February 29, 2000

February 29, 2000 | Testimony on Jobs, Jobs and Labor Policy

Unemployment Compensation Reform

Madam Chairman, Members of the Committee, thank you for the opportunity to testify before you today. The views I express in this testimony are my own and should not be construed as representing any official position of The Heritage Foundation.

As the 106th Congress begins its debate over the Unemployment Compensation (UC) system, Members should consider three important principles to ensure that both workers and employers receive the greatest benefit from any reform.

  1. Lower the tax burden on American jobs. The third-largest tax increase in the Taxpayer Relief Act of 1997 was an extension of the temporary Federal Unemployment Tax Act (FUTA) surtax that was scheduled to expire at the end of 1998. The FUTA surtax was extended to December 2007 because many Members thought they needed to increase tax revenues to balance the budget. As a result, the tax burden on American workers has hit a record post-World War II high. Moreover, surplus unemployment taxes continue to be used for purposes totally unrelated to the UC system. Surplus FUTA surtax revenue that builds up in federal trust funds, like the Social Security payroll tax, is converted to federal government bonds and spent as general revenue or used to pay down publicly held debt.

Ending the FUTA surtax would reduce the overtaxation of American jobs and allow workers and employers to keep $8.3 billion more of their hard-earned money over the next five years to spend or invest as they see fit.

  1. Consolidate responsibility for the UC system at one level of government. The taxing and spending authority for the UC system should be at one level of government and not split between the federal government and the states. Effective program accountability requires the states to be responsible for both raising and spending the revenue to run the UC system. Maintaining bifurcated taxing and spending authorities diminishes direct accountability.

In 1996, Congress passed welfare reform that provided states with greater flexibility while holding them accountable for reducing welfare caseloads. In 1998, Congress passed the Workforce Investment Act that created one-stop career centers and gave the states greater responsibility for job training and employment service programs while demanding more effective results. Congress should now do the same for the unemployment compensation system, and a positive step in that direction is contained H.R. 3174, the Employment Security Financing Act of 1999.

H.R. 3174 would:

  • Provide states with sufficient funding to deliver UC services and maintain program integrity.

  • Reduce the length of unemployment for many unemployment claimants. With better capacity to provide job search assistance, the Employment Security system will help more claimants return to work sooner.

  • Reduce employer tax and paperwork burdens. Employers will no longer pay the temporary FUTA surtax, and they will only have to deal with one tax collection agency -- the state, not the IRS.

  • And eliminate burdensome federal mandates that cause inefficiencies and impose increased costs.
  1. UC benefits should be paid only to individuals who are involuntarily out of work. When both UC and Social Security were created in 1935, policymakers knew there would be political pressure to use the tax revenue for other government programs. That is why they placed limits on the use of those funds. Now the Department of Labor is rushing to remove those limits by regulatory fiat. Congress should not allow the President to unilaterally convert the UC program into a huge new government entitlement program unrelated to unemployment. Surplus UC tax revenue should be returned to employers and workers and not used to expand the program to cover family leave. Any new expansion of the program to cover new parents would pit employees who voluntarily choose (and in many instances can afford) to be out of work against workers who involuntarily lose their jobs.

If Congress follows these three principles and recommendations, Members would strengthen and improve the UC system while reducing the record high tax burden on American jobs. Thank you for your time, and I will be happy to answer any questions you may have.

D. Mark Wilson is a former Research Fellow of The Heritage Foundation.

Related Issues: Jobs, Jobs and Labor Policy