Unemployment Benefits: Legislative Issues in the 108th Congress

Order Code 95-742 EPW

Updated January 27, 2005

CRS Report for Congress

Received through the CRS Web

Unemployment Benefits:

Legislative Issues in the 108th Congress

-name redactedAnalyst in Applied Microeconomics

Domestic Social Policy Division

Summary

Changes in the federal-state unemployment compensation (UC) system were

considered during the 108th Congress as legislation was introduced to reform and expand

the UC system. The 107th Congress enacted the Temporary Extended Unemployment

Compensation (TEUC) program (P.L. 107-147), which included a 13-week extension

of UC benefits, an $8 billion distribution to states, and 13 additional weeks of extended

UC benefits in high unemployment states. These temporary benefits were extended

twice during the 108th Congress, (P.L. 108-1 and P.L. 108-26) extending eligibility

through the week ending before December 31, 2003. The 108th Congress enacted

special TEUC benefits for displaced airline related workers, known as TEUC-A (P.L.

108-11). The 108th Congress also enacted the SUTA Dumping Prevention Act of 2004

(P.L. 108-295). This report will not be updated.

Background

The UC system, funded by both federal and state payroll taxes, pays benefits to

covered workers who become involuntarily unemployed for economic reasons and meet

state-established eligibility rules. Federal administration of UC is under the U.S.

Department of Labor (DOL). The UC system, established by the Social Security Act of

1935 (P.L. 74-271), operates in each state, the District of Columbia, Puerto Rico, and the

Virgin Islands. Federal law sets broad rules that the 53 state programs must follow and

levies a payroll tax on employers under the Federal Unemployment Tax Act (FUTA).

States set most of the specific rules for eligibility, benefits, and financing. States also

process the claims and pay the benefits. The UC system helps counter economic trends.

When the economy grows, UC revenue rises and program spending falls, thereby slowing

growth. In a recession, revenue falls and program spending rises, stimulating the

economy. Benefits totaling an estimated $45.3 billion were paid to an estimated 10.2

million UC claimants in all programs during FY2004.

Coverage. Federal law defines the jobs a state UC program must cover to avoid

its employers’ having to pay the maximum FUTA tax rate (6.2%) on the first $7,000 of

Congressional Research Service ˜ The Library of Congress

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each employee’s annual pay. If a state UC program complies with all federal rules, the

net FUTA tax rate is only 0.8% for employers. A state must cover jobs in firms that pay

at least $1,500 in wages during any calendar quarter or employ at least one worker in each

of 20 weeks in the current or prior year. The FUTA tax is not paid by governmental or

nonprofit employers, but state programs must cover government workers and all workers

in nonprofits that employ at least four workers in each of 20 weeks in the current or prior

year (the states are reimbursed for the expenditures on federal workers by the federal

government). Table 1 lists the net FUTA tax rates and taxable wage ceilings from 1937

and later.

Table 1. Net FUTA Tax Rates and Taxable Wage Ceilings

Calendar

Years

Net Tax

Rate

(%)

Taxable Wage

Ceiling

Calendar

Years

Net Tax

Rate

(%)

Taxable Wage

Ceiling

1937-1939

0.3

none

1972

0.5

$4,200

1940-1960

0.3

$3,000

1973

0.58

4,200

1961

0.4

3,000

1974-1976

0.5

4,200

1962

0.8

3,000

1977

0.7

4,200

1963

0.65

3,000

1978-1982

0.7

6,000

1964-1969

0.4

3,000

1983-2007

0.8

7,000

1970-1971

0.5

3,000

2008 & later

0.6

7,000

Source: CRS compilation of Federal Unemployment Tax Act changes.

Benefits. To receive UC benefits, claimants must have enough recent earnings to

meet their state’s earnings requirements. States usually disqualify claimants who lost

their jobs because of inability to work or unavailability for work; voluntarily quitting

without good cause; discharge for job-related misconduct; refusal of suitable work

without good cause; or a labor dispute. Generally, benefits are based on wages in covered

work over a 12-month period. Most state benefit formulas replace half of a claimant’s

average weekly wage up to a weekly maximum. Weekly maximums in 2004 ranged from

$133 (Puerto Rico) to $508 (Massachusetts) and, in states that provide dependents’

allowances, up to $762 (Massachusetts). The average weekly benefit nationwide was

$262 for FY2004. Benefits are available for up to 26 weeks (30 weeks in Massachusetts

and Washington1). The average benefit duration in FY2004 was 16.4 weeks. A federalstate extended benefits (EB) program offers benefits for an additional 13 to 20 weeks in

states with unemployment rates above certain levels.

Financing. The 0.8% FUTA tax funds federal and state administration, the federal

share of the EB program, loans to insolvent state UC accounts, and state employment

services. States levy their own payroll taxes to fund regular UC benefits and the state

share of the EB program. State ceilings on taxable wages in 2004 ranged from the $7,000

1

The maximum duration of UC benefits in Washington for laid-off workers who file new claims

on Apr. 4, 2004, or later was 26 weeks.

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FUTA federal ceiling (11 states) up to $31,000 (Hawaii). State UC tax rates are

experience-rated where employers generating the fewest claimants have the lowest rates.

State tax rates averaged 1.8% of taxable wages and 0.6% of total wages in FY2003. State

UC revenue is deposited in U.S. Treasury accounts as federal revenue in the budget. State

accounts in the Unemployment Trust Fund (UTF) are credited for this revenue. These

credits allow Treasury to reimburse states for their benefit payments without annual

appropriations, but these reimbursements do count as federal budget outlays. If a state

trust fund account becomes insolvent, a state may borrow federal funds. State UTF

revenue exceeded outlays from FY1995 to FY2000, but outlays significantly exceeded

trust fund revenue in FY2001-FY2004 (Table 2).

Table 2. Revenue and Spending Associated With

Unemployment Compensation, FY1997-FY2004

(in billions of dollars)

1997

1998

1999

2000

2001

2002

2003

2004b

UC revenue, total

28.2

27.4

26.3

27.1

27.8

27.5

33.2

37.1

FUTA tax

6.1

6.4

6.5

6.9

6.9

6.6

6.5

6.7

State UC taxes

22.1

21.1

19.9

20.7

20.8

20.91

26.7

32.4

UC outlays, total

23.7

22.9

24.5

23.7

31.0

53.8

57.4

45.32

Regular benefits

20.3

19.4

20.7

20.2

27.3

42.0

42.0

39.9

.02

.02

a

a

0.16

0.32

0.16

—

—

—

—

7.9

11.0

4.13

3.5

3.7

3.5

3.6

3.7

4.1

4.0

Extended benefits

Emergency UC

Administration

a

a

3.5

Source: U.S. Department of Labor, UI Outlook, January 1997-January 2004.

a. Less than $50 million.

b. Estimated for 2004.

Legislative Issues in the 108th Congress

Proposals to Extend Unemployment Compensation Benefits

The EB program provides for additional weeks of UC benefits up to a maximum of

13 weeks during periods of high unemployment, and up to a maximum of 20 weeks in

certain states with extremely high unemployment. EB benefits are funded half (50%) by

the federal UTF while states fund the other half (50%). The EB program is triggered

when a state’s insured unemployment rate (IUR2) or total unemployment rate (TUR3)

reaches certain levels. Congress has acted five times — in 1971, 1974, 1982, 1991, and

2002 — to establish temporary programs of extended UC benefits.4

2

The IUR is the ratio of UC claimants divided by individuals in UC covered jobs.

3

The TUR is the ratio of unemployed workers to all workers in the labor market.

4

For more information on extended UC benefits, see CRS Report RL31277, Temporary

(continued...)

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The Temporary Extended Unemployment Compensation (TEUC)

Program. The TEUC program was enacted on March 9, 2002, as part of the Job

Creation and Worker Assistance Act of 2002 (P.L. 107-147). The TEUC program

provided up to 13 weeks of federally funded benefits for unemployed workers who had

exhausted their regular UC benefits. In addition, up to an additional 13 weeks were

provided in certain high unemployment states that had an IUR of 4% or higher and met

certain other criteria (TEUC-X). P.L. 107-147 also provided for a one-time $8 billion

distribution to states known as Reed Act funds.5 TEUC benefits were payable to

individuals who, in addition to meeting other applicable state UC law provisions: (1) filed

an initial claim that was in effect during or after the week of March 15, 2001; (2)

exhausted regular benefits or had no benefit rights due to the expiration of a benefit year

ending during or after the week of March 15, 2001; (3) had no rights to regular or

extended benefits under any state or federal law; and, (4) were not receiving benefits

under Canadian law.6 In addition, individuals must also have had 20 weeks of full-time

work, or the equivalent in wages, in their base periods.7

These temporary benefits ended on December 28, 2002; however, the 108th Congress

extended TEUC twice (through P.L. 108-18 and P.L. 108-26). Thus, TEUC eligibility was

possible through the week ending before December 31, 2003, and TEUC benefits were

paid through the week of April 3, 2004.

A number of bills were introduced in the 108th Congress to further extend and

expand the TEUC program. While some bills were superceded by P.L. 108-1, others went

beyond the provisions of P.L. 108-1. Some would have extended the program beyond the

end of May 2003; others would have provided for additional weeks of benefits for

unemployed who have exhausted their benefits; some would have temporarily established

alternative triggers for qualifying states as high-unemployment for the TEUC-X program.

In addition, some bills would have also temporarily expanded regular UC eligibility in all

states to include part-time and low-wage unemployed workers. After the enactment of

P.L. 108-26 on May 28, 2003, several bills were introduced to further extend and expand

TEUC.

On February 4, 2004, the House passed an amendment to the Community Services

Block Grant program reauthorization bill, H.R. 3030 (H.Amdt. 462), administered by the

Department of Health and Human Services, that would have provided a six-month

4

(...continued)

Programs to Extend Unemployment Compensation, by (name redacted).

5

For more information on the Reed Act, see CRS Report RS22006, The Unemployment Tax Fund

and Reed Act Distributions, by (name redacted).

6

DOL, Unemployment Insurance Program Letter No. 17-02.

7

A worker’s benefit rights are determined on the basis of his/her employment in covered work

over a prior period, called the base period. In most states, an individual’s base period is a fourquarter, 52-week period that depends on when the worker first applies for benefits or first begins

drawing benefits. However, several states lengthen the base period under specified conditions.

8

See CRS Report RS21397, Unemployment Benefits: Temporary Extended Unemployment

Compensation (TEUC) Program, by (name redacted) for additional details.

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extension of TEUC benefits. It was received in the Senate and referred to the Committee

on Health, Education, Labor, and Pensions. No further action was taken.

Benefits for Certain Workers Unemployed by Terrorist Attack and The

War on Iraq. In response to the unemployment of airline and airline related workers

resulting from the September 11, 2001 terrorist attacks, subsequent security measures

taken, and the war with Iraq, P.L. 108-11, was signed into law on April 16, 2003. This

temporary program provided up to 39 weeks of extended benefits to qualified individuals

whose regular UC claim is based in whole, or in part, on qualifying employment with a

certified air carrier, at a facility in an airport, or with a producer or supplier of products

or services for an air carrier.9 The program had two tiers of benefits, known as TEUC-A

and TEUC-AX. These programs were authorized through the week ending before

December 29, 2003, and there was a phaseout period for individuals with an existing

claim that ran through the week ending before December 26, 2004. H.R. 3405, which did

not pass either house, would have made employees of foreign air carriers eligible for

TEUC-A and TEUC-AX.

Other Proposals in Unemployment Compensation

Tax Avoidance and Other Abuses of the UC system. In 2004, the

Administration proposed to require states to amend their state unemployment tax laws to

deter schemes to avoid paying UC taxes through such means as transfers from businesses

to shell companies (commonly referred to as State Unemployment Tax Acts, or SUTA,

dumping) and to reduce UC benefit overpayments and fraud and abuse.

On August 28, 2004, the SUTA Dumping Prevention Act of 2004 (P.L. 108-295)

was enacted. The law amended Title III of the Social Security Act (SSA), requiring the

states to amend their UC laws to provide substantial penalties for SUTA Dumping

Activities. It directed the Secretary of Labor to study and report on implementation of the

requirement. P.L. 108-295 also revised Title IV part D of the SSA, directing the Secretary

of Health and Human Services to disclose information on individuals and their employers

in the National Directory of New Hires to a state agency for purposes of UC

administration. The Secretary is to provide states access to the directory of the names and

Social Security account numbers for faster detection of individuals who have gone back

to work, but who continue to collect UC benefits.

Personal Reemployment Accounts. The Bush Administration initially

proposed Personal Reemployment Accounts10 (PRAs) in its 2003 economic stimulus

package. On January 29, 2003, H.R. 444, the Back to Work Incentive Act was

introduced. A $3.6 billion proposal, this would have amended the Workforce Investment

Act (WIA) of 1998 and authorized the Secretary of Labor to establish a personal

reemployment accounts (PRAs) grant program. A voucher program, it would have made

9

For more detailed information, see U.S. Department of Labor, Special Temporary Extended

Unemployment Compensation for Displaced Airline Related Workers, at

[http://www.workforcesecurity.doleta.gov/unemploy/factsheetteuc_a.asp].

10

For more information on PRAs and subsequent activity in the 108th Congress, see CRS Report

RL31825, Personal Reemployment Accounts: Results from Bonus Experiments, by (name redacted)

and (name redacted).

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individuals eligible for a PRA who (1) were identified as likely to exhaust UC benefits

and in need of job search assistance to make a successful transition to new employment;

(2) were receiving regular UC under any federal or state UC program administered by the

state; and, (3) were eligible for at least 20 weeks of regular UC benefits. It would have

allowed PRAs to be used to purchase intensive services, training services, or supportive

services through the existing Employment Service’s one-stop delivery system on a

fee-for-service basis, or through other providers. It would have provided cash

reemployment bonuses consisting of 60% of the balance of their PRAs, to recipients who

obtained full-time employment before the end of the 13th week of unemployment for

which UC benefits were paid, and the remaining 40% if recipients remained in those jobs

for six months.

On March 20, 2004, H.R. 4444, Worker Reemployment Accounts Act of 2004, was

introduced. The bill amended WIA to authorize the Secretary of Labor to establish and

implement a demonstration project on PRAs. H.R. 444 was amended by the Committee

on Education and the Workforce by substituting the language of H.R. 4444. Also inserted

in H.R. 444, as passed by the House, were the texts of H.R. 4409 (Teacher Training

Enhancement Act) and H.R. 4411 (Priorities for Graduate Studies Act). On June 3, 2004,

the House passed H.R. 444 as amended by H.R. 4444. The bill was received in the Senate

and referred to the Committee on Health, Education, Labor, and Pensions. No further

action was taken.

Expansion of Eligibility. H.R. 1802, introduced on April 11, 2003, would have

required states to expand eligibility for UC benefits to workers seeking part-time work

and to use an individual’s most recent earnings in determining UC eligibility (often

referred to as the alternate base period), which would have made it easier for certain new

or low-wage workers to qualify for UC benefits. States would have been prohibited from

denying UC benefits to individuals solely because they were seasonal workers, because

they left employment due to sexual harassment, because of loss of adequate child care for

children under age 13, or because the individual was a victim of domestic violence. The

bill expanded the UC tax wage base from the first $7,000 of employee wages to the

taxable wage base used for Social Security taxes ($87,000 in 2003), and lowered the gross

FUTA tax from 6.2% to 5.59%. No action on the bill was taken.

H.R. 2188 (in addition to extending and expanding TEUC ) would have provided

several reforms to the UC system. The bill would have lowered the permanent EB

program’s insured unemployment rate (IUR) triggers from 5% to 4%, provided for

variable earnings to be credited to state UC trust fund accounts depending on the state’s

ability to meet certain funding goals, and provided interest-free advances to state UC

accounts only to states which met certain funding goals. The bill would have also

provided a two-year suspension of federal income tax on UC benefits for taxable years

beginning after December 31, 2002, and permitted states to collect FUTA taxes from

employers in the state instead of FUTA taxes being sent to the Secretary of Labor for

taxable years beginning after December 31, 2003. No action on the bill was taken.

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