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Mr. LARSON. One more section and that is section 3, reduced rates. All States now have experience rating which, of course, is merely a system in which roughly your State tax rates go down if you have good unemployment experience, but at the present time you have to have at least 3 years behind you of employment experience to get the benefit of experience rating.

You can see what the effect of that is on new businesses, which is rather unfortunate. Just at the time when the going is the toughest you are hit with a straight 3-percent tax, while all your competitors who have been in business for a few years are getting 1 percent or 1.6 percent on a national average, so the proposal is to cut this minimum period down to 1 year, and you can see this would be a pretty important corollary of extending to 1 or more because you have a lot of new businesses covered under the 1 or more provision and this is designed not only to help out generally, but to help out the new people that will come in under the 1 or more provision.

Mr. Mason. It is designed to make it easy to implement this new coverage?

Mr. LARSON. Yes; it is partly that. It is not entirely that. It would be a good thing even standing by itself because it would help new businesses and stimulate expansion which is something we all always very much want.

Mr. KEAN. It does get away from the principle of the experience of a corporation, that on which the rate is based. "I think there is mixed thought as to whether that new corporation ought to go in or not. I can see very strongly from your point of view the unfairness against a new business, and yet certainly 1 year's business does not provide a true experience test for people who just go into business for a short time and find the business is going to fail.

Mr. LARSON. It is true it cuts down the length of experience to 1 year, but after that, you see, you go back to your minimum again, that is to say, after you have in fact been in business for 3 years you are back on a 3-year basis. It is only during this interim transitional period that you get the benefit of the shorter period.

Mr. KEAN. After you once start in the rating goes back to 3 years?

Mr. LARSON. It goes back; yes. Of course, here I might state that a State need not go down to 1 year if it does not want to.

Mr. KEAN. It is optional.

Mr. LARSON. Yes; it is optional. This is something which is merely permissive and gives the State a little more elbow room in which to deal with this new business problem.

Mr. BYRNES. Are you leaving this subject now?
Mr. LARSON. I think that probably is all on H. R. 8857.

Mr. BYRNES. I would like to get some more information. This experience rating acts as a tax cut for those who show a good experience as far as steady employment; is that right?

Mr. LARSON. Yes.
Mr. BYRNES. And we give him credit on his tax?
Mr. LARSON. That is correct.

Mr. BYRNES. In other words he pays less tax. A person with good experience pays less tax than a person with bad experience?

Mr. LARSON. That is right.

Mr. BYRNES. Do you mean to tell me that in 1 year you can test any given employer as to whether he has a good experience or a bad experience as far as continuity of employment is concerned?

Mr. LARSON. You can test it temporarily, which is all this does. This gives him a rate which will apply to the next period, but, as I say, this only carries through this initial transitional period.

Mr. BYRNES. You certainly have figures on business mortality rates.
Mr. LARSON. Yes.
Mr. BYRNES. Is it not much higher in the first years?
Mr. LARSON. Yes; definitely.

Mr. BYRNES. Which would seem to indicate to me that what you are going to do is say that we will give to those we know are bad risks, people with bad experience as far as level employment situation is concerned, we will give you a special benefit even though you are bad risks, that does not sound like good sense to me in an insurance program. I think

I think you weaken the basic structure of experience rating and the purpose of the experience rating, which is to say to an employer, "You are going to get a cash benefit. You are going to get a tax credit if you can so organize your business to avoid unemployment.”

Mr. LARSON. If he organizes it that way the first year

Mr. BYRNES. However, you cannot tell what he has done in 1 year's operation as far as I can see.

Mr. LARSON. This does not really give an advantage to the new business. It only puts him on the same terms as the old business in that he gets an experience rating and instead of, as now, being under a rather severe disadvantage. It is true that business mortality is high in the first year, but is that not something we ought to try to improve?

Would it not be better in this small way to make a contribution to cutting down business mortality, and specially at a time like this stimulating new business, new small business particularly, and business expansion? I think that is what this is going to do.

Mr. BYRNES. You were telling us before that this additional tax is so small for this 1-employee plant or 2-employee plant that it is not worth bothering about as a cost item to that particular employer. Now you are saying that a tax credit can be a matter of the question of whether his business continues or whether it fails.

I think we have to have some consistency here some place.

Mr. LARSON. I do not think I was quite as extreme on the other point. I do not think I said that businesses would stand or fall on their employment experience rating.

It is one effect that gives them a little competitive disadvantage. It might be the difference between 3 percent and a 1 percent rating, something like that, or if you want to take the overall average, 1.3 percent, or 1.4 percent, or 1.5, or 1.6 percent. I do not say this will prevent business mortality.

Mr. BYRNES. Do I understand that you feel that with a new employer going into business, you can judge in his first year's operation what his general record is going to be as far as continuity of employment so as to be able to give him a tax credit.

Mr. Larson. You see, the whole experience rating system is not quite as absolute or quite as simple as that. It is something that spreads out over a long period of years and in most cases under the reserve ration plan, which most States have, it involves a building up of a pooled record.

It does not stand or fall on what happens in 1 year. It goes on and on. Maybe he will get a break the first year, but it will not last very long if his subsequent experience shows that the first year's experience was wrong. It will kick back and even out in the end because, you see, let us suppose he starts paying 3 percent but his actual experience is much, much better than that. He is piling up during these 3 percent years this reserve with no debits against it, so pretty soon after 3 years his rating is going to go way down.

On the other hand, if we let him get this early start with the lower rate and then if he has really bad experience, he will pay for it sooner or later, but it is a matter of the timely adjustments of his good and bad experience.

Mr. BYRNES. He may never pay for it because he may go out of business and that is where your mortality is. He will last for only 2 or 3 years.

However, he folds and all these people draw unemployment compensation, but who is going to pay for it? It is the other employers under your plan because he will not even have paid the full 3 percent rate.

Mr. LARSON. I see your point, but of course, to a considerable extent that is the nature of insurance. We never know when we take out life insurance whether we are going to pay $25 and draw $1,000 or whether we are going to pay much more in premiums than our beneficiaries ultimately get. I think to a considerable extent that is the problem here, that some people draw out, so to speak, much more than they put in and with some it is the other way around.

Mr. BYRNES. You still in insurance, as I understand it, have different rates for different types of risks. You do not put everybody in the same category. You have preferred risks.

If I can judge the experience of new businesses, you are taking bad risks and giving them the preferred rate.

Mr. LARSON. I think it might be interesting—I did not trouble you with too many figures on this—to show the disproportion between what the new employers are paying and what the old employers are paying, but in some States the new employers are paying a wholly disproportonate share of the State's bill for unemployment insurance.

I have a table here, table 12, which indicates the contributions to the State funds being made by unrated employers as to the precentage of benefits and expenditures. If you start at the top you will find the unrated employers, the ones not getting the benefit of experience rating, are paying in Arizona 63.9 percent, and in Nebraska 40.6 percent, and in many, many cases up and down that list will 40, 50, 60, 70, up to 108 percent of benefit expenditures in the case of Colorado.

That is the relative burden that is being carried by the people who have not been allowed the benefits of the experience rating because of the period of years it must be weighed. The minimum is 3 years.

In some States it is actually 4 or 5 as it actually turns out, and as I say, this is again optional. If any State decides for reasons of its own that it does not want to go down to 1 year, of course it is free to keep it higher.

Mr. BYRNES. The question as I see it is a question of the soundness of the system. Under this provision, the States are invited to make à change in the State systems that might put their system on an unsound basis. I think we have to be very careful even if it is optional because it is an invitation to them.

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Mr. LARSON. I think you have to weigh that argument against the argument that these things have gotten completely disproportionate, as you can see from this column of figures on table 12, as to the amount that is being carried by the unrated employers.

So far as the solvency of the fund, the typical experience rating has a self-adjusting mechanism within it so when the solvency begins to get into the least bit of trouble, the rate moves up and the fund is automatically restored, so I do not think this would threaten the solvency of the State fund in itself.

Mr. BYRNES. You could fix it so everybody else has to pay a higher rate. You can always adjust it that way. That is what the mechanism is. When things are bad, everybody gets less credit. I do not think it is very consistent with the theory of the experience of an employer having something to do with the rate he has.

You might just as well move into a system of just a flat-iate tax. You can forget about experience rating.

The CHAIRMAN. Mr. Larson, I would like to congratulate you on the very clear statement that you have made.

There is an appropriation bill on the floor. We cannot proceed very well this afternoon, so the committee will be adjourned until 10 o'clock_tomorrow morning. Will you arrange to be here then?

Mr. LARSON. Yes. We have the one big item of the Federal civilian worker coverage which I have not touched on.

Mr. Chairman, could I have this formal statement and the tables put in the record?

The CHAIRMAN. Yes; without objection those will be included in the record. (The prepared statement, tables, and charts referred to follow :)

STATEMENT OF ARTHUR LARSON, UNDER SECRETARY OF LABOR Mr. Chairman, and members of the committee, I wish to express my appreciation for this opportunity to present the views of the administration with respect to the five bills dealing with the unemployment compensation program which are the subject of the present hearings. These bills are H. R. 6537, 6539, 7054, 8585, and 8857.

All of these bills except one, H. R. 8585, deal in one form or another with four recommendations the President submitted to Congress in his Economic Report of January 28, 1954, with regard to Federal legislation to improve the unemployment insurance system. These are, extension of the Federal unemployment tax to employers of one or more employees, extension of the Tax Act to certain types of services performed in connection with the processing of agricultural products, provisions to enable the States to permit new employers with less than 3 years of experience under the law to qualify for reduced tax rates, and extension of unemployment compensation to Federal civilian employees.

I would like to begin by discussing H. R. 8857, introduced recently by the chairman of this committee. The administration strongly endorses all of the provisions of this bill. They carry out in full the first three recommendations of the President which I have outlined.

COVERAGE OF EMPLOYERS OF ONE OR MORE

The major change this bill makes in the unemployment compensation system is found in section 1. This section makes employers of less than eight workers subject to the payroll tax imposed by the Federal Unemployment Tax Act. At present only those who employ 8 or more for at least 20 weeks are subject to this Federal tax. H. R. 8857 extends this tax coverage by amending the definition of the term employer in the Federal Unemployment Tax Act to impose tax liability upon all persons who employ one or more individuals at any time if they perform the types of services covered by the act. As you know, those employers who are covered by approved State unemployment tax laws, receive up

States

to 90 percent credit as a tax offset against the Federal tax for their State unemployment taxes.

The administration urges extension of coverage as provided in section 1 of this bill. Exclusion of emplovers of less than eight from tax liability under the present Federal act means that the employees of these firms are not entitled to any unemployment benefits unless, of course, the law of the State in which they are located covers them by taxing these employers. The 48 States, the District of Columbia, Alaska, and Hawaii, have unemployment compensation laws. The present coverage in the 51 States is set forth in the following table:

Number of Size-of-firm coverage (number of workers): 8 or more

22 6 or more.

2 4 or more

8 3 or more.

2 1 or more

17 Seven of the one or more States cover these employers if they employ workers in covered employment at any time as is proposed in H. R. 8857; 5 of the 17 do so only if the payroll is a certain size in a calendar quarter or year; 5 do so only if employment has extended for a specified number of weeks in a year.

As the President pointed out in his Economic Report this year, it is estimated that this limitation on coverage by the Federal and State unemployment compensation laws leaves some 3.4 million workers unprotected by the unemployment insurance system. The President therefore recommended, in both his budget message and Economic Report, prompt extension of the Federal-State unemployment insurance system to employers of one or more workers as is provided in section 1 of H. R. 8857.

At the outset, I think we should keep in mind that unemployment insurance is designed to provide protection to all workers who are subject to the risk of involuntary unemployment to the extent that this is administratively feasible. Failure to cover small employers in the original act was due not to the feeling that there was no need for protecting their employees, but to concern whether it would be administratively feasible to collect contributions from small employers at the commencement of the program. The only discussion of the size limitation in connection with consideration of the original act appears in a report of the Advisory Council to the President's Committee on Economic Security in 1934. The report of that Council suggested 6 workers in 13 weeks, with the following comment:

“A broader coverage than that suggested is deemed desirable by the Advisory Council, but practical considerations lead us to recommend that it be limited as above outlined in inaugurating the system, We recommend, however, that the Federal administrative authority study the problem of extending the coverage to the employers of less than six employees. We recommend also that it work out plans for unemployment compensation to the employees of the Federal Government."

It is interesting to note that the final coverage of 8 or more represented a compromise in the conference committee between House action providing for coverage of 10 or more and Senate action for 4 or more.

From the standpoint of the individual, this form of protection against the hazard of involuntary joblessness is just as important if he works for a small employer as if he works for an employer of thousands. Nor is the threat of unemployment any less. In the States which already cover small firms, benefits are paid to unemployed workers of such firms in almost the same proportion as to unemployed workers of large establishments.

In addition, from the standpoint of the general economy, it is as important to maintain the purchasing power of employees of small firms as of large firms. I need hardly pcint out that unemployment benefits are now universally accepted as a means of slowing up the forces that go to make a depression in periods of falling employment of workers. The community benefits because such protection increases the effectiveness of the unemployment insurance program in providing a cushion against declining purchasing power. The extension of coverage provided by H. R. 8857 would particularly benefit small localities where a large percentage of workers are employed by small firms. Also, the small employer finds it easier to obtain and keep workers who would otherwise prefer to work for a larger establishment where they would be protected by the compensation system.

Several objections have been raised to the extension of the unemployment insurance system to these small employers. The administration has weighed these objections and does not believe them valid.

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