As Congress considers ways to return the budget
surplus to taxpayers, a good first step would be to look at the
payroll tax increase it imposed on workers last year.
The
third largest tax increase in the Taxpayer Relief Act of 1997 was
an extension of a little-known payroll surtax in the Federal
Unemployment Tax Act (FUTA) that was scheduled to expire at the end
of 1998. Believing incorrectly that they needed to increase
revenues to balance the budget, Members voted to extend the FUTA
surtax through 2007 and raised the ceiling on federal trust funds.
As a result, the tax burden on American workers has hit an all-time
high, and surplus unemployment taxes pile up to be used for
purposes completely unrelated to the unemployment system.
Revenue from the FUTA tax is designated
for the administration of the Unemployment Insurance (UI) system.
The current FUTA tax rate of 0.8 percent on the first $7,000 of
wages has two components: a permanent tax rate of 0.6 percent and a
temporary surtax of 0.2 percent. Passed in 1976 to restore depleted
federal UI trust funds, the surtax was set to expire in 1987. Since
1987, however, it has been extended five times--despite having
accomplished its goal--and is now set to expire at the end of
2007.
This
repeated extension of a supposedly temporary surtax has caused
federal UI trust fund balances to balloon from $4.9 billion in 1987
to $19.1 billion in 1997. Because of last year's extension
of the surtax, trust fund balances are forecast to explode to $41.6
billion at the end of fiscal year (FY) 2003 (see Chart
1).
Like Social Security payroll tax revenue, FUTA surtax revenue in
federal trust funds is converted to federal government bonds and
spent as general revenues; the money is not set aside for the UI
system.
Senator Wayne Allard (R-CO) has introduced
legislation (S. 2170) to repeal the FUTA surtax. Representative
Clay Shaw (R-FL) has introduced the Employment Security Financing
Act of 1998 (H.R. 3684), which would not only repeal the surtax,
but also significantly reform how the Employment Security system is
financed.
Together, these two bills would let
workers and businesses keep $8.1 billion more of their hard-earned
money over the next five years--just 1.6 percent of the projected
budget surplus. They also would let Congress
honor the promise it made in 1993 to repeal the temporary FUTA
surtax, and take a small step toward lowering the tax burden on
American jobs.
BENEFITS OF ENDING THE FUTA SURTAX
There are three important benefits to
ending the FUTA surtax:
- It would stop the unnecessary
overtaxation of jobs. In 1998, the federal tax burden is
expected to reach a record peacetime high of nearly 21 percent of
economic output. In FY 1997, only $3.5 billion (57
percent) of $6.1 billion in FUTA tax collection was returned in
federal grants to administer state unemployment offices.
Although regular FUTA taxes have been more
than sufficient to finance the UI system, Congress continues to
extend the surtax. Removing the FUTA surtax would reduce the
overtaxation of workers' wages by $8.1 billion from 1999 to
2003--an average of $1.6 billion per year. Without the surtax,
federal UI accounts still would grow to $33.6 billion in 2003, an
increase of 45.4 percent from 1998.
Workers could bring home more of their real income and
enjoy more job opportunities
Legally mandated benefits like unemployment insurance are
not "free" to workers. Studies indicate that, on average, over 80
percent of the cost of all employer-paid payroll taxes is shifted
to workers in the form of lower real paychecks. When combined with
other private-sector mandates, such as increasing the minimum wage,
the resulting higher labor costs will affect an employer's
decisions about whether and when to hire a worker, which worker to
hire, how much cash to pay the worker, and how long to keep that
worker. The rise in mandated labor costs paid by employers is one
of the most important forces leading companies to lay off workers
or use part-time, temporary, and contract labor instead of
full-time employees.
State
economies would be strengthened
Years of overtaxation have caused an immense amount of
money ($23.1 billion in FY 1998) to pile up in trust funds in
Washington, D.C.--nearly twice the amounts of three years ago even
though employment has increased only 7.4 percent. As Senator Allard
said when introducing his legislation, "It is inappropriate for the
federal government to continue to raise surplus unemployment taxes
and use those surpluses for purposes totally unrelated to the
unemployment system."
Without the FUTA surtax, hundreds of
millions of dollars would remain in state economies (see Table
1). For example, Mississippi workers and employers would be
able to keep $72.2 million from 1999 to 2003, and the Georgia
economy would save $234.9 million. Larger states would fare even
better. Workers and employers in New York would save $529.1 million
from 1999 to 2003, the Texas economy would save $552.7 million, and
the California economy would save $892.0 million. These funds would
be far more productive used in the private economies of states than
piled up in Washington trust funds.
Conclusion
It
is time to end the temporary FUTA surtax and return surplus
unemployment taxes to workers and businesses. This would reduce the
overtaxation of American jobs, allow workers and businesses to keep
$8.1 billion more of their hard-earned money over the next five
years, and strengthen state economies.
In
1997, Congress mistakenly thought it had to increase revenues in
order to balance the budget. In 1998, however, there is no
mistaking the fact that the enormous tax burden on American jobs
must be reduced.
--Mark Wilson is a former Labor
Economist at The Heritage Foundation.