are: In addition, there are three major features of the bill which we are accepting only because of the merits of the bill in its entirety. These (1) Enactment of five new Federal standards to govern the eligibility rules under State unemployment compensation laws. (2) Increasing the Federal taxable wage base to $4,200 without freeing the States from the necessity of following suit. And (3), forcing the States to extend their coverage to small employers and to some employment now excluded. We have discussed these seven major provisions in our prepared statement. Rather than to take your time now to summarize what we said there, I should like to comment briefly on some of the changes in H.R. 14705 which have been proposed to your committee. You have been asked to reject the methods chosen by the House for increasing the yield of the Federal unemployment tax. The House adopted a permanent increase of one-tenth of 1 percent in the net Federal tax effective at once; and, it added an increase in the taxable base to $4,200 to take effect later. The Secretary of Labor has proposed that the net tax rate be reduced to the present level, four-tenths of 1 percent, after 2 years, with the base then being increased in two steps to $4,800 and then to $6,000. It is clear from the projections available, and as a matter of fact from the Secretary's testimony on February 5th, that this revision is not needed to meet the costs of the program for the foreseeable future. The Secretary said he proposes it in the interests of improving the equity of distributing the cost burden of the program among employers. Since the reason for change is so stated, we believe that this committee should let itself be guided by the opinions of employer taxpayers as to which is, in fact, the fairer way to raise the needed additional revenue. The employers and employer organizations represented by the national chamber strongly prefer a tax-rate increase over a tax-base increase. They especially ask that the State legislacures be left free to determine how best to distribute the State unemployment compensation tax burdens among employers. We do not rest our case on that point, however. We challenge the ssumption underlying this whole equity argument that high annual arnings of employees go hand in hand with high unemployment benefit costs. In our prepared statement you will find compelling evilence to support the commonsense conclusion that people who work he year round will have higher annual incomes than those who work nly part of the year. Consequently, a tax-base increase tends to have uch more impact proportionately on the tax costs of an employer ho provides year-round work than it has on a seasonal employer. his is true even though the seasonal employer may pay somewhat igher wage rates. We support the House bill as it stands because the tax-base inrease is moderate and it is combined with a rate increase; but we ould not acquiesce in any further increase in the tax base-especially no action were taken to free the States from the necessity of followg the Federal lead. There has also been considerable discussion of adding provisions › the bill which would establish Federal control of basic elements the State benefit formulas. The national chamber believes that ESS ESS TH. TH the States should frequently review their benefit formulas to make sure that they are keeping pace with the relevant economic trends. Whenever such review shows that benefits have fallen below reasonable and locally accepted criteria they should act promptly to restore them to accepted levels. But, on the other hand, the National Chamber is vigorously opposed to the Federal Government stepping into this field of State discretion There is no evidence that the enactment of Federal standards to govern the States in these matters would level out existing interstate differ ences in benefit costs. Benefit levels and benefit costs vary from State to State in line with differing wage levels and differing costs of living To my knowledge no benefit standard has ever been seriously proposed which would iron out the differences in benefit levels that are the result of variations in wages and prices in different sections of the country Benefit costs also vary from State to State because of differences in the frequency and severity of unemployment. For example, unemployment compensation in Alaska pays out at the rate of $191.70 per year per worker covered by its law while the average payout per covered worker in Virginia is $9.21. Yet, to conform with the standards formula of two-thirds of the State's average weekly wage, for example, Virginia would have to raise its maximum benefits only $24 while Alaska with its already higher costs would have to raise its maximum by $69. Senator ANDERSON. Is that because of the climate up there in Alaska? Mr. HIBBARD. It is due in large part to the seasonality of employment due to the wide variations in weather conditions. We are very much opposed to incorporating benefit standards in the Federal Unemployment Tax Act. We hope you will decide not to encumber this constructive and timely bill by adding such a controversial provision to it at this time. In summary, the national chamber believes H.R. 14705 is generally a constructive bill. It steers a middle course among widely divergent views as to the changes needed at this time to improve and modernize certain features of the Federal Unemployment Compensation Act in the best way available immediately to bring about those changes. It is our hope that the bill can be passed in the Senate without damaging amendments, thereby achieving promptly the needed improvements in the Federal-State employment security program. Thank you, Mr. Chairman. Senator BENNETT. No questions. Senator ANDERSON. Thank you very much. Mr. HIBBARD. Mr. Chairman, in his testimony before this committee on February 5th, the Secretary made reference to some comparisons of the costs for benefits of certain industry units and size groups of employers. Rather than take your time at this time, I would like the privilege, if I may, of submitting a memorandum indicating some pertinent information arising out of the operation of the Michigan law bearing on the question of what size of employers are involved in the highest benefit costs and their industry classifications. Senator ANDERSON. Without objection, we will be glad to have that information. (The memorandum referred to and Mr. Hibbard's prepared statement follow :) EFFECTS OF A TAXABLE WAGE BASE INCREASE ON THE EQUITABLE DISTRIBUTION AMONG EMPLOYERS OF UNEMPLOYMENT COMPENSATION BENEFIT COSTS Testimony presented to the Senate Finance Committee on H.R. 14705 by the U.S. Department of Labor on February 5, 1970, may have left the impression hat the present taxable wage base of $3,000 favors large employers, in durable goods manufacturing industries, at the expense of smaller employers in "more competitive" industries. It has been argued (1) that the cost impact of a taxable vage base increase would be greater for employers in durable goods manufacuring; and (2) that benefit payment expense is greater for durable goods manu. acturers than for other employers. Consequently, according to the argument Inancing all costs through an increase in the taxable wage base will be "equiable" because it will produce the most revenue from the employers whose operaions cause the most benefit payments. This argument may be applied to the taxes imposed to finance the new extended enefits program or to the taxing formulas of state laws. EXTENDED BENEFIT COSTS The federal share of the cost of extended benefits will be financed by the appliation of a uniform tax rate to whatever taxable wage base is finally adopted. there is a genuine concern about the equity of the distribution of the tax costs extended benefits, then the most accurate and direct way of allocating the cost extended benefits is through a system of experience rating similar to those in fect under state laws. The impact of a tax base increase can never be as accurate - equitable as experience rating of tax rates in apportioning the cost of benefits nong employers. The House of Representatives made a giant stride toward improving the equity · distributing the cost of extended benefits by providing that the states should ear 50% of the cost of extended benefits. H.R. 14705 also makes provisions for ate as well as national "triggers" to put the extended benefits into effect. This deral-state arrangement (1) assures that each state's share in the cost of tended benefits will be more nearly proportionate to the benefits it derives, and 2) permits the states to apply the principle of experience rating to taxes they vy to finance extended benefits. STATE BENEFIT COSTS Michigan's operating data show that there is not a concentration of employers no do not pay their own way under the law either among the large firms or nong firms engaged in durable goods manufacturing. The Michigan Employment Security Commission is required by law to maintain running account of each employer's experience with tax payments and benefit thdrawals. If the cumulative account balance for an employer is a deficit, "red" lance, that means that the employer has not paid the full cost of benefits for his ployees, and that his benefit costs have been subsidized in part by the unem-yment fund. These operating statistics show that the largest employers are not the largest tor in the deficit balance situation. Out of about $108 million in deficit account ances existing on June 30, 1969, $33.2 million (30.7%) were in the accounts 13,500 employers whose business was inactive or who had annual taxable rolls of less than $10,000-in other words, small employers. n contrast, for the large firms, there was a total of only $9.6 million (8.9%) in ative balances in the accounts of the 55 employers whose taxable payrolls eeded $1 million per year. ccording to Michigan data, the assumption that manufacturing industry is the jor source of deficit balances is also without foundation. n Michigan, employers engaged in manufacturing enterprises had 58.3% of the able payrolls of all employers covered by the law. However, manufacturing cerns accounted for $18.7 million out of $108 million in deficit balances-only %. For purposes of comparison, the contract construction industry had only % of the total of all taxable payrolls in the state, but construction employers ounted for $43.1 million-39.8% of all the deficit balances. Within the broad category of "manufacturing", durable goods employers were of a factor in the negative balance problem than non-durable goods nufacturers. The 3 durable goods sub-classes having the largest amount of negative balances accounted for 27.2% of the total deficit balances in the manufacturing industry. The 3 non-durable goods classifications having the most deficit balances accounted for 47.5% of the total of all deficit account balances of employers in the manufacturing industry. CONCLUSION The assumptions on the basis of which it has been contended that raising the taxable wage base would result in more equitable distribution of the cost of unemployment benefits among employers do not square with operating data. A good system of employer experience rating will do a much better job of relating each employer's unemployment tax payments to the benefit payments received by his employees; and experience rating applies under all the state laws now. PREPARED STATEMENT OF RUSSELL L. HIBBARD FOR THE CHAMBER OF COMMERCE My name is Russell L. Hibbard. I am a member of the Personnel Staff of General Motors Corporation, Detroit, Michigan, where I have charge of staff activities relating to Unemployment and Workmen's Compensation. I am speaking on behalf of the Chamber of Commerce of the United States. I have for several years been a member of the National Chamber's Committee concerned with the federal-state unemployment compensation system. Accompanying me is William P. McHenry, Jr. of the National Chamber's staff, who serves as Committee Executive of the Unemployment Compensation Committee. The National Chamber very much appreciates this opportunity to make known the views of business on H.R. 14705. This bill, as passed by the House of Representatives, would make a number of important and, on balance, constructive changes in our nation-wide system of unemployment compensation. In general, we are in accord with the substance of the changes in the unemployment compensation. In general, we are in accord with the substance of the changes in the unemployment compensation system which would be brought about by passage of H.R. 14705 in its present form. The House bill uses federal sanctions to compel the state legislatures to make many of these changes in their laws. We believe it would have been better policy to encourage the states to make the desired changes without federal compulsion. Nevertheless, we give our support to the bill, in its present form, as a reasonable and balanced approach to the recognized need for change. In doing this, we want to make it clear that the National Chamber continues to favor improvements in the state unemployment compensation laws by state action. We favor retention of control over the substance of unemployment compensation laws by the state legislatures. If changes should be made in the present bill which add any other standards for state legislative action, or make the state action already required by the bill unreasonable and excessive, such action may undermine the basis for our support of the bill in its present form, and force us to oppose it. SUMMARY OF CHAMBER POSITION The major provisions of the bill to which we give our unqualified support are: (3) Recognition that some manpower functions now financed through the federal unemployment tax should more properly be handled as a general cost of government. (4) Provision for court review of Labor Department decisions as to the conformity of state laws with federal requirements. Those features of H.R. 14705 which conflict with our positions relative to federal control over state unemployment compensation legislation are those which would: (1) enact five new standards for state legislation concerning requirements of eligibility for unemployment benefits. (2) force the states to raise their taxable wage bases, whether or not such increases are needed to maintain state unemployment benefit funds. (3) force the states to extend their tax coverage to small business and other groups. We propose to comment, briefly, on the major features of H.R. 14705. EXTENDING THE DURATION OF UNEMPLOYMENT COMPENSATION BENEFITS For some years, the National Chamber has favored the enactment of suitable ermanent provisions for the payment of extra weeks of benefits in periods when nemployment rates are high. The provisions in H.R. 14705 which call for such a permanent, standby, exnded benefits plan have been carefully worked out. They would create a conructive and satisfactory program. We are in accord with the provisions for "triggering" the extended benefits to operation in individual states, as well as nationally. State triggers would a better job of meeting the needs of the unemployed who exhaust their benes than a single national trigger. State sharing in the cost of the extended benefits is a necessary corollary the provision for triggering the program into operation in individual states. also has the advantage of giving the states a considerable range of choice of venue sources to finance the states' share of the program costs. FINANCING EXTENDED BENEFITS AND ADMINISTRATIVE COSTS n the Chamber's testimony before the Ways and Means Committee, we exssed a strong preference for a tax rate increase-rather than a tax base rease as the means through which to finance the federal share of extended efits and administrative costs. From the standpoint of fluctuations in fed1 revenue for administration, a rate increase is superior. A base increase will se revenue to fluctuate inversely to the needs of the program. We further urged that, if a taxable wage base increase were utilized to proe all or part of the required revenue, the Federal Unemployment Tax Act uld be amended so that the states would not be forced to conform their tax es to the federal base. We pointed out that state unemployment tax rates rage much higher than the federal rate, so that the cost impact of carrying federal base over into the state laws would be much greater. he House materially improved on the original bill's taxing provisions. A tax increase was adopted and the tax base increase carried by the original bill (a) deferred for two years and (b) limited to 40 per cent of the increase inally proposed. Moreover, the House bill recognizes that many functions ormed by the employment service should not be charged against federal mployment tax revenues. he National Chamber still maintains its preference for changing the tax rather than the tax base. However, we consider the provision for a tax increase provided in H.R. 14705 to be much more acceptable than that ained in H.R. 12625. -nues Under H.R. 14705 Would Be Adequate ditional Federal unemployment tax revenues are needed to finance the -al share of the cost of the extended-duration unemployment benefits and to y the costs of administering the state and national employment security manpower programs once the effects of accelerating collections of the unoyment tax to a quarterly basis have dissipated. R. 14705 proposes to raise the net federal unemployment tax rate from 0.4 ent to 0.5 per cent for calendar years 1970 and 1971. The bill retains the 0.5 ent rate and also raises the federal taxable wage base from $3,000 to $4,200 ive January 1, 1972. As Table 1 on the following page shows, projected revunder H.R. 14705 will meet projected costs for at least the next six years. et, by the end of Fiscal Year 1975, there will be a cumulative surplus in s of $700 million. ording to the Chairman of the House Ways and Means Committee, the Sec- of Labor asked for a higher taxable wage base than the $4,200 provided R. 14705. The Committee turned down this request because: "We did not think it was necessary for us to do it (raise the base above 1,200) now or in the foreseeable future, to provide funds for the adminisative costs of the program. We think that this would take us at least to the |