 

[21] Wayne Vroman, Unemployment Insurance Tax Equity in Washington, 
Report No. 3, Washington, DC: The Urban Institute, January 1999. 

[22] Although agriculture, forestry, and fisheries received a 
relatively large subsidy proportional to taxes paid, it tends to be one 
of the smallest sectors of the economy. Thus, the industry's overall 
contribution to cross-subsidization may not be as great as other, 
larger sectors that also receive subsidies. 

[23] These findings for the service industry may also vary, in part, 
because of the diversity of subindustries in this category. 

[24] See: Raymond C. Munts and Ephraim Asher, "Cross-Subsidies among 
Industries from 1969 to 1978," in Unemployment Compensation: Studies 
and Research, Volume 2, Washington D.C.: U.S. National Commission on 
Unemployment Compensation," July 1980, pp. 277-297, and Anderson and 
Meyer, "The Unemployment Insurance Payroll Tax and Inter-industry and 
Interfirm Subsidies," p. 122. 

[25] Louise Laurence, "How Large Are the Subsidies Provided by the 
System of Financing Unemployment Insurance?" The Quarterly Review of 
Economics and Finance, Vol. 33, Fall 1993, p. 242. 

[26] Data provided by Illinois and Texas contained taxes assessed to 
employers. Officials from both states indicated that in excess of 99 
percent of taxes assessed are collected from employers. 

[27] It should be noted that over this period, taxes paid by all 
experience-rated employers in Illinois were about $2.2 billion less 
than benefits charged. Hence, the construction industry accounted for 
about half of this difference. Data we obtained from Illinois, Texas, 
and Washington are reported in base year 2005 dollars. 

[28] Employers in Texas were assessed higher taxes relative to benefits 
charged during this time period in order to pay off deficits generated 
in previous years. Employers were charged an obligation assessment to 
cover a bond issuance in 2003. 

[29] Robert Tannenwald and Christopher O'Leary, "Unemployment Insurance 
Policy in New England: Background and Issues," New England Economic 
Review, Federal Reserve Bank of Boston, May 1997, pp. 3-22. 

[30] Tannenwald and O'Leary, "Unemployment Insurance Policy in New 
England: Background and Issues," p. 16. 

[31] Joseph M. Becker, S.J., Experience Rating in Unemployment 
Insurance: An Experiment in Competitive Socialism, Baltimore, Maryland: 
The Johns Hopkins University Press, 1972. 

[32] Laurence, "How Large Are the Subsidies Provided by the System of 
Financing Unemployment Insurance?" pp. 241-242. 

[33] Using a practice known as SUTA dumping, some employers have 
created a new company to improve their experience rating and attain a 
lower tax rate. See GAO-03-819T. Despite this practice, new employers, 
as a whole, pay subsidies in some states. 

[34] Louise Laurence, "How Do Firm Characteristics Affect the Subsidies 
Provided by the Unemployment Insurance System?" Applied Economics, Vol. 
9, September 1991. 

[35] 

[36] Wayne Vroman, Unemployment Insurance Financing Options in 
Massachusetts, The Urban Institute, Washington D.C., December 2003. 

[37] The tax schedule also included a number of changes in addition to 
a higher maximum tax rate. Consequently, some portion of this change 
may be due to factors other than the increased maximum tax rate. 

[38] Advisory Council on Unemployment Compensation, Unemployment 
Insurance in the Unites States: Benefits, Financing, and Coverage, 
Washington D.C.: February, 1995. 

[39] Illinois and Texas provided data on taxes due rather than taxes 
paid. However, state officials told us there should be little 
difference between the two figures. 

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