1. Arkansas

CALCULATIONS OF CUMULATIVE COSTS

Since the employers benefit cost rate is 1.1% ($11,000÷$1 million), his tax rate has stabilized at 1.1%-a rate which just offsets his annual benefit costs and maintains his account balance at $75,000, or 7.5% of his annual taxable payroll. (A 7.5% account balance produces a 1.1% tax rate under the law's schedule of tax rates.)

When the taxable wage base is increased to $4,800, this employer's annual taxable payroll goes up to $1,358,400.

To achieve again the equilibrium between credits and charges to his account, this employer must build up his account balance from $75,000 to an amount which will produce a reserve ratio (on the new, higher base) which yields a tax rate (on the new base) which in turn will equal his benefit cost rate (also on the new base).

1. Benefit Cost Rate on $4,800 base-$11,000+$1,358,400=0.8%.

2. Tax rates most nearly corresponding to cost rate-0.7% and 0.9%.

Note: Since the law does not provide a tax rate exactly equal to the cost rate, the employer's annual tax rates will fluctuate between 0.7% and 0.9% and will average 0.8% over the years.

3. Reserve Ratios Required for 0.7% and 0.9% tax rates. For 0.7% rate, 82% reserve ratio required. For 0.9% rate, 8% reserve ratio required.

4. Size of Required Reserves on the New Base-8% x $1,358,400=$108,672— 82% x $1,358,400-$115,464.

5. Weighted Average of Required Reserves on New Base--$111,728.

6. Required Increase in Average Reserve Balance (Cumulative Cost)-Between $111,728-75,000-$36,728.

Note: The Arkansas law gives the employer a one-time, irrevocable option to have his reserve ratio calculated on the basis of his most recent annual taxable payroll or on the basis of his average annual taxable payrolls for several recent years. The foregoing figures would be valid in either cases, but the period of time required to reach the final cumulative figure would be longer if the employer had elected to have an average payroll used.

2. Michigan

Michigan's present taxable wage base is $3.600, so the employer's current annual taxable payroll is $1,200,800 instead of $1,000,000 as in the other states cited.

The employer's benefit cost rate is .92% ($11,000+$1,200,800). His tax rate has stabilized at an average of .92%, fluctuating between 0.9% and 1.1% from year to year. (Of the above tax rates only 0.8% and 1.0% respectively are credited to the employer's account. The remainder is a flat rate tax applicable to all employers.)

To attain tax rates of 0.9% and 1.1%, the employer's account must have a reserve ratio of 7% and 6.7% respectively; and these percentages amount to $84,000 and $80,400. The weighted average of these figures is $83,640.

When the taxable wage base is increased to $4,800 this employer's annual taxable payroll goes up to $1,358,400.

To achieve again the equilibrium between credits and charges to his account, this employer must build up his account balance from a range between $80,400 and $84,000 to an amount which will produce a reserve ratio (on the new, higher base) which will yield a tax rate (on the new base) which in turn will equal his benefit cost rate (also on the new base).

1. Benefit cost rate on $4,800 base-$11,000÷$1,358.400=0.81%.

2. Tax rates (exclusive of flat tax rate) most nearly corresponding to cost rate 0.8% and 1.0%.

3. Reserve ratios required for those tax rates-7.0% and 6.7%.

4. Reserve balances required for those tax rates-$95,088 and $91,013.

5. Weighted average of required balances-$94,844.

Increase in amount of average required balance-$11,244.

3. New York

The employer's current benefit cost rate is 1.1% ($11,000-$1,000,000). His tax rate has stabilized at an average of 1.1% (exclusive of the flat-rate "subsidiary" contribution assessed against all employers covered by the New York law) by fluctuating between 1.0% and 1.2% from year to year.

To attain tax rates of 1.0% and 1.2%, the employer's account must have a reserve ratio of 11% and 10.5%, respectively; and these percentages amount to $110,000 and $105,000. The weighted average of these figures is $107,500.

When the taxable wage base is increased to $4,800, this employer's annual taxable payroll goes up to $1,358,400.

To achieve again the equilibrium between credits and charges to his account, this employer must build up his account balance from a range between $105,000 and $110,000 to an amount which will produce a reserve ratio (on the new, higher base) which will yield a tax rate (on the new base) which in turn will equal his benefit cost rate (also on the new base).

1. Benefit cost rate on $4,800 base-$11,000÷$1,358,400=0.81%.

2. Tax rates (exclusive of flat tax rate) most nearly corresponding to cost rate 0.8% and 1.0%.

3. Reserve ratios required for those tax rates-11.5% and 11%.

4. Reserve balances required for those tax rates $156,216 and $149,424.

5. Weighted average of required balances-$155,876.

Increase in amount of average required balances-$48,376.

4. Ohio

The employer's current benefit cost rate is 1.1%. His tax rate has stabilized at 1.1%. To attain a tax rate of 1.1%, the employer's account must have a reserve ratio of 7.5%; and this reserve ratio requires an account balance of $75,000.

When the taxable wage base is increased to $4,800, this employee's annual taxable payroll goes up to $1,358,400.

To achieve again the equilibrium between credits and charges to his account, this employer msut build up his account balance from $75,000 to an amount which will produce a reserve ratio (on the new, higher base) which will yield a tax rate (on the new base) which in turn will equal his benefit cost rate (also on the new base).

1. Benefit cost rate on $4,800 base-0.81%.

2. Tax rates most nearly corresponding to cost rate-0.7% and 0.9%.

3. Reserve ratios required for those tax rates-8.5% and 8.0%.

4. Reserve balances required for those tax rates-$115,464 and $108,672. 5. Weighted Average of Required Balances-$111,728.

Increase in amount of Average Required Balances-$36,728.

E. Tax Cost, fourth and subsequent years on $4,800 base:

Annual benefit charges..

Average annual taxable payroll.

Benefit ratio_

Tax rate..

Tax cost..

$11,000 1,358, 400 0.81% 0.6% $8, 150

STATEMENT OF PAUL P. HENKEL, CHAIRMAN OF THE SOCIAL SECURITY COMMITTEE OF THE COUNCIL OF STATE CHAMBERS OF COMMERCE; ACCOMPANIED BY WILLIAM R. BROWN, ASSOCIATE RESEARCH DIRECTOR, COUNCIL OF STATE CHAMBERS OF COMMERCE

Mr. HENKEL. Mr. Chairman, members of the committee, thank you for the opportunity of permitting the Council of State Chambers of Commerce to appear at this hearing.

My name is Paul Henkel and I am manager of payroll taxes for the Union Carbide Corp., but I appear here today as chairman of the Social Security Committee of the Council of State Chambers of Commerce. I am testifying for the member State chambers of commerce listed at the end of this statement who have specifically authorized me to represent them on this occasion. Accompanying me is William R. Brown, associate research director of the Council of State Chambers of Commerce.

We appear today to express general support for H.R. 14705 despite the fact that we have serious reservations and objections to a few of its provisions. Our reservations and objections concern:

1. The increase in the Federal unemployment compensation taxable wage base to $4,200 in 1972;

2. The inclusion of Federal benefit eligibility standards.

FEDERAL-STATE EXTENDED BENEFIT PROGRAM

It is a pleasure to express our support of the objective of H.R. 14705 to establish a permanent program of extended unemployment benefits. We are pleased that the administration has accepted the Housepassed version of a jointly financed Federal-State financed extended benefit program. We also are pleased that the Interstate Conference of Employment Security Agencies overwhelmingly favors this type of extended benefit program.

Our position on H.R. 14705 is similar to that which we took before this committee in 1966 on H.R. 15119. That bill, too, would have established a Federal-State extended benefit program during periods of high unemployment. But, as the chairman of this committee observed in opening the current hearings, there was a deadlock between the House-Senate conferees after the Senate amended the House-passed bill. We would hope that the Senate will accept the House bill without major amendment and thus preclude another deadlock.

FINANCING PROVISIONS

Although we support the establishment of the Federal-State extended benefit program, we wanted the Federal portion thereof to be financed by an increase in the Federal unemployment tax rate. In our statement to the House Ways and Means Committee, we opposed an increase in the Federal unemployment taxable wage base. As a matter of principle, we still do. We recognize, however, that the $4,200 taxable wage base proposed in H.R. 14705 is a reasonable middle ground between the employer's position and the administration's position. (Initially, the administration bill, H.R. 12625, proposed a $4,800-$6,000 taxable wage base.)

The administration orignally pressed for a $6,000 taxable wage base on the ground that it was necessary to finance a 100-percent federally financed extended benefit program. Although the administration now concedes that such a program should or could be financed on a 50-percent Federal, 50-percent State basis, it nevertheless attempts to continue to justify the need for a $6,000 taxable wage base. The logic in this escapes us.

On pages 3 and 5 of our written statement which was reproduced on pages 127 through 129 of the printed record of these hearings, we have included several arguments that have already been mentioned by preceding witnesses and in order to conserve this committee's time we will not dwell on these arguments. However, we would wish to point out, (1) we do not agree with the theoretical case for a $6,000 taxable wage base that Dr. Shultz made in his testimony. We disagree with his underlying asumptions and conclusions and are convinced that his theory promotes rather than eliminates inequities.

(2) We do not agree with Dr. Shultz' contention that it is inequitable to require an employer in a low-wage industry or State to pay a higher effective tax rate.

(3) We do not agree with Dr. Shultz' contention that the decreasing proportion of taxable payrolls to total payrolls produces inequitable results and prevents State experience rating from accurately reflecting differences in employers' assigned tax rates.

There has been a sharp distinction between the nature and purpose of Federal and State unemployment taxes. We strongly emphasize that this distinction should be maintained to the greatest extent possible. The Federal unemployment compensation tax has been used solely to pay administrative costs. Any relationship between the taxable wage base and total wages paid to employees has nothing to do with raising money to defray administrative costs.

We think a head tax or a "per employee" tax is a fair and convenient mechanism for raising administrative money. It is nothing more. It certainly costs no more to administer the unemployment compensation claims and to provide job referral services to a high-paid claimant than it does to provide the same service to a low-paid claimant.

We wish to point out that the administration proposes to increase the social security taxable wage base to $9,000 in 1971. As you know, the employer social security tax rate is scheduled to increase from 4.8 percent to 5.2 percent in 1971. It is our view that the Congress must take these increases into consideration while deciding upon the changes in and the costs of Federal-State unemployment compensation programs.

41-184-7016

We have attached to our statement table I, which compares on a cost per employee basis the present and proposed status of both social security unemployment compensation. The State unemployment compensation tax cost on the table has been computed at the standard 2.7-percent tax rate. The rate assigned to most new employers. Admittedly that rate could be lower. It could be one-tenth of 1 percent. But it also could be higher. For example, 4 percent.

We think this table brings to light, first, the hidden or "iceberg" effect of the changes in the Federal unemployment taxable wage base on State unemployment compensation tax costs and, second, the total impact of payroll taxes which is to all employers and which should be to the Congress a matter of serious concern.

We think the table demonstrates the reasonableness of H.R. 14705 in contrast to H.R. 12625, the initial administration bill.

It is undeniable that in the past Congress has come to expect opposition from employers and business associations to proposed social insurance tax increases and social welfare changes. Our reaction, however, has been compelled by excessively liberal and costly proposals. We have come forward today in support of H.R. 14705 even though employers and State chambers of commerce are not entirely satisfied with the House-passed version of the bill. We reiterate our view that it represents a fair and reasonable accommodation of conflicting viewpoints. We urge that there be no further substantive amendments to H.R. 14705, particularly an increase in the taxable wage base beyond $4,200 and the inclusion of Federal weekly benefit standards.

Thank you.

Senator ANDERSON. Thank you.

Questions?

Senator WILLIAMS. No questions.

Senator ANDERSON. Thank you very much.

(Mr. Henkel's prepared statement follows:)

PREPARED STATEMENT OF PAUL P. HENKEL ON BEHALF OF THE COUNCIL OF STATE

CHAMBERS OF COMMERCE

I am Paul P. Henkel. I am Manager of Payroll Taxes for the Union Carbide Corporation, but I appear here today as Chairman of the Social Security Committee of the Council of State Chambers of Commerce. I am testifying for the member state chambers of commerce listed at the end of this statement who have specifically authorized me to represent them on this occasion. Accompanying me is William R. Brown, Associate Research Director of the Council of State Chambers of Commerce.

We appear today to express general support for H.R. 14705 despite the fact that we have serious reservations and objections to a few of its provisions. Our reservations and objections concern:

(1) the increase in the Federal Unemployment Compensation taxable wage base to $4200 in 1972;

(2) the inclusion of Federal benefit eligibility standards.

FEDERAL-STATE EXTENDED BENEFIT PROGRAM

It is a pleasure to express our support of the objective of H.R. 14705 to establish a permanent program of extended unemployment benefits. We are pleased that the Administration has accepted the House-passed version of a jointly financed Federal-State financed extended benefit program. We also are pleased that the Interstate Conference of Employment Security Agencies overwhelmingly favor this type of extended benefit program.

Our position on H.R. 14705 is similar to that which we took before this Committee in 1966 on H.R. 15119. That bill, too, would have established a Federal