Michigan Loses Out on FUTA Tax

Like the rest of the country, Michigan is working its way out of what turned out to be a relatively mild recession, with unemployment still rather high.  For thousands of Michigan families, the recession won't end until new jobs open up—and job creation usually doesn't pick up until the very end of a recession.

Fortunately there is something Congress can do to speed the process.

The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax of 0.8 percent on the first $7,000 earned by their employees.  This tax does not fund unemployment insurance—the actual funds that go to the unemployed are collected through a separate state tax.  Funds collected under FUTA are returned to the states to cover the costs of administering their unemployment insurance systems.

At least that's what's supposed to happen.  As it turns out, the federal government is keeping most of this FUTA revenue.  Researcher William B. Connerly, Ph.D., of the American Institute for Full Employment in Klamath Falls, Ore., recently discovered that only 47 percent of FUTA taxes actually go to running state unemployment insurance programs.  The rest stays in Washington, where it has the effect of making the budget surplus look larger than it actually is.

Michigan fares better than most states on this deal, but of the $246.6 million Michigan employers pay in FUTA taxes annually, only $134.9 million—a little more than half—comes  back to Michigan's unemployment insurance system.

The Bush administration has proposed a hefty funding cut for FUTA, from 0.8 percent down to 0.2 percent.  In effect, this would leave the states to cover the costs of their own unemployment insurance systems, while the remaining FUTA funding would cover functions such as loaning money to states that exhaust their unemployment funds, or providing money for 13-week benefit extensions in states with high unemployment.

The FUTA tax cut would save Michigan employers over $184 million annually.  Even if the state government were to hike unemployment taxes to make up its administrative costs, employers would still come out ahead, to the tune of around $50 million annually (the $184 million saved minus the $134.9 million it costs to run Michigan's system).

What would be even better would be to eliminate FUTA altogether.  The reason: Making the states come up with the funds to run their own unemployment insurance systems is likely to make those systems more efficient.

A basic tenet of sound public policy is that nobody spends someone else's money as carefully as he spends his own.  And the Michigan Unemployment Agency (MUA) is a perfect example.  In 2001, the MUA paid out more than $1.6 billion.  If past years are any guide, more than 10 percent of the funds paid out were not properly payable under Michigan's unemployment law.  According to the U.S. Department of Labor, 10.35 percent of the monies paid out of the state's unemployment insurance funds in 2000 were overpayments. Because states like Michigan administer their unemployment insurance with federal FUTA tax money, there is no pressure to use the money efficiently.

Making the state Legislature responsible for funding the Michigan Unemployment Agency would mean that the agency and its budget would be under the control of elected officials from Michigan, rather than being monitored from afar by one-size-fits-all-minded bureaucrats in Washington.  State lawmakers are more in touch with the unemployment situation in Michigan, and are more responsive to the needs of job seekers and employers.  This would translate into closer scrutiny and more flexibility in how the fund is administered.

As things now stand, Michigan's unemployment insurance program is being run in a way that wastes taxpayer dollars.  Being laundered through a large federal bureaucracy weakens accountability and provides little incentive for efficiency or innovation in the handling of state unemployment insurance funds.

While it is a relatively small item in Michigan's budget, the FUTA tax is aimed at the heart of Michigan employment.  It is levied directly on employers and goes up every time new workers are hired.

Now is a perfect time for Congress to cut the cost of hiring new workers.  Lowering or abolishing the FUTA tax would be a good way to start.

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(Paul Kersey is labor research associate with the Mackinac Center for Public Policy.  Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)

Summary

Washington is keeping most of the revenue collected from employers under the Federal Unemployment Tax Act (FUTA), a tax that is supposed to fund the administration of state unemployment insurance programs. Congress should abolish this tax-which constitutes a direct tax on employment-and hand states back the responsibility of running their own unemployment programs.

Main Text Word Count: 694

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