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It is argued that this is not an appropriate area for Federal legislation and that enactment of such a provision in the Federal law is merely a device to force the States to pass legislation which should be left to their discretion. The administration does not agree with such a position. When we examine the original division of items betweer: the Federal and State unemployment insurance legislation, it is clear that one of the few things reserved by the Federal act was the specification of the minimum number of employees per firm and the types of service which give rise to compulsory coverage. This could only mean that this detail should also be subject to amendment by Federal action when the time is ripe for greater coverage. By contrast, there is nothing in the Federal legislation about levels or duration of benefits; this was left to the States on the theory that wages and living conditions vary from State to State. The State employment security administrators have recognized this distinction and as recently as 1951 representatives of the Interstate Conference of Employment Security Agencies testified before the committee in favor of extending the coverage of the Federal act to employers of one or more. They recognize that the present limitation of the Federal tax to employers of eight or more is a standard which the Federal Government should be free to change.

The subject is also one in which the Federal Government has a very definite interest. Present-day American business and economic activities of every kind have become so interdependent that economic developments within a State are frequently the result of forces beyond the State's control. This has been dramatically evidenced in the past year or so when a drop in automobile and farm machinery production has caused unemployment not only among auto workers in Michigan, but among steelworkers, parts manufacturers, dealers, tire manufacturers, repairmen, contractors, subcontractors, distributors, retailers, and so on in a chain reaction extending far beyond the confines of 1 State, of 1 industry, or of employees of large firms. Because of this interdependence, the Federal Government has a definite interest in as widespread protection against unemployment and maintenance of purchasing power as is possible. In this connection it has been recognized that the Federal Government has an obligatior. to see to it that the country maintains a strong economy and is not permitted

to slip into a depression. Then in, the Federal Unemployment Tax Act is a Federal tax law which has been in the statute books since 1935. No one would recommend its repeal. As a Federal tax statute it is appropriate for the Federal Government to make sure that it represents the most equitable form of coverage. It is clear that equity requires extension of the tax to all employers unless it is not feasible to

Otherwise, an unfair and unnecessary discrimination results. As I shall discuss shortly, there is no valid reason why an employer of 8, 9, or 10 or a 1,000 employees should pay this tax and not those of 1, 3, or 7.

I would also like to point out that in the last 872 years not a single State has extended coverage by eliminating or reducing size-of-firm restrictions. Twentytwo States have, indeed, retained their exclusion of less than 8 since the Social Security Act was enacted nearly 20 years ago. There appears to be little likelihood that the States will do anything by themselves in this particular area of unemployment insurance.

If coverage of the Federal act is extended in this manner, very little legislative action should be necessary in the States in order to provide unemployment benefits to the employees of these small firms. In anticipation of possible Federal action in this area, the laws of 32 States already provide for automatic extension of the coverage of their laws if the Federal act is so amended. In addition, the laws of all but one of the remaining States provide that small employers not now. covered may voluntarily elect coverage prior to State legislative action.

Another objection which has been raised to such an extension of coverage is that it will bring into the unemployment-compensation program multitudes of intermittent and occasional employers and employees who have no substantial relation to the job market. This objection is largely due to a misconception of who would be covered. For example, it is said that whenever anyone hires a man to cut his lawr. he would be covered under the proposed amendment. However, as you know, the act expressly excludes from the type of employees on whom employers must pay the tax, those who perform domestic service. It also excludes those who perform service which is not in the course of an employer's trade or business, unless the employee is regularly employed for 26 days or more in the quarter and receives at least $50 cash therefor.

Nor would insuperable administrative and cost burdens be added by bringing these additional employers under the system. The old-age and survivors insurance program has applied to employers of one or more since the date of its enact

do so.

ment in 1935. The withholding tax also applies to employers of one or more. Extension of the unemployment tax to the same employers thus opens up the possibility of joint Federal tax returns and a saving of time and expense both to the taxpayer and the Federal Government.

In addition, experience in those States which already cover these small employers has demonstrated that simplified procedures are a result. The actual amount of work per employer is reduced. Questions involved in determining whether or not an employer is covered are greatly simplified. There is no necessity to wait until the end of the taxable year to determine employer liability. No audits of the employer's payroll records or extensive investigations for coverage purposes are needed, and elaborate files on employers who are on the borderline of coverage become unnecessary as does frequent circulation of such employers.

For example, the Arkansas Employment Security Agency, in a report to the Federal bureau in 1948, stated that some of the administrative advantages of coverage of small firms were that “field auditors do not have to audit employer accounts to determine whether or not an employer is liable. When you get into one or more coverage, practically all employers in covered employment are subject to the act and, therefore, much time is saved in determining their status.” The Washington agency reported as follows:

“Beyond initial load of setting up previously excluded group of employers, the adm tration has posed no problem other than increased field volume. Actually, the men in the field encounter fewer collection problems among the smaller firms and prefer extended coverage to former coverage with size-of-firm and duration tests. General coverage eliminates former problems of constant liability audits. Benefit determination has been simplified and speeded up by extended coverage since formerly liability had to be established in many cases before benefit determination could result.”

In addition, this more nearly universal coverage of employers will make it much easier to make sure that a worker who has applied for benefits is not actually working for another employer.

As I have stated, H. R. 8857 extends coverage to employers who employ one or more persons at any time without imposing any requirement of number of weeks of employment, as do some States. If such a requirement were retained the possibilities of administrative simplification in determining employer liability, which I have pointed out, would be destroyed. Furthermore, such a limitation would continue to exempt from coverage not only many small employers but also many large employers who employ great numbers of workers for a period of less than 20 weeks. In fact, an employer could escape coverage if he provided employment continuously up to 38 weeks, if 19 weeks of employment were provided at the end of one year and 19 at the beginning of the next. Keeping such a limitation would thus exempt a large amount of employment in construction and other seasonal industries. This is particularly inequitable for workers who shift from one construction or seasonal job to another and whose total employment during a year is much longer than 20 weeks.

Another objection raised to this type of coverage is that experience rating will not work for small employers. But the facts do not bear out these fears. Experience rating is the procedure under which an employer is entitled to a reduced tax rate if his experience with employment or other factors directly related to unemployment risk, meets certain standards. Let us look at the experience of small employers. The maximum contribution rate in most States is 2.7 percent. In 1953, 57.4 percent of employers covered by State laws who had less than $5,000 annual payroll had favorable contribution rates of less than 1 percent, as compared with only 53.7 percent of all employers regardless of size. The full rate of 2.7 percent or more was paid by 23.3 percent of the employers with less than $5,000 payroll as compared with 17.5 percent of all employers. From these data, it would appear that small firms have substantially as stable employment as larger employers as well as substantially favorable experience ratings.

It has also been objected that while the employment by small employers is relatively stable, if an employer of 1 person lays off his 1 employee, it wipes out his experience rating. However, in all but one State the employers' accounts on the basis of which they get an experience rating, are bookkeeping accounts in a pooled 'fund and the workers get benefits from this pooled fund whether or not the individual employer has contributed enough to pay for his benefits. It is the essence of insurance that the benefits provided are paid in full whether or not the insurer has paid contributions equal to the benefits. It is true that in a few States, if an employer's account is exhausted, he must contribute at the highest rate until his contribution offsets the benefits paid to his former employees. In most States,

however, the rates are not burdensome on the employer since the maximum rate is 2.7 percent of wages and the highest rate in any State is 4.1 percent. Pertinent is the report of the California Employn.ent Security Agency in 1948 that: “We know of no business mortality which has been caused by this extension of coverage to these smaller firms.'

In this connection, I would like to make it clear that the unemploymentinsurance tax will not impose any unreasonable burden on small employers. The payrolls on which the unemployment-insurance tax is based are only part of the costs of doing business, a part which varies in importance in different industries. Nearly 70 percent of the employers who would be brought under the tax by the extension of coverage provided by H. R. 8857 are in the service and trade industries. In these industries the payroll costs of individual proprietors, of ail sizes, amount to slightly less than 10 percent of the net costs of goods sold and business deductions allowed. An additional 3-percent tax on payrolls would consequently represent an overall increase in business costs of only about three-tenths of 1 percent. Since 57.4 percent of employers with less than $5,000 annual payrolls have tax rates of less than 1 percent, their overall increased cost would be substantially less than one-tenth of 1 percent.

The highest amount that employers will have to pay for each employee is 3 percent of $3,000 or $90 (except in the case of a few States that have rates up to 4.1 percent for the employers that have unusually unfavorable experience). Actually, the experience of the States has been that the average employer pays in State contributions only 1.3 percent of taxable wages and that average Federal and State annual taxes per employee at the maximum taxable wage are $48. As I have pointed out earlier, 57.4 percent of employers with less than $5,000 annual payroll have tax rates of less than 1 percent.

In concluding my remarks on section 1 of H. R. 8857 I would like to point out that not only will some 3.4 million workers not now covered receive unemploymentinsurance protection, but also a substantial number of workers already covered will have more adequate protection than they now have. Part of a worker's employment during the course of a year may be for a covered employer, and part for a noncovered employer. At present, his noncovered wages cannot be included with his covered wages to determine his entitlement to unemployment benefits. This means that employees who may have worked the same amount of time as covered employees, may be denied benefits because part of the necessary wages to qualify them were earned in noncovered employment. This is manifestly inequitable.

AMENDMENT OF DEFINITION OF AGRICULTURAL LABOR

Section 2 of H. R. 8857, while continuing the exclusion of agricultural labor as such, would extend the unemployment compensation system to those workers who perform certain types of services related to agriculture or in connection with the processing of agricultural products which are essentially industrial in nature. This is accomplished by adopting the OASI definition of agricultural labor by reference in the Federal Unemployment Tax Act. In this connection, it is important to note that the OASI law does two things. It defines the term "agricultural labor" so that any type of service which would not constitute agricultural labor within that definition is thereby included within the general coverage of the law. But the OASI law also partially covers those services which are defined as agricultural labor. H. R. 8857 does not propose to extend coverage to any type of service included within the definition of agricultural labor, so that in this respect coverage will not conform to the OASI law.

I would like to present some of the background of this proposal. When the Social Security Act was enacted in 1935, agricultural labor was excluded without any explicit definition of the term. State unemployment-insurance laws as enacted contained a similar exclusion without any explicit definition. The need for uniformity in interpretation was filled by regulations of the Bureau of Internal Revenue. The regulations remained in effect until Congress added a definition of agricultural labor for both unemployment insurance and old-age and survivors insurance purposes—in identical language-in 1939. In 1950 this definition was amended further for purposes of the old-age and survivors insurance law only to , cover within the system the types of services to which I have referred. It is now proposed that this definition be adopted for purposes of the Federal Unemployment Tax Act.

The principal effect of this change would be to cover drying, packing, packaging, processing, freezing, grading, storing, and similar services performed for a farm

operator when he has produced less than half the commodities processed or handled.

As I have stated, section 2 of H. R. 8857 does not extend coverage to agricultural labor, as such. It is designed to extend the unemployment insurance tax only to those groups of industrial-type and processing workers who were given old-age and survivors' insurance protection by the 1950 amendments.

Some of the workers that would be covered by the proposed change in the Federal Unemployment Tax Act are already covered under State unemployment-insurance laws. Thus, the Florida law covers the grading, packing, packaging, or processing of fresh citrus fruits; and California limits the agricultural labor exclusion to services on a farm in the employ of the owner or tenant of the farm where the materials being processed are produced. Likewise, a number of the States require that in order for agricultural services to be excluded, they must be performed for an owner or tenant as an incident to ordinary farming operations. Amendment of the Federal Unemployment Tax Act as is proposed in section 2 would thus remove any competitive disadvantage in which employers are placed in the States which already cover some or all of these workers.

The President's Economic Report of January 28, 1954, recommended extension of the unemployment compensation system to these workers and pointed out that such an extension would give the protection of the system to an estimated 200,000 workei who are now excluded.

In this recommendation the President pointed out that these services “cannot reasonably be classed as agricultural pursuits,” because they are essentially commercial or industrial in character. The agricultural processing workers frequently operate mechanical equipment such as graders or conveyors; they include an increasingly growing number of stationary engineers tending steam boilers, box assemblers, truck operators, receiving clerks, box lidders, and electricians, as well as those who handle, sort, grade, wash, polish, and pack the fruits and vegetables; and the laborers who keep the packinghouse in order. There is little to distinguish these operations from those in factories. Except for the product handled, the work and occupations are virtually identical.

It should be noted that operative organizations are now covered by the law and that the proposed amendment would treat as a cooperative an unincorporated group of farm operators if the number of operators in the group is more than 20. This would remove an existing inequity since formally organized cooperatives, regardless of size, are now covered, but larger unincorporated groups of operators are not. In this respect, also, the definition of agricultural labor would correspond to that used for purposes of the old-age and survivors' insurance system.

State legislative action would not be required in all States to give these workers protection. Twenty-six State unemployment-insurance laws, in anticipation of a possible amendment of the Federal Unemployment Tax Act, provide for automatic coverage of such employers upon amendment of the Federal act.

This type of coverage has been supported both by the employers and the workers who would be benefited. In Florida, the employers of the citrus-processing plants supported the original State legislation covering citrus-packing workers, while in California a considerable number of agricultural processors elected coverage in accordance with the provisions of collective agreements. The California employers have long stressed their competitive disadvantage in this area as compared with other States.

The basis for excluding a worker from unemployment-insurance benefits because he is employed by a large corporation to operate an automatic machine for packing fruits or vegetables, while extending coverage to his friend who works across the road in a canning factory, cannot easily be explained. In a word, the agricultural processing workers cannot understand why they are not covered for unemployment-insurance purposes, because when unemployed, their need is as great as that of other workers in similar occupations in commerce and industry who are at present covered.

These workers have been covered under the old-age and survivors' insurance program since 1950 without undue difficulty. And in California, where over 20,000 agricultural processing workers have been covered since June 1, 1945, the employment security agency states that the administrative problems have been about the same as those in similar seasonal work. The administration therefore urges extension of unemployment-compensation coverage to these workers as provided in section 2 of H. R. 8857.

REDUCED RATES FOR NEW EMPLOYERS

Section 3 of H. R. 8857 amends the experience-rating provisions of the Federal Unemployment Tax Act.

As you know, in all States employers are granted reductions in the unemployment taxes they must pay the State if their unemployment experience has been sufficiently favorable so as to meet certain requirements spelled out in the Federal and State laws. The Federal Unemployment Tax Act allows employers to credit this reduction against their Federal unemployment tax. In other words an employer who has received such a reduction is credited with the difference between the amount actually paid and the amount he would have been required to pay if he had not received the reduction.

At the present time at least 3 years of experience with the risk of unemployment under the State law is required by the Federal Act before a State can give an experience rating-and therefore a tax reduction—to an employer, no matter now stable his employment. This means that an employer must be charged the full 3.0 percent rate, 2.7 percent to the State fund and 0.3 percent to the Federal Government, during at least the first 3 years of his coverage under the program. In some States, the period exceeds 3 years. In 1953, rated employers paid an average tax rate of about 1.1 percent, or 1.4 percent if the Federal tax is included. New employers who pay 3 percent are thus put at a competitive disadvantage with established employers and are required to carry an extra financial load at a time they can perhaps least afford it.

The President, in his Economic Report of January 28, 1954, recommended that "Congress allow the shortening, from 3 years to 1, of the period required to qualify for a rate reduction.”. Section 3 of H. R. 8857 carries out this recommendation in full. The administration therefore strongly recommends its adoption.

Interest in this problem of what are proper contribution rates for new employers has been considerable. Immediately after World War II, the issue was raised by several States and discussed by the executive committee of the Interstate Conference of Employment Security Agencies composed of the employment security administrator of each State, in connection with assistance to veterans who were establishing their own business. Since then, the interstate conference has adopted resolutions at most of its annual meetings calling for study of the problem. The Federal Advisory Council on Employment Security, after thoroughly considering the problem, unanimously recommended the enactment of such legislation.

Four types of employers may be affected by this provision: (1) Employers newly covered by an extension of coverage of the State law—which would result if H. R. 8857 is enacted into law, (2) employers establishing a new business, (3) out-of-State employers establishing new branches in the State, and (4) veterans who are reestablishing their businesses after a lapse due to military service. There has been strong sentiment in favor of giving these new employers some tax relief on the ground that the present experience rating requirements discriminate against new business. Such tax relief would seem especially desirable in connection with the proposed extension of coverage to many small firms which would have to pay, if experience rating is not revised as proposed, the present high rates for periods ranging from 3 to 5 years.

The present disparity of treatment has become especially marked in the last few years.

During these years, contribution rates of most established employers dropped to low levels in nearly all States, with the result that there has been a widening gap between the low average tax rates of the rated employers and relatively high tax rates of the unrated ones. For the rate year beginning in 1953, in only 1 State did the rated employers pay an average rate as high as 2.0 percent of taxable wages; in 31 States, rated employers paid an average rate of 1 percent or less of taxable wages. In some States, large numbers of employers have had their tax rates reduced to zero. In the tax rate year beginning in 1953, for example, in 5 States between 47 and 98 percent of all employers eligible for rate reductions paid zero rates. In as many as 38 States, at least 50 and as high as 98 percent of employers eligible for rate reductions paid rates of less than 1 percent. This drop in tax rates of employers eligible for rate reductions has been due, for the most part, to increasing reserve funds. These in turn have resulted in part from very favorable economic conditions coupled with the higher average tax rates in effect in the earlier years. Also, in a good many instances, the increased reserve funds have resulted from the high tax yields contributed by new employers not eligible for rate reductions, with the result that established employers are benefiting at the expense of new employers.

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