President Obama’s budget proposal includes changes to federal unemployment compensation taxes that would provide some short-term relief for Connecticut employers but also long-term increases beginning in 2016.

Under the proposal, a 0.2% increase in the surcharge on the federal unemployment tax (FUTA) that had expired in 2011 would return in 2014 and be made permanent – bringing the total surcharge for most states up to 0.8%.  Unfortunately, because Connecticut borrowed so heavily from the federal government to maintain the solvency of the Unemployment Compensation Trust Fund, our surcharge grows at 0.3% per year until the debt is paid off – and is currently at 1.4%.

The good news is, however, interest payments that some states—including Connecticut—are making on dollars borrowed from the federal government to keep the state’s unemployment system afloat would be suspended for two years.

The president’s proposal also suspends for two years the 0.3% FUTA credit reduction that Connecticut and other states are experiencing because of the loan interest payback.

Raising the Wage Base

However, the president proposes raising the FUTA wage base to $15,000 in 2016.  Thereafter, the wage base would be indexed and automatically increase each year based on wage growth. 

Those changes, plus the return of the surcharge and loan interest payments, would be a significant cost increase to Connecticut employers.

According to UWC, the changes would cost all U.S. employers an additional $65 billion ($50 million due to the tax base increase and $15 billion from the FUTA rate increase).

The FUTA increases are not expected to be well received in the House, but their fate is uncertain in the Senate.

The FUTA tax covers the costs of administering the unemployment insurance and job service programs in all states. In addition, it pays half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.

Other changes

Emergency unemployment compensation benefits and 100% federal funding of regular extended benefits are discontinued after 2013. With the economy gaining some traction, the number of weeks of unemployment comp on average is expected to decrease but average weekly benefit amounts will go up with wage increases.

For more information, contact CBIA’s Eric Gjede at 860.244.1931 or eric.gjede@cbia.com.