CONCLUSIONS AS TO IMPACTS ON STATE TAXES The foregoing analysis demonstrates that the effects of a tax base change der state unemployment compensation laws are complicated and likely to be equitable. The impact on states will vary significantly with variations in wage tes and in stability of employment, and with the type of experience rating rmula used in the state. The impact on employers within a state will also be ratic and inequitable, and it will tend to redistribute the cost of the program the benefit of high cost employers and to the detriment of low cost employers. If a state should decide to increase its tax base without outside compulsion, would have the opportunity to make suitable compensating changes in its tax mula which can ameliorate or even eliminate these undesirable effects. But if e states were forced to increase their tax bases by federal action, these adjustents are not likely to be made, for lack of time and opportunity to work them t and sell them to the state legislature. Impact on Federal Taxes.-Much the same reasons which indicate against The federal tax is a flat tax against all employers. Consequently, increasing umptions: (a) Identical employers in each of the 5 states. In each state, each employer as 300 hourly-rate employees who work 50 weeks per year and earn $80 per eek. In addition, in each state, each employer has 33 employees on a salary asis who earn more than $4,800 per year. (b) Taxable Payroll under existing State law taxable wage base : Arkansas ($3,000 base). Michigan ($3,600 base). New York ($3,000 base) Ohio ($3,000 base) Texas ($3,000 base). $1, 000, 000 1, 000, 000 (c) Taxable Payroll, in each state, on the $4,800 base, $1,358,400-300 emoyees at $4,000, plus 33 employees at $4,000. (d) Each employer has a level annual benefit cost of $11,000. (e) No change occurs in the factors entering into the determination of tax tes under the state law except for the increase in the tax base to $4,800. MARY OF CUMULATIVE EFFECTS OF ADOPTING A $4,800 TAXABLE WAGE BASE ON WS [Cumulative cost increase (rounded to nearest $1,000)] e: Arkansas Michigan (now has $3,600 base). New York.... Ohio Texas* xas is one of the states with the "replenishment" approach to benefit financing. other states shown have "reserve ratio" experience rating. 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 taxae payroll goes up to $1,358,400. To achieve again the equilibrium between credits and charges to his account, is employer must build up his account balance from a range between $105,000 ad $110,000 to an amount which will produce a reserve ratio (on the new, gher base) which will yield a tax rate (on the new base) which in turn will ual 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 e-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. Ohio ncrease in amount of average required balances-$48,376. The employer's current benefit cost rate is 1.1%. His tax rate has stabilized at o achieve again the equilibrium between credits and charges to his account, Benefit cost rate on $4,800 base-0.81%. Tax rates most nearly corresponding to cost rate-0.7% and 0.9%. Reserve ratios required for those tax rates-8.5% and 8.0%. Reserve balances required for those tax rates-$115,464 and $108,672. xas crease in amount of Average Required Balances-$36,728. ESS אפ SS 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 exnded benefit program, we wanted the Federal portion thereof to e financed by an increase in the Federal unemployment tax rate. our statement to the House Ways and Means Committee, we oposed an increase in the Federal unemployment taxable wage base. s a matter of principle, we still do. We recognize, however, that e $4,200 taxable wage base proposed in H.R. 14705 is a reasonable iddle ground between the employer's position and the administraon's position. (Initially, the administration bill, H.R. 12625, prosed a $4,800-$6,000 taxable wage base.) The administration orignally pressed for a $6,000 taxable wage se on the ground that it was necessary to finance a 100-percent lerally financed extended benefit program. Although the adminration now concedes that such a program should or could be financed a 50-percent Federal, 50-percent State basis, it nevertheless empts to continue to justify the need for a $6,000 taxable wage se. The logic in this escapes us. янг RESS On pages 3 and 5 of our written statement which was reproduced pages 127 through 129 of the printed record of these hearings, have included several arguments that have already been menned by preceding witnesses and in order to conserve this comtee's time we will not dwell on these arguments. However, we uld wish to point out, (1) we do not agree with the theoretical e for a $6,000 taxable wage base that Dr. Shultz made in his imony. We disagree with his underlying asumptions and consions and are convinced that his theory promotes rather than eliates inequities. 2) We do not agree with Dr. Shultz' contention that it is initable to require an employer in a low-wage industry or State ay a higher effective tax rate. RESS 3) We do not agree with Dr. Shultz' contention that the decreasing portion of taxable payrolls to total payrolls produces inequitable lts and prevents State experience rating from accurately reflectdifferences in employers' assigned tax rates. анл here has been a sharp distinction between the nature and purpose ederal and State unemployment taxes. We strongly emphasize this distinction should be maintained to the greatest extent pos. The Federal unemployment compensation tax has been used y to pay administrative costs. Any relationship between the ble wage base and total wages paid to employees has nothing to ith raising money to defray administrative costs. think a head tax or a "per employee" tax is a fair and convenient anism for raising administrative money. It is nothing more. It inly costs no more to administer the unemployment compensation s and to provide job referral services to a high-paid claimant it does to provide the same service to a low-paid claimant. wish to point out that the administration proposes to increase the security taxable wage base to $9,000 in 1971. As you know, the oyer social security tax rate is scheduled to increase from 4.8 pero 5.2 percent in 1971. It is our view that the Congress must take increases into consideration while deciding upon the changes in he costs of Federal-State unemployment compensation programs. 11-184-70- -16 |