Report to the Chairman, Subcommittee 

on Human Resources, Committee on 

Ways and Means, House of 

Representatives 

United States Government Accountability Office

GAO 

July 2006 UNEMPLOYMENT 

INSURANCE 

States’ Tax Financing 

Systems Allow Costs 

to Be Shared among 

Industries 

GAO-06-769 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2006

UNEMPLOYMENT INSURANCE 

States’ Tax Financing Systems Allow 

Highlights of GAO-06-769, a report to the Costs to Be Shared among Industries 

Chairman, Subcommittee on Human 

Resources, Committee on Ways and 

Means, House of Representatives 

In 2006, the Unemployment

Insurance (UI) program is expected

to collect over $37 billion in taxes 

from employers to pay $34 billion 

in benefits to unemployed workers.

Under state UI programs, 

employers’ tax contributions are 

experience-rated—that is, they

reflect the extent to which they laid

off workers who then collected

benefits. To examine the equity of

this system, we met with officials 

from five states, reviewed prior 

studies, and examined state data to

determine (1) how states ensure

that employers pay UI taxes based

on their experience with

unemployment, and the aspects of 

state unemployment insurance 

systems that limit experience

rating; (2) the extent to which 

employers pay unemployment

insurance taxes commensurate 

with unemployment benefits paid

to their former employees; and how 

this varies by industry; and 

(3) steps states could take to 

increase the degree of experience

rating. 

We provided a draft of this report 

to the Department of Labor (Labor) 

for its review. Overall, Labor 

agreed with our findings. 

All state Unemployment Insurance-financing systems are experience-rated, 

but several aspects of these systems limit the connection between an 

employer's tax contributions and the employer’s experience with

unemployment. For example, a state’s maximum tax rate limits the size of an 

employer’s tax payment, regardless of the costs an employer may have

imposed on the system. Similarly, a minimum tax rate ensures that an 

employer’s tax rate will not drop below a specified floor, no matter how 

much its experience rating improves. Other aspects of state systems allow 

the cost of some benefits to be charged to all employers rather than to a 

single employer. These shared costs include, for example, benefits paid to 

unemployed workers of a firm that has gone out of business. When the cost 

of benefits is shared in this way, it reduces experience rating and imposes 

additional costs on all employers. 

A series of studies that examine experience rating in state UI systems show 

that a number of industries used more in benefits than they paid in taxes to 

finance the system. Certain industries, such as construction and agriculture, 

forestry, and fisheries, as a whole, consistently received such subsidies,

while other industries, such as finance, insurance, and real estate tended to 

pay subsidies. Newer firms that are not yet experience-rated, regardless of 

industry, also tend to pay subsidies. Our analysis of more recent data from 

three states found a similar pattern of subsidies. 

States could increase experience rating and reduce subsidies by adjusting 

aspects of the unemployment insurance tax structure, such as the maximum

tax rate. However, each of these adjustments has trade-offs that would have

to be considered by a state because the adjustments would raise costs for 

some employers or reduce costs for others. In addition, such adjustments 

would have to be evaluated based on the implications for other policy 

objectives established for a state’s unemployment insurance program. 

Unemployment Insurance Benefits Charged and Taxes Paid by Selected Industries in 

Washington State from 1999 to 2004 

www.gao.gov/cgi-bin/getrpt?GAO-06-769.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Sigurd R. 

Nilsen at (202) 512-7215 or nilsens@gao.gov. 
Page i GAO-06-769 Unemployment Insurance 

Letter 1

Results in Brief 2 

Background 4 

States’ Unemployment Insurance Financing Systems Limit the 

Degree of Experience Rating 6 

State UI Tax Policies Result in Persistent Cross-subsidization 

among Firms and Industries 18 

Measures to Improve Experience Rating and Reduce Subsidies 

Must Be Balanced against Other Goals 27 

Concluding Observations 31 

Agency Comments and Our Evaluation 32 

Appendix I Objectives, Scope, and Methodology 34 

Appendix II Example of a State’s Unemployment Insurance 

Tax Products 

36 

Appendix III Comments from the Department of Labor 38 

Appendix IV GAO Contacts and Acknowledgments 40 

Related GAO Products 41 

Tables 

Table 1: Comparison of Reserve Ratio and Benefit Ratio 

Approaches 7 

Table 2: Minimum Tax Rates, Maximum Tax Rates, and Taxable 

Wage Bases of State Unemployment Insurance Programs 11 

Table 3: Summary of Findings of Cross-subsidization among 

Industries from Literature Review 19 

Table 4: Cross-subsidization among Industries in Washington State, 

1989 to 1999 21 

Contents 
Page ii GAO-06-769 Unemployment Insurance 

Table 5: Industries Ranked by Benefit-Tax Ratio for Selected States 24 

Table 6: California Unemployment Insurance Tax Schedules 36 

Table 7: Basis for Rate Schedule Used 37 

Figures 

Figure 1: Tax Rates and Reserve Ratios in California 13 

Figure 2: Unemployment Insurance Benefits Charged and Taxes 

Paid by Selected Industries in Washington State from 1999 

to 2004 25 

Abbreviations 

ERI Experience Rating Index 

FUTA Federal Unemployment Tax Act 

GAO Government Accountability Office 

NAICS North American Industry Classification System 

SIC Standard Industrial Classification System 

UI Unemployment Insurance 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-06-769 Unemployment Insurance 

July 26, 2006 

The Honorable Wally Herger 

Chairman 

Subcommittee on Human Resources 

Committee on Ways and Means 

House of Representatives 

Dear Mr. Chairman: 

Unemployment compensation is a social insurance program designed to 

partially replace the lost wages of individuals who become involuntarily 

unemployed and to stabilize the economy in times of economic recession. 

In partnership with the federal government, individual states administer 

the Unemployment Insurance (UI) program and fund benefits through 

payroll taxes levied on employers. In 2006, employers are projected to 

make state unemployment tax contributions of over $37 billion, and an 

estimated $34 billion will be paid in benefits to unemployed workers. 

All state UI systems are experience-rated so that employers’ contribution 

rates are risk-based, and nearly all vary according to how much or how 

little their workers received unemployment benefits. In principal, this 

means that an employer who lays off many workers that claim 

unemployment insurance benefits will pay more in taxes than an employer 

that lays off fewer workers that claim benefits. However, very limited 

federal guidance governs how states are to implement the experiencerating provision. Further, because unemployment programs serve as social 

insurance programs, it is generally recognized that some high-layoff 

employers may, over time, pay less in taxes than benefits paid to their 

former workers, while other employers may pay more. 

Wanting to know about the equity of state systems of unemployment 

insurance financing, you asked that we explore how the taxes that pay for 

the system are distributed among employers. Specifically, we addressed 

the following questions: 

1. How have states ensured that individual employers pay unemployment 

insurance taxes based on their experience with unemployment, and 

what aspects of state unemployment insurance systems limit such 

experience rating? 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-06-769 Unemployment Insurance 

2. To what extent do employers pay unemployment insurance taxes 

commensurate with unemployment benefits paid to their former 

employees, and how does this vary by industry? 

3. What steps could states take if they wished to ensure that the taxes 

paid by individual firms more closely matched the benefits paid to the 

former employees of each firm? 

To answer the first and third questions, we reviewed pertinent literature 

and interviewed Department of Labor (Labor) officials and officials of 

national organizations representing the perspectives of business, labor, 

and state unemployment insurance agencies, as well as nationally 

recognized experts on unemployment insurance. We also conducted indepth interviews with representatives of unemployment insurance 

agencies in five states—California, Illinois, Michigan, Texas, and 

Washington. We selected these states because they are relatively populous 

and geographically dispersed, and because they take different approaches 

to ensuring experience rating. We discussed each state’s approach to 

financing unemployment insurance benefits, and the implications that 

various aspects of these systems had for experience rating and the 

existence of cross-subsidies. In addition, we reviewed pertinent 

documents describing the unemployment insurance-financing systems in 

each of these five states. To answer the second question, we identified and 

reviewed 10 studies published between 1972 and 2000 that measured how 

closely taxes paid by firms and industries matched the benefit costs they 

imposed. We confirmed with the Department of Labor and national 

experts on unemployment insurance that these 10 studies constituted the 

definitive work done to date on this subject. To supplement these studies, 

we obtained data on tax and benefits payments by industry type from 

three of the five selected states. We determined that the data were 

sufficiently reliable for our purposes. See appendix I for more details on 

scope and methodology. 

We conducted our work between September 2005 and June 2006 in 

accordance with generally accepted government auditing standards. 

All states have established experience-rated unemployment insurance 

financing systems, but several aspects of these systems limit the 

connection between an employer’s tax contributions and the employer’s 

experience with unemployment. In nearly all states, unemployment 

insurance taxes are based on some measure of benefits paid to a firm’s 

former workers. However, over time, taxes may not equal benefits for 

Results in Brief 
Page 3 GAO-06-769 Unemployment Insurance 

several reasons. Some aspects of state systems limit firms’ tax payments. 

For example, a state’s maximum tax rate limits the size of an employer’s 

tax payment, regardless of the costs an employer may have imposed on 

the system. Similarly, minimum tax rates ensure that an employer’s tax 

rate will not drop below a specified floor, no matter how much its 

experience rating improves. Other aspects of state systems cause 

significant portions of total benefit payments to become “shared”—that is, 

to become a common cost of all firms. For example, under some 

conditions, states pay benefits but do not attribute those benefits to a 

specific employer. One type of such a “noncharge” is a benefit payment 

made that is finally reversed, but not recovered. Such shared benefit costs 

reduce experience rating and impose additional costs on all employers. 

The manner in which states distribute the cost of these benefits, in order 

to recoup them, also affects the match between taxes paid and benefits 

charged to each employer. 

Studies performed since the 1970s show that considerable crosssubsidization exists among firms and industries in states’ unemployment 

insurance systems. Certain industries, such as construction and 

agriculture, forestry, and fisheries, as a whole, consistently pay less in 

unemployment insurance taxes than in benefits received by their former 

employees, which is likely due to the cyclical or seasonal nature of these 

industries. In some cases, the differences between taxes paid and benefits 

received can be substantial. For example, our analysis of 1999-to-2004 data 

from Illinois shows that firms in the construction industry paid more than 

$1 billion less in unemployment insurance taxes than the unemployment 

benefit costs charged to them. Other industries, in particular finance, 

insurance, and real estate, tend to have more stable or growing 

employment and pay overall subsidies. Yet studies using firm-level data 

have also found that there is a considerable amount of cross-subsidization 

within industries. For example, although construction is found to be the 

most consistently subsidized industry, an intra-industry analysis using data 

from Texas finds that the majority of firms within that industry are paying 

more in taxes than in benefits received by their former employees. In 

addition, newer firms that are not yet experience-rated, regardless of 

industry, tend to pay subsidies. 

States could increase experience rating and reduce cross-subsidies by 

adjusting aspects of the unemployment insurance tax structure, such as 

the maximum tax rate and the taxable wage base. However, each of these 

adjustments has trade-offs that would have to be evaluated by a state 

because these adjustments would raise costs for some employers or 

reduce costs for others, and have implications for other policy objectives 
Page 4 GAO-06-769 Unemployment Insurance 

established for a state’s unemployment insurance program. For example, 

according to officials of the California Employment Development 

Department, the state’s current unemployment insurance-financing system 

was explicitly developed so that high-unemployment industries important 

to the state’s economy—specifically, construction and agriculture—would 

not bear the full cost of benefits paid to workers in those industries. 

Consequently, while raising the maximum tax rate would make these 

employers pay a more equitable share, it could conflict with other state 

policy goals. 

We provided a draft of this report to the Department of Labor for its 

review. Overall, Labor agreed with our findings. 

Labor also provided technical comments on the draft report, which we 

have incorporated where appropriate. 

The unemployment insurance program was established in 1935 to (1) give 

workers temporary and partial insurance against income loss during 

unemployment for which they are not at fault, and (2) to help stabilize the 

nation’s economy in economic downturns by maintaining workers’ 

purchasing power. The program operates as a partnership between the 

states and the federal government.1

 Under this arrangement, Labor 

provides broad policy guidance and program direction, while the states 

design and implement specific program details. Within certain limits, 

states have broad autonomy in carrying out their basic program 

operations. They decide the requirements that unemployed workers must 

meet for eligibility, the amount of benefits, and the length of time they will 

pay benefits. They also decide on the tax rates employers must pay on 

their payrolls. Further, states can and do make changes in these and other 

aspects of their unemployment insurance system. As a result, state 

eligibility requirements, benefit levels, payroll tax rates, and trust fund 

balances vary, reflecting variations in program decisions and the economic 

fortunes of each state. 

Federal and state payroll taxes on employers finance the UI program. The 

federal government uses the proceeds from its payroll tax to (1) pay for all 

 1

We use the term “states” to refer to the administrative entities of the 53 unemployment 

insurance programs that cover the 50 states, the District of Columbia, Puerto Rico, and the 

Virgin Islands. 

Background 
Page 5 GAO-06-769 Unemployment Insurance 

program administrative costs and one-half of extended benefit payments 

and (2) maintain a loan account from which financially troubled states can 

borrow funds to pay UI benefits.2

 The gross federal tax rate is 6.2 percent 

on the first $7,000 paid annually by employers on each employee. If a state 

meets federal requirements, and has no delinquent federal loans, however, 

its employers are eligible for up to a 5.4 percent credit, making the net 

federal tax rate 0.8 percent. To receive the maximum federal tax credit, 

states must, among other things, establish a taxable wage base for state UI 

taxes at least equal to the federal wage base—currently $7,000. 

Most of the funds used to pay UI benefits come from the states, which levy 

a payroll tax on employers to finance regular UI benefits and one-half of 

extended benefits. States generally structure their UI taxes to include 

several tax rate components or schedules. In accordance with federal law, 

within a tax schedule, an employer’s tax rate will vary according to the 

firm’s experience in laying off workers who subsequently receive UI 

benefits, commonly called their experience rating.3

 Those firms with many 

unemployed workers receiving UI benefits will generally pay a higher UI 

tax rate than firms with few workers receiving unemployment insurance. 

These tax rate schedules also vary according to some measure of a state’s 

trust fund balance, with the highest tax schedules generally applying when 

state fund balances have fallen below a specified level. Each state 

maintains its own trust fund with the U.S. Treasury that is used for 

depositing program income and from which UI benefits are paid. 

The experience-rating aspect of the unemployment insurance systems is 

unique in the world—the United States is the only nation that finances its 

UI system though an experience-rated tax. The objectives of experience 

rating are (1) the prevention of unemployment by inducing employers to 

stabilize their operations and thus their employment, so as to reduce their 

 2

The federal tax includes a 0.2 percent surtax to reimburse the general fund for extended or 

supplemental benefits paid in the 1974-1975 recession. Repayment was completed in 1987, 

but the surtax has been extended through 2007. 

3

Under federal law, states are not granted the 5.4 percent credit on the federal tax unless 

their UI system is experience-rated. Specifically, the law states that a state may not offer 

reduced tax rates to an employer “except on the basis of his (or their) experience with 

respect to unemployment or other factors bearing a direct relation to unemployment risk 

during not less than the three consecutive years immediately preceding the computation 

date” (26 U.S.C. § 3303(a)(1)). States may also have reduced rates for newly subject 

employers on a reasonable basis. 
Page 6 GAO-06-769 Unemployment Insurance 

tax rates, and (2) the equitable allocation of costs of unemployment 

benefits. 

. 

Although all state and territorial unemployment insurance programs base 

an employer’s tax rates on its experience with unemployment, the design 

of each state’s financing system also limits the degree of experience rating. 

Nearly all state programs, for example, base tax rates on some measure of 

benefits paid to a firm’s former workers. However, all states have a 

maximum tax rate that limits the financial liability of an employer, 

regardless of the amount of benefits paid to a firm’s former employees. As 

a result, some employers will, over time, pay less than the full costs of 

benefits attributed to them. Also, some benefits are paid but not charged 

to an individual employer, partly because the employer is not at fault. 

These and other design features allow an employer’s total tax payments to 

vary from total attributed benefits, over time. 

All state unemployment insurance programs adjust the tax rates of 

individual firms on the basis of their experience with unemployment, and 

50 of the 534

 systems do so based on one of two basic systems—the 

reserve ratio system or the benefit ratio system. 

In these 50 states, when unemployment insurance benefits are paid to a 

worker, the value of those benefits is “charged” to the worker’s former 

employer or employers.5

 Under both systems, benefits payments charged 

to a firm over a defined period of time become a key basis for an 

employer’s experience rating. However, the reserve ratio system and the 

benefits ratio system also have important differences. 

Under the reserve ratio system—used by 33 state and territorial 

unemployment insurance programs—states set up an account for each 

experience-rated employer. All taxes paid by an employer are credited to 

this account, and benefits to a firm’s former employees are debited from 

this account. Ordinarily, this balance—or “reserve”—is carried forward 

 4

Two states—Delaware and Oklahoma—use a system known as the benefit-wage-ratio 

system, and Alaska uses a system known as the payroll variation plan. 

5

States have different practices regarding the charging of benefits—some states charge 

benefit payments only to the most recent employer; others charge multiple employers, 

either in reverse chronological order or in proportion to the wages paid during the base 

period. Further, in some situations, benefits are paid but are not charged to a specific 

employer. 

States’ 

Unemployment 

Insurance-Financing 

Systems Limit the 

Degree of Experience 

Rating 

Nearly All States Base 

Experience-Rated Tax 

Rates on Benefits Paid to a 

Firm’s Former Workers 
Page 7 GAO-06-769 Unemployment Insurance 

from year to year.6 The balance of this account is positive if cumulative tax 

payments are larger than cumulative benefits charged, and negative if 

cumulative tax payments are smaller than cumulative benefits charged. In 

each year, each employer’s experience rating—the reserve ratio—is 

developed by dividing the firm’s reserve balance by a measure of the 

wages paid by the firm—in most cases, an aggregate or average of 3 years’ 

taxable wages. Table 1 illustrates the calculation of an experience rating 

using the reserve ratio method. 

Table 1: Comparison of Reserve Ratio and Benefit Ratio Approaches 

Reserve ratioa Benefit ratiob 

Formula 

Taxes paid minus benefits charged

Average of 3 years’ wages

Benefits charged over 4 years

Total wages over 4 years

Relationship to tax rates 

The lower the reserve ratio, the higher the tax rate The higher the benefit ratio, the higher the tax rate 

Examples 

Reserve ratio range: 

Maximum tax: Below –0.11 

Midpoint: 0.01 to 0.02 

Minimum tax: 0.2 or more 

Tax rates

5.4 

4.0 

0.7 

Benefit ratio range:

Maximum tax: Above 0.0575. 

Midpoint: 0.0225 to 0.02375 

Minimum tax: below 0.000001 

Tax rates

5.4 

2.65 

0

Source: GAO analysis of California and Washington state UI financing systems. 

a

The reserve ratio example is from one of the tax schedules used in California. In California, different 

schedules may be used from year to year, depending on the balance of the UI reserve fund. In 

California, the formula also includes some credits to an employer’s account in addition to taxes paid, 

and some deductions in addition to benefits charged. 

b

The benefit ratio example is from the tax rate schedule used by Washington state. In Washington, a 

single schedule is used, but rates can be adjusted each year by factors that account for the size of 

social costs or fund solvency. 

The benefit ratio approach, used by 17 of the 53 state and territorial UI 

systems, does not consider employers’ tax contributions, but only benefits 

charged over a defined period, usually 3 years. As with the reserve ratio 

system, benefit charges are divided by a measure of the firm’s total wages, 

such as payroll over 3 years. Table 1 illustrates the calculation of an 

experience rating using the benefit ratio method. 

 6

In some states, the contributions and benefits taken into account are limited to those since 

a certain date. For example, in Rhode Island, they are limited to those since October 1, 

1958. 
Page 8 GAO-06-769 Unemployment Insurance 

Once a state has established an employer’s experience rating as measured 

by the reserve ratio or the benefit ratio for a tax year, these experience 

ratings are used to determine an employer’s tax rate. In general the basic 

tax rate is determined through use of a tax rate schedule, and in some 

states through use of a formula. The basic experience-rated tax rate can 

also be adjusted in response to other considerations, such as the solvency 

and financial health of the trust fund or to cover shared costs. As table 1 

illustrates, employers with high reserve ratios pay relatively low tax rates, 

and those with low reserve ratios, especially employers with negative 

reserve ratios, pay relatively high taxes. Conversely, the higher a benefit 

ratio, the higher an employer’s tax rate. 

Each year, an employer’s tax payment is calculated by multiplying the tax 

rate by the employer’s taxable wage base. Under federal law, the taxable 

payroll must be at least the first $7,000 in wages paid to each employee, 

but state taxable payrolls vary from this minimum up to $32,300. 

In any given year, both the reserve ratio and the benefit ratio systems 

allow for considerable differences between tax payments and benefit 

charges. In theory, unemployment insurance programs rely on a forwardfunded approach. Typically, the trust fund is replenished when tax 

payments exceed benefit payments during times of low unemployment. 

Conversely, trust funds are depleted during times of high unemployment 

because benefit payments exceed tax revenue. By design, higher tax 

payments lag behind increased benefit payments, in part so that employers 

are not burdened with higher tax rates during times of economic difficulty. 

Because the reserve ratio is based on the full history of an employer’s 

benefit charges and tax payments, it will change less abruptly because of 

an increase or decrease in benefit payment than the benefit ratio. 

However, both are designed to partly recoup charged benefits and ensure 

some degree of equity among employers over multiple years. 
Page 9 GAO-06-769 Unemployment Insurance 

Although the large majority of state UI systems have implemented 

experience-rated systems that ensure a linkage between taxes paid and 

benefits charged, several aspects of state UI systems limit this linkage. As 

a result, state UI systems are only partly experience-rated, and a firm’s UI 

tax payments can be substantially determined by factors other than 

benefits charged.7

Although benefit ratio and reserve ratio systems establish, for each 

employer, a basis for a tax rate linked to benefits charged, they both have 

important limitations in this regard. First, benefit ratio and some reserve 

ratio systems do not have perfect memories of benefits charged. Typically, 

benefit ratio systems consider benefit payments over the previous 3 years. 

For example, benefit payments, charged to a firm in years prior to the 

3-year range, even if not fully recaptured in tax payments, are not 

considered in calculation of taxes for future years. Similarly, while reserve 

ratio systems generally are supposed to reflect the balance between all 

benefits charged and all taxes paid since enactment of a state’s 

unemployment insurance law, this does not always occur in practice. Six 

of the 33 states that use the reserve ratio system have provisions for 

effectively writing off benefit charges if the firm’s reserve balance or 

reserve ratio sinks below a certain level.8

 For example, the California 

unemployment insurance program writes off benefit charges if an 

employer has a negative balance that would otherwise exceed 21 percent 

of average taxable payroll during the last 3 calendar years. When these 

negative balances are forgiven, the benefit charges are effectively erased 

from the record of an individual firm. In both the case of a reserve ratio or 

a benefit ratio system, benefits that were once attributable to an individual 

firm become the common burden of all employers. 

A second major factor that limits the degree of experience rating is that 

these systems do not take into account the time value of money. For 

example, employers in a state using the reserve ratio approach may—by 

consistently paying less in taxes than the amount of chargeable benefits 

paid to former workers—carry a significant and growing negative balance 

 7

To some extent, these departures from experience rating are an outgrowth of various 

changes that have been made to state systems over the years that have typically been 

established based on negotiations between business and labor interests. 

8

Pennsylvania uses both a reserve ratio and a benefit ratio component in determining 

employer tax rates. The state also writes off benefit charges for the reserve ratio 

component. 

Several Aspects of State UI 

Systems Limit the Linkage 

between Tax Rates and 

Benefits Paid to a Firm’s 

Former Workers 

Benefit Write-offs and the Time 

Value of Money 
Page 10 GAO-06-769 Unemployment Insurance 

for many years. Because states maintain records in nominal dollars, such 

negative balances understate the real cost that such employers have 

imposed on the state’s unemployment insurance trust fund. Conversely, 

employers that consistently maintain significant positive account balances 

are not compensated for these balances—the nominal balance understates 

the real contribution such employers have made to the state’s trust fund.9

The same effect may occur in states using the benefit ratio system, but 

because of the 3-year time horizon on the benefits that affect the tax rates, 

there is less potential for this practice to have a large cumulative effect. 

While all states vary an employer’s tax rate on the basis of experience 

rating, all states have also established maximum tax rates that limit an 

employer’s tax liability. In accordance with federal guidelines, states must 

have a maximum tax rate of at least 5.4 percent. However, as table 2 

indicates, maximum tax rate policies differ markedly from state to state—

ranging from 5.4 percent in 13 states to 15.4 percent in Massachusetts.10

 9

According to Labor, South Dakota does charge interest to negative balance employers. 

Further, 16 states credit interest earned on their trust find balances back to employers in 

some way. 

10The actual maximum tax rate in a state can change from one year to the next, because of 

the use of different schedules or changes in factors used to calculate a tax rate by formula. 

Maximum Tax Rates 
Page 11 GAO-06-769 Unemployment Insurance 

Table 2: Minimum Tax Rates, Maximum Tax Rates, and Taxable Wage Bases of State Unemployment Insurance Programs 

State 

Minimum 

tax 

Maximum 

tax 

Taxable 

wage base State 

Minimum 

tax 

Maximum 

tax

Taxable 

wage base

Alabama 0.65 6.8 $8,000 Nebraska 5.4 $7,000

Alaska 1.0 5.4 $27,900 Nevada 0.25 5.4 $22,900

Arizona 

2.85 5.4 $7,000

 New 

Hampshire 2.8 6.5 $8,000

Arkansas 0.9 10.8 $10,000 New Jersey 1.2 7.0 $24,900

California 1.3 5.4 $7,000 New Mexico 2.7 5.4 $17,200

Colorado 1.0 5.4 $10,000 New York 0.9 8.9 $8,500

Connecticut 

1.5 6.9 $15,000

 North 

Carolina 0 5.4 $16,700

Delaware 0.1 9.5 $8,500 North Dakota 0.1 $19,400

District of Columbia 1.9 7.4 $9,000 Ohio 0.1 6.7 $9,000

Florida 0.001 6.4 $7,000 Oklahoma 0.5 5.5 $13,800

Georgia 0.05 10.8 $8,500 Oregon 2.2 5.4 $27,000

Hawaii 2.4 5.4 $32,300 Pennsylvania 1.0225 10.59 $8,000

Idaho 2.4 6.8 $28,000 Puerto Rico 2.5 5.4 $7,000

Illinois .2 9.0 $10,500 Rhode Island 1.9 10.0 $16,000

Indiana 

1.1 5.6 $7,000

 South 

Carolina 1.24 6.1 $7,000

Iowa 0 9.0 $20,400 South Dakota 1.5 10.5 $7,000

Kansas 0.01 7.4 $8,000 Tennessee 0.5 10.0 $7,000

Kentucky 1.0 10.0 $8,000 Texas 0 6.0 $9,000

Louisiana 0.3 6.0 $7,000 Utah 0.1 9.0 $23,200

Maine 2.4 7.5 $12,000 Vermont 1.3 8.4 $8,000

Maryland 2.3 9.5 $8,500 Virginia 0.3 6.4 $8,000

Mass. 1.58 15.4 $14,000 Virgin Islands 0.1 9.5 $18,600

Michigan 1.0 10.0 $9,000 Washington 2.47 5.4 $30,500

Minnesota 0.6 9.5 $23,000 West Virginia 1.5 8.5 $8,000

Mississippi 0.1 5.4 $7,000 Wisconsin 0.27 8.9 $10,500

Missouri 0 8.7 $11,000 Wyoming 0 8.5 $16,400

Montana 1.67 6.37 $21,000 

Source: Comparison of State Unemployment Laws, 2005, U.S. Department of Labor. 

Note: In those cases where cells are empty, no state data were available. The maximum and 

minimum tax rates in this table are based on the “least favorable” scenario, that is, the highest 

maximums and minimums. Depending on the condition of the state’s trust fund and other factors, in a 

given year, the actual maximum and minimum tax rates may be lower than these rates. For example, 

28 states have higher maximum tax rates on the least favorable schedule than on the most favorable 

schedule. The differences range from less than a percentage point to more than 7 percentage points. 
Page 12 GAO-06-769 Unemployment Insurance 

The maximum tax rate may cause a departure from experience rating in 

certain circumstances for two reasons. First, as a result of maximum tax 

rates, firms with very different experience ratings will be assessed the 

same tax rate. For example, an employer that is just at the threshold of the 

maximum tax rate will pay the same tax rate as an employer whose 

experience rating indicates a much greater propensity to lay off workers. 

Figure 1 illustrates this effect using an example from California. According 

to one of the tax schedules used in that state, all employers with reserve 

ratios of -0.11 or less pay at the maximum tax rate of 5.4 percent. 

Consequently, an employer with a reserve ratio of -0.20 or worse will pay 

the same tax rate as an employer with a reserve ratio of -0.11. 
Page 13 GAO-06-769 Unemployment Insurance 

Figure 1: Tax Rates and Reserve Ratios in California 

The second departure from experience rating occurs because the 

maximum tax rate causes some firms to pay considerably less in taxes 

than benefits charged. Because of the maximum tax rate, it is possible that 

an employer will continue to pay less in taxes than benefits charged year 

after year. For example, an Illinois firm with 100 employees at a maximum 

tax rate of 9.0 percent and a taxable wage base of $10,500 per employee 

will pay a total of $94,500 in taxes in a year. Assuming this employer laid 

off 15 workers who each earned $673 per week, each worker would qualify 

for unemployment insurance benefits of about $8,400, or a total of about 

$126,000.11 In a single year, the employer’s workers would receive about 

$31,500 more in benefits than taxes paid by the employer. If this pattern 

continues for multiple years, the maximum tax rate would prevent the 

 11In Illinois, a worker generally receives benefits equal to about 48 percent of base period 

wages. This scenario assumes that each worker collects benefits for the full 26 weeks 

permitted. 
Page 14 GAO-06-769 Unemployment Insurance 

employer’s tax contributions from increasing, and the difference between 

benefits charged and taxes paid may become a permanent subsidy to the 

employer. 

In conjunction with the maximum tax rate, employers’ tax contributions 

are also limited by the level of the taxable wage base set by the state. 

Because an employer’s tax rate is multiplied by its taxable wage base to 

determine its tax payments, an employer paying at a given tax rate will pay 

less tax than an employer at the same tax rate with a higher taxable wage 

base. While federal law requires a $7,000 minimum taxable wage base, 

table 2 shows that taxable wage bases vary significantly from state to 

state, ranging from the $7,000 minimum in nine states to $32,300 in Hawaii. 

Just as states set maximum tax rates, most states also set minimum tax 

rates greater than zero. Minimum tax rates ensure that an employer’s tax 

rate will not drop below a specified floor, no matter how much its 

experience rating improves. Consequently, employers with significantly 

different experience ratings may have the same tax rate. Figure 1 

illustrates that employers with a reserve ratio greater than 0.20 would pay 

at the minimum rate of 0.7 percent. As table 2 shows, minimum tax rates 

even at the highest rate schedules vary widely among the states—from 

zero in five states to 2.85 percent in Arizona. 

The method states use to assign an employer a tax rate, and the range of 

possible tax rates between the minimum and the maximum tax, also 

affects the degree to which a state UI system is experience-rated. Some 

states use tax schedules to assign employers whose benefit ratio or 

reserve ratio falls within a particular range a particular tax rate. Such 

schedules—if they have relatively few tax rates and broad intervals 

between the rates—can limit experience rating because employers with 

different experience ratings will pay at the same tax rate. Also, if the 

difference between one tax rate and the next is substantial, employers 

with nearly identical experience ratings may pay significantly different tax 

rates. As Labor noted in 1983 guidance to states, within the limits of the 

maximum and minimum rates, the smaller the intervals between the 

variant rates, the greater the effect of individual employer experience on 

the employer’s tax rate.12 Further, numerous differential rates make the 

 12Unemployment Insurance Program Letter to States, General Principles of Experience 

Rating under Section 3303(a)(1), FUTA (Federal Unemployment Tax Act), 

U.S. Department of Labor, June 23, 1983. 

Minimum Tax Rates 

Tax Rate Increments 
Page 15 GAO-06-769 Unemployment Insurance 

transition from one tax rate to another more equitable because two 

employers with almost identical experience ratings could have different 

tax rates if they are on either side of the border between two rates. More 

tax rates will help ensure that the difference between one rate and the 

next is smaller. 

State unemployment insurance funds bear some costs that cannot be 

recovered from the individual employer that might otherwise be 

considered responsible for such benefit costs. Such costs become the 

common burden of all employers, and for this reason can be referred to as 

shared costs. Such shared costs fall into three general categories: 

(1) benefits that are charged to a specific active employer but are not fully 

recovered from that firm in tax revenue, (2) benefits paid to former 

employees of firms that have gone out of business and cannot make 

additional tax payments, and (3) benefit payments made to workers that 

are not charged to a specific employer. 

Some aspects of state unemployment insurance programs prevent the tax 

payments of some employers from matching charged benefits. For 

example, if over multiple years, an employer’s benefits charges amount to 

$50,000 but because of a maximum tax rate, the firm pays only $43,000 in 

taxes, the state must raise revenue to cover the costs of this difference. As 

a result, such costs become the common burden of all firms in the 

unemployment insurance system. 

This aspect of shared costs can be a substantial portion of total benefits 

paid. Labor publishes one measure of such costs, referred to as ineffective 

charges.13 In 2004, the most recent year for which data are available, such 

ineffective charges ranged from 2.5 percent of total benefits paid in North 

Dakota to 38.7 percent in Arizona. In other words, only 2.5 percent of total 

benefits payments in North Dakota were charged to active employers who 

did not pay taxes to cover these benefit costs. In Arizona, 38 percent of all 

benefit payments were charged to active employers, but not matched by 

commensurate tax revenue. 

 13Labor reports ineffective charges as part of an overall measure of experience rating 

known as the experience rating index, or ERI. The ERI has important limitations as a 

measure of experience rating. In particular, the measure of ineffective charges is made only 

for a single year. It does not take into account that current-year benefits for some 

employers lead to higher future tax payments. 

Some Costs Are Shared 

among All Employers, a 

Fact That Contributes to 

Differences between 

Benefits Charged and 

Taxes Paid 

Charged Benefits That Are Not 

Covered by Responsible 

Employers’ Tax Payments. 
Page 16 GAO-06-769 Unemployment Insurance 

One of the states we contacted—California—has an alternate measure of 

such shared costs. Under the state’s reserve ratio method of experience 

rating, the California Employment Development Department keeps track 

of annual increases in negative balances for employers that have negative 

balances. Each year, these increases to the negative balance are totaled 

and are distributed to all firms in the UI system. 

State unemployment programs also pay benefits to unemployed workers 

whose former employer has gone out of business. In the event that the 

state cannot collect commensurate tax revenue from these firms, the costs 

of such benefit payments—known as inactive charges—must be borne by 

the UI system, and ultimately by all other active firms. In 2004, inactive 

charges ranged from 0.2 percent of benefits in Massachusetts to 

19.5 percent of benefits in Nevada. 

In some situations, state unemployment insurance programs will pay 

noncharged benefits, that is, benefits paid to unemployed individuals but 

not charged to the firms for whom the employees had worked. Because 

these benefit payments are not associated with an individual employer, 

they become the common burden of employers in state UI systems. 

Noncharged benefit payments are allowed partly because of the belief that 

an employer should not be charged for unemployment for which the 

employer was not responsible. For example, many states pay 

unemployment benefits to a worker who voluntarily quits a job and has 

not found another job after some interval, or under certain conditions, 

such as compelling personal reasons not attributable to the employer. 

Policies regarding noncharging of benefit payments vary from state to 

state.14 In addition to voluntary resignations, common types of noncharges 

include benefits paid to employees who were discharged for misconduct 

and benefit payments made in situations where the benefit award is finally 

reversed. A few states will not charge unemployment benefits paid to a 

worker hired to replace a member of the armed services called into active 

duty and laid off upon the service person’s return. 

Noncharged benefits can amount to a significant portion of total benefit 

payments. In 2004, noncharged benefits in the states ranged from about 

3 percent of total benefit payments in Colorado and New York to about 

 14States that allow certain general categories may differ in the specific provisions of such 

noncharges. For example, California and Nevada pay benefits to persons who quit their last 

job to accompany a military spouse, while some other states do not. 

Benefits Charged to Inactive 

Firms 

Noncharged Benefits 
Page 17 GAO-06-769 Unemployment Insurance 

32 percent in Maine. In 2004, noncharged benefits exceeded 10 percent of 

total benefit payments in 34 states and over 20 percent of total benefits in 

7 states. Nationally, from 2001 to 2004, noncharges averaged between 

10.0 percent and 13.3 percent of all benefits paid. 

In order to maintain the solvency of the state unemployment insurance 

fund, state unemployment insurance agencies must collect tax payments 

to cover shared costs, and must implement some technique of distributing 

this tax burden among employers that pay in to the fund. States have 

considerable flexibility in doing so, and our contacts with 5 states 

indicated that practices may differ widely. Four of the 5 states that we 

contacted—California, Michigan, Texas, and Washington—implement tax 

rate adjustments specifically designed to distribute and recapture shared 

costs, and each of the 5 implement adjustments in response to changes in 

the state UI fund. 

Tax rate adjustments—whether to recoup shared costs or to ensure fund 

solvency—can have an effect on the degree of experience rating. For 

example, Illinois makes two adjustments to employers’ experience-rated 

tax rates—the state experience factor and the fund-building rate.15 Because 

the state experience factor is multiplied by the employer’s basic tax rate as 

determined by an employer’s benefit ratio, the relationship of the tax rates 

among all employers does not change. On the other hand, Illinois also adds 

a fund-building surcharge—in 2005 the fund-building rate was 0.9 percent 

(or $94.50 per employee)—to each employer’s tax rate. Because this 

amount is a flat add-on to the adjusted tax rate, it distorts experience 

rating in that it changes an employer’s experience-rated rate relative to 

those of other employers. For example, an employer with a tax rate of 

3 percent would now have a tax rate of 3.9 percent, an effective 30 percent 

increase. On the other hand, an employer with a 5 percent tax rate would, 

with the fund-building component added, now have a tax rate of 

5.9 percent—an 18 percent increase. A similar effect could occur in 

Michigan, which adds a flat 1 percent to the tax rate of each employer to 

recoup the costs of nonchargeable benefits. 

 15Illinois’ state experience factor is designed to increase or decrease experience-rated tax 

rates based on recent net gains or losses in the state’s UI fund. In 2005, for example, 

because benefits paid considerably exceeded net revenues for the preceding 3-year period, 

the 2005 state experience factor was 139 percent. The fund building rate is intended to 

build up adequate reserves in the trust fund. This rate is set statutorily, and was set at 

0.9 percent in 2005, and at 0.8 percent for 2006 and 2007. 

Method of Assessing Solvency 

and Social Cost Surcharges 

Affects Experience Rating 
Page 18 GAO-06-769 Unemployment Insurance 

Studies conducted over the past 34 years indicate that some industries 

persistently pay less in unemployment insurance taxes than benefits paid 

to their former workers, while others persistently pay more. The studies 

we reviewed found that such cross-subsidies favor seasonal and cyclical 

industries, such as construction and agriculture, forestry, and fisheries, 

whereas firms in the finance, insurance, and real estate industry regularly 

pay subsidies. Our analysis of more recent data from several states finds 

similar evidence of cross-subsidization, with sometimes substantial 

differences between taxes paid and benefits received. In addition, research 

shows that there is a considerable amount of cross-subsidization among 

firms within the same industry. Studies have also found that new firms 

that are not yet experience-rated, regardless of industry, tend to pay 

subsidies. 

A series of studies examining data from the 1950s to the late 1990s have 

found consistent cross-subsidization among industries in state UI 

systems.16 The studies we reviewed refer to an excess in benefits received 

by former workers compared to taxes paid by an employer as a subsidy.17

Though these studies used varying methodologies, they have all compared 

total unemployment insurance taxes paid by firms in a broad industry 

group to total benefits paid to UI recipients from those industries over 

time.18 As table 3 indicates, in many cases, studies of different states and 

time periods show the same industries pay or receive subsidies. 

 16In general, the studies we reviewed performed their analysis using two digit Standard 

Industrial Classification (SIC) codes. 

17The studies we examined calculate subsidies in slightly different ways, and the differing 

ways affect the size of the subsidy estimates. Typically, studies estimated the size of the 

subsidy by comparing charged UI benefits to total UI taxes paid by a firm. Other studies 

compared the total of charged and noncharged benefits to taxes paid in their measures of 

subsidies. 

18It is important to examine subsidies over multiple years, instead of only for a single year, 

because the UI system is designed to recoup costs from employers over multiple years. 

Single-year data may overestimate the extent of cross-subsidization, particularly when the 

use of UI is related to an unemployment shock and not persistent job turnover or layoffs. 

State UI Tax Policies 

Result in Persistent 

Cross-subsidization 

among Firms and 

Industries 

Cross-subsidization 

Typically Favors Firms in 

Seasonal and Cyclical 

Industries Such as 

Construction and 

Agriculture 
Page 19 GAO-06-769 Unemployment Insurance 

Table 3: Summary of Findings of Cross-subsidization among Industries from Literature Review 

Study Data Receive subsidies: Industry Pay subsidies: Industry 

O’Leary and others 

2000 

28 states, 

1998 

• Construction • Financial service providers 

• Low-wage manufacturing 

Vroman 

1999 

Washington state, 

1989-1999 

• Construction 

• Agriculture, forestry, and 

fisheries 

• Manufacturing 

• Finance, insurance, and real estate 

Tannenwald and O’Leary 

1997 

Massachusetts, 

1988-1996 

• Construction • Transportation, communications, and 

public utilities 

• Trade 

• Finance, insurance, and real estate 

• Services 

Anderson and Meyer 

1993a 

6 states, 

1978-1984 

• Construction 

• Manufacturing 

• Mining 

• Agriculture, forestry, and 

fisheries 

• Finance, insurance, and real estate 

• Retail trade 

• Services 

• Transportation 

• Wholesale trade 

Anderson and Meyer 1993b 22 states, 

approximately 1980-1991 

• Construction 

• Manufacturing 

• Mining 

• Agriculture, forestry, and 

fisheries 

• Finance, insurance, and real estate 

• Trade 

• Services 

Laurence 

1993 

Texas, 

1978-1982 

• Construction 

• Manufacturing 

• Services 

• Finance, insurance, and real estate 

• Mining and quarrying 

Munts and Asher 

1980 

21 states, 

1968-1975 

• Construction 

• Manufacturing 

• Agriculture, forestry, and 

fisheries 

• Mining 

• Services 

• Finance, insurance, and real estate 

• Trade 

Topel 

1983 

6 states, 

1971-1975 

• Miscellaneous manufacturing 

• Apparel 

• Construction 

• Primary and fabricated metals 

• Retail trade 

Becker 

1972 

15 states, 

1957-1967 

• Construction 

• Mining 

• Agriculture, forestry, and 

fisheries 

• Finance, insurance, and real estate 

Source: GAO analysis of relevant studies. 

Notes: Data from states in Anderson and Meyer study (1993b) vary within this time frame. Topel 

(1983) and O’Leary and others (2000) did not include all major industrial categories in their studies. 
Page 20 GAO-06-769 Unemployment Insurance 

According to the studies, certain industries, such as construction and 

agriculture, consistently received subsidies, which can be substantial. 

Across different states and time periods studied, the construction industry 

most consistently paid less in taxes than benefits paid to its former 

employees. For example, one study examined industry groups over a 

12-year period, from 1980 to 1991, for 22 states and found that the 

construction industry received the largest subsidy.19 To compare the 

relative size of subsidies, the study calculated a summary benefit-tax ratio 

for each industry averaged across states by dividing benefits received by 

total UI taxes paid.20 The ratio of 1.68 averaged across 22 states indicates a 

large subsidy to the construction industry—as a whole, employers in this 

industry paid about $1 for every $1.68 in benefits received by their former 

workers. A more recent study of Washington state’s UI program also 

examined cross-subsidization among industries over an 11-year period and 

found the construction industry received the largest subsidy, as indicated 

by the benefit-tax ratios reported in table 4.21 The total taxes paid by 

construction firms covered 77 percent of charged benefits over this time 

period. 

 19Patricia M. Anderson and Bruce D. Meyer, “The Unemployment Insurance Payroll Tax and 

Inter-industry and Interfirm Subsidies,” in Tax Policy and the Economy, Ed., James M. 

Poterba, Cambridge, Massachusetts: MIT Press, 1993, pp. 111-144. 

20A benefit-tax ratio equal to 1 means that an employer is paying exactly the amount of 

taxes as benefits received by their former workers. Similarly, an employer or industry with 

a benefit-tax ratio greater than 1 is receiving a subsidy, while an employer or industry with 

a ratio less than 1 is paying a subsidy. 

21Wayne Vroman, Unemployment Insurance Tax Equity in Washington, Report No. 3, 

Washington, DC: The Urban Institute, January 1999. 
Page 21 GAO-06-769 Unemployment Insurance 

Table 4: Cross-subsidization among Industries in Washington State, 1989 to 1999 

Dollars in millions 

Industry Benefits charged Taxes paid Benefit-tax ratio

Agriculture, forestry, and fisheries 318.6 282.7 1.13

Mining 19.5 18.4 1.06

Construction 916.4 701.7 1.31

Manufacturing 982.4 1334.9 0.74

Transportation, communication, and utilities 251.4 381.2 0.66

Wholesale trade 315.8 481.1 0.66

Retail trade 398.5 735.0 0.54

Finance, insurance, and real estate 199.0 338.2 0.59

Services 677.8 1027.0 0.66

Source: Wayne Vroman, Unemployment Insurance Tax Equity in Washington, Report No. 3, Washington, D.C.: The Urban Institute, 

January 1999. 

Note: The benefit-tax ratio is equal to charged benefits divided by total taxes paid. 

Although cross-subsidization is found to most consistently favor firms in 

the construction industry, other industries also tend to benefit. The 

majority of these studies found that firms in agriculture, forestry, and 

fisheries receive subsidies. As shown in table 4, for instance, the study of 

Washington state found that this industry received the second largest 

subsidy from 1989 to 1999. Charged benefits exceeded total taxes paid by 

about 13 percent.22 In addition, several of the studies report that firms in 

manufacturing and mining industries also tend to receive subsidies. For 

example, the mining and manufacturing industries on average received 

37 percent and 9 percent more in benefits than in taxes paid, respectively, 

according to the study of 22 states. 

Conversely, other industries, in particular finance, insurance, and real 

estate consistently pay more in taxes than their former employees receive 

in UI benefits, according to studies reviewed. Data from all of the studies 

that examine cross-industry subsidies and include the finance, insurance, 

and real estate sector indicate that firms in this industry pay a subsidy, 

which is often substantial. The study which used data from 22 states to 

calculate a combined average benefit-tax ratio for each industry concluded 

 22Although agriculture, forestry, and fisheries received a relatively large subsidy 

proportional to taxes paid, it tends to be one of the smallest sectors of the economy. Thus, 

the industry’s overall contribution to cross-subsidization may not be as great as other, 

larger sectors that also receive subsidies. 
Page 22 GAO-06-769 Unemployment Insurance 

that the finance, insurance, and real estate industry received about half the 

taxes it paid in benefits to its former workers, which was the largest 

subsidy paid by any industry. While firms in the finance, insurance, and 

real estate industry most consistently pay a subsidy to the UI program, 

overall, many other industries also tend to pay subsidies, although not in 

every state and time period studied. These industries include wholesale 

trade, services, retail trade, transportation, communications, and public 

utilities. 

While some industries tend to receive or pay subsidies over time and in 

different states, other industries do not show a consistent pattern. An 

industry may receive a subsidy in one state and pay a subsidy in another 

state because of differences in the structure of states’ UI programs or the 

regional economy. For example, evidence for the service industry may be 

inconsistent across states.23 One study using data for 21 states from 1968 to 

1975 found that the service industry tends to receive a net subsidy, while a 

more recent study using data for 22 states from 1980 to 1991 found that the 

service industry paid almost 32 percent more in taxes than in benefits 

received by its former workers.24 There is also mixed evidence for the 

mining industry. Although several studies have found that mining receives 

an overall subsidy, a study of the Texas UI program found that this 

industry had the highest percentage of firms that are subsidizers.25

More recent tax data obtained from three of the five states we contacted 

largely parallels the findings of earlier studies.26 (See table 5.) In two of the 

three states, as in the previous studies, construction, as well as agriculture, 

forestry, and fisheries received subsidies. For example, in Washington, the 

taxes paid by construction firms covered approximately 70 percent of 

 23These findings for the service industry may also vary, in part, because of the diversity of 

subindustries in this category. 

24See: Raymond C. Munts and Ephraim Asher, “Cross-Subsidies among Industries from 1969 

to 1978,” in Unemployment Compensation: Studies and Research, Volume 2, Washington 

D.C.: U.S. National Commission on Unemployment Compensation,” July 1980, pp. 277-297, 

and Anderson and Meyer, “The Unemployment Insurance Payroll Tax and Inter-industry 

and Interfirm Subsidies,” p. 122. 

25Louise Laurence, “How Large Are the Subsidies Provided by the System of Financing 

Unemployment Insurance?” The Quarterly Review of Economics and Finance, Vol. 33, 

Fall 1993, p. 242. 

26Data provided by Illinois and Texas contained taxes assessed to employers. Officials from 

both states indicated that in excess of 99 percent of taxes assessed are collected from 

employers. 
Page 23 GAO-06-769 Unemployment Insurance 

charged benefits paid to their former employees. In Illinois, the subsidy to 

the construction industry was substantial—from 2001 to 2004, firms in the 

construction industry, as a whole, paid more than $1 billion less in 

unemployment insurance taxes than the unemployment benefit costs 

charged to them.27 In Texas, the construction industry had the highest ratio 

of benefits to taxes, indicating that benefits charged were high relative to 

taxes paid compared with other industries for the 2-year period. However, 

the construction industry actually paid a subsidy in Texas from 2004 to 

2005.28 During this time all industries in Texas paid more in taxes than in 

benefits charged to their former employees. Officials from Texas indicated 

this was to repay a trust fund deficit, which the state covered with a bond 

issuance in 2003. 

 27It should be noted that over this period, taxes paid by all experience-rated employers in 

Illinois were about $2.2 billion less than benefits charged. Hence, the construction industry 

accounted for about half of this difference. Data we obtained from Illinois, Texas, and 

Washington are reported in base year 2005 dollars. 

28Employers in Texas were assessed higher taxes relative to benefits charged during this 

time period in order to pay off deficits generated in previous years. Employers were 

charged an obligation assessment to cover a bond issuance in 2003. 
Page 24 GAO-06-769 Unemployment Insurance 

Table 5: Industries Ranked by Benefit-Tax Ratio for Selected States 

Illinois (2001-2004) Texas (2004-2005) Washington (1999-2004) 

Benefittax ratio Industry 

Benefittax ratio Industry Benefittax ratio Industry Benefittax ratio

Construction 2.48 Construction 0.92 Construction 1.42

Mining 1.67 Educational services 0.89 Manufacturing 1.08

Agriculture, 

forestry, fishing, 

and hunting 

1.62 Utilities 0.75 Agriculture, forestry, 

fishing, and hunting 

1.06

Professional, 

scientific, and 

technical services 

1.54 Agriculture, forestry, 

fishing, and hunting 

0.74 Information 1.05

Highest: 

Administrative and 

support, and 

waste 

management and 

remediation 

services 

1.51 Administrative and 

support, and waste 

management and 

remediation services 

0.74 Professional, scientific, 

and technical services 

1.02

Management of 

companies and 

enterprises 

0.74 Mining 0.44 Utilities 0.49

Health care and 

social assistance 

0.84 Accommodation and 

food services 

0.44 Health care and social 

assistance 

0.51

Accommodation 

and food services 

0.84 Wholesale trade 0.54 Accommodation and 

food services 

0.59

Educational 

services 

0.91 Information 0.57 Retail trade 0.62

Lowest: 

Utilities 0.96 Arts, entertainment, 

and recreation 

0.58 Finance and insurance 0.63

Average: 1.27 0.66 0.85

Source: GAO analysis. 

Note: The average benefit-tax ratio for each state is based on all major North American Industry 

Classification System codes, but does not include public administration or unclassified employers. 

Our more recent tax data also show a similar pattern with regard to those 

industries that paid subsidies.29 In two of the three states from which we 

had data (Texas and Washington), as in the studies reviewed, the finance, 

insurance, and real estate industry paid more in taxes than in benefits paid 

 29Data GAO obtained are reported according to the North American Industry Classification 

System (NAICS). Dollar figures are reported in base year 2005 dollars. In 2003, the Bureau 

of Labor Statistics converted from the U.S. Standard Industrial Classification (SIC) system 

to NAICS codes. 
Page 25 GAO-06-769 Unemployment Insurance 

to its former workers. Other industries that paid subsidies in Illinois and 

Washington include utilities, health care and social assistance, 

management of companies and enterprises, and accommodation and food 

services. (See fig 2. for Washington) Although the mining industry is often 

found to receive a subsidy, in Texas this industry paid a subsidy of more 

than $56 million from 2004 to 2005. 

Figure 2: Unemployment Insurance Benefits Charged and Taxes Paid by Selected 

Industries in Washington State from 1999 to 2004 

The persistence of subsidies to firms in industries such as construction 

and agriculture, forestry, and fisheries may be caused by the industries’ 

susceptibility to seasonal or economic cycles that result in layoffs and 

push firms to the maximum tax rate. As one study of UI programs in New 

England notes, “firms enjoying the largest subsidies tend to face highly 

cyclical or seasonal demand for their products.”30 If this susceptibility 

causes firms in industries such as construction or agriculture to 

chronically be at the maximum tax rate, the subsidies they receive may not 

be recovered by the state. There is at least one anomaly with regard to this 

explanation: The retail trade industry is also seasonal in nature but, 

according to some studies, pays subsidies. According to one study, a 

possible explanation may be that many unemployed workers in this 

industry were not eligible for UI benefits.31 If unemployed workers in the 

retail trade industry were only employed for a short time, they may be 

unable to receive benefits and their former employer would not be 

 30Robert Tannenwald and Christopher O’Leary, “Unemployment Insurance Policy in New 

England: Background and Issues,” New England Economic Review, Federal Reserve Bank 

of Boston, May 1997, pp. 3-22. 

31Tannenwald and O’Leary, “Unemployment Insurance Policy in New England: Background 

and Issues,” p. 16. 
Page 26 GAO-06-769 Unemployment Insurance 

charged. Aside from the retail trade industry, firms in industries like 

finance, insurance, and real estate may consistently pay more in taxes than 

benefits paid, because they tend to have more stable or growing 

employment and pay the minimum tax rate. 

Using more detailed data, some studies have found cross-subsidization 

within industries. While, at the broad level, some industries receive or pay 

subsidies, not all subcategories or firms within these industries fit the 

pattern of the overall industry. For example, one study found that within 

the manufacturing industry, apparel manufacturing receives a subsidy that 

is three to four times as great as the benefit-tax ratio of other 

manufacturing subgroups.32 Another study, using data from Texas, found 

that, even though the construction industry as a whole receives the second 

largest subsidy, the majority of firms within the construction industry paid 

more in taxes than benefits received by their former employees.33 In that 

study, approximately 52 percent of construction firms paid a net subsidy. 

Research has also shown that the likelihood an individual firm will receive 

a subsidy can vary by the age of the firm. In particular, young firms that 

are not yet experience-rated are found to pay more in taxes than benefits 

received by their former workers.34 Typically, firms with less than 3 years 

of employment history are assigned a standard tax rate or the average 

industry rate. One study, using data from Texas, reports that the majority 

of such new firms pay a subsidy, although a few of these firms receive 

large subsidies.35 Among firms less than 5 years old, approximately 

67 percent pay a subsidy, which is the highest rate of all age groups. 

Overall, the author found that young firms and old firms tend to subsidize 

firms in the 11- to 20-year age group. In addition, our analysis of recent 

data from Illinois also indicates that firms that are not yet experiencerated pay a relatively large subsidy. In Illinois, new employers paid 

 32Joseph M. Becker, S.J., Experience Rating in Unemployment Insurance: An Experiment 

in Competitive Socialism, Baltimore, Maryland: The Johns Hopkins University Press, 1972. 

33Laurence, “How Large Are the Subsidies Provided by the System of Financing 

Unemployment Insurance?” pp. 241-242. 

34Using a practice known as SUTA dumping, some employers have created a new company 

to improve their experience rating and attain a lower tax rate. See GAO-03-819T. Despite 

this practice, new employers, as a whole, pay subsidies in some states. 

35Louise Laurence, “How Do Firm Characteristics Affect the Subsidies Provided by the 

Unemployment Insurance System?” Applied Economics, Vol. 9, September 1991. 

Studies Reveal That 

Subsidy Patterns for Broad 

Industries Do Not Apply to 

All Firms in an Industry, 

and New Firms Tend to 

Pay Subsidies 
Page 27 GAO-06-769 Unemployment Insurance 

21 percent more in taxes than benefits received by their former workers 

from 2001 to 2004, to the amount of more than $84 million. 

States could take various actions to improve experience rating and reduce 

subsidies, but state officials and experts indicated that such changes 

should be considered in light of other program goals and considerations. 

For example, higher maximum tax rates would better balance tax 

payments and benefit charges for employers whose former employees 

impose high costs on a state’s program. However, according to state 

officials and experts, states may also wish to limit the financial liability of 

firms under the unemployment insurance system and that for some firms 

and industries, higher tax rates might be difficult to bear. 

State unemployment insurance programs could improve experience rating 

and reduce cross-subsidies by increasing the unemployment insurance 

taxes paid by firms that receive subsidies. Among the several ways states 

could improve experience rating, some of the key adjustments would be to 

raise the maximum tax rate, increase the taxable wage base, or adopt 

some combination of these two modifications.37A 2003 analysis of the 

Massachusetts unemployment insurance program indicates that making an 

adjustment can have a substantial effect on closing the gap between 

benefits charged to and taxes paid by firms that get a subsidy.38 Using a 

simulation analysis, the study found that using a new tax rate schedule 

with higher maximum rates reduces ineffective charges from $978.4 

 37Labor also cited another innovative option it referred to as a flexible maximum tax rate. 

The option would allow a UI program to add a tax increment beyond the maximum tax rate 

for employers whose tax payments are substantially smaller than benefit charges. The goal 

would be to make each marginal layoff have some added impact on an employer’s rate, but 

not be enough to be a complete reimbursement According to Labor, this innovative 

concept would provide increased cost allocation and an active incentive to decrease 

benefit costs that does not exist with a fixed maximum tax rate. 

38Wayne Vroman, Unemployment Insurance Financing Options in Massachusetts, The 

Urban Institute, Washington D.C., December 2003. 

Measures to Improve 

Experience Rating 

and Reduce Subsidies 

Must Be Balanced 

against Other Goals 

Increasing Tax Payments 

of Subsidized Firms Could 

Reduce Subsidies but 

Increase Financial Strain 

on Some Businesses and 

Have Other Undesirable 

Effects 
Page 28 GAO-06-769 Unemployment Insurance 

million to $801.3 million, an 18 percent decrease.39 Further, an increase in 

the taxable wage base from $10,800 to $18,000 was found to reduce 

ineffective charges—that is, benefit charges to active firms that are not 

matched in tax revenue from those firms—from $978.4 million to 

$773.6 million, a 21 percent decrease. 

U.S. Department of Labor and state officials, as well as unemployment 

insurance experts, have noted that measures to improve experience rating 

or reduce cross-subsidies involve trade-offs that states would need to 

consider. Several unemployment insurance officials and experts have 

stated that full experience rating is not desirable, in part because some 

firms could not afford to pay the full costs of benefits their former 

employees incur. Commenting on the possibility of higher maximum tax 

rates, an official with the Texas Workforce Commission told us that firms 

that now pay at the highest tax rates include seasonal employers and 

employers whose business activities are being taken over by overseas 

firms and other declining companies. He noted that some of these 

companies are already under financial stress, and some may well have 

adjusted their business models based on the assumption of the maximum 

tax rate. An increase in the rate could seriously hurt such firms. 

States may also face political resistance to such increases. An Illinois 

official said that increases to the maximum tax rate would be portrayed by 

affected businesses that are already paying at the maximum tax rate as 

creating a bad business climate; some might say that such a change would 

drive them out of business or force them to relocate out of the state. 

Similarly, in a 1996 report to the President and Congress, the Advisory 

Council on Unemployment Compensation noted that some employers—

especially small ones—that need to lay off workers may find that their tax 

rates increase so dramatically as a result of those layoffs that that 

additional layoffs become necessary. The report further noted that no 

research has been conducted on the potential negative effects of 

experience rating. 

Reducing subsidies by raising the maximum tax rates or the taxable wage 

base may also conflict with particular policy objectives of a state. For 

example, officials of the California Employment Development Department 

 39The tax schedule also included a number of changes in addition to a higher maximum tax 

rate. Consequently, some portion of this change may be due to factors other than the 

increased maximum tax rate. 
Page 29 GAO-06-769 Unemployment Insurance 

told us that the California unemployment insurance system was 

intentionally developed to subsidize two industries important to the 

California economy—agriculture and construction. The officials explained 

that the California agricultural sector includes not just farms, but 

canneries and other associated industries that have large seasonal 

fluctuations in demand for labor. When the state’s UI system last 

underwent major revision in 1985, there was an emerging need to provide 

alternative sources of income so that workers would be available from 

season to season. Unemployment benefits paid during the off-season 

became an essential part of an agricultural worker’s annual income. The 

officials stated that a pattern of a working season, followed by a period of 

subsisting on unemployment benefits, followed by another working 

season, has become the norm for many of these workers. 

Improving experience rating by increasing the taxable wage base might 

involve offsetting effects on experience rating. As noted by the Advisory 

Council on Unemployment Compensation, a change in the taxable wage 

base most directly affects the degree of experience rating by changing the 

distribution of employers’ tax rates.40 Raising the taxable wage base 

increases the degree of experience rating for employers at the maximum 

tax rate before the increase, and below it afterward. However, if the tax 

rate schedule was not adjusted at the same time, raising the taxable wage 

base could also reduce experience rating, as it would increase tax 

payments by employers who already pay subsidies into the unemployment 

insurance system. If the tax rate schedule was modified, some employers 

might move to the minimum tax rate, a change that would also limit 

experience rating. 

Noncharged benefits—benefits payments that are not charged to a specific 

employer—detract from experience rating because they are shared—that 

is, they are borne to some degree by all employers, thus adding to the 

costs of employers who had no responsibility for the unemployment. 

Noncharges could be reduced either by reducing benefit payments in such 

cases or by charging such benefits to the recipient’s previous employer or 

employers. However, each approach has its drawbacks. 

 40Advisory Council on Unemployment Compensation, Unemployment Insurance in the 

Unites States: Benefits, Financing, and Coverage, Washington D.C.: February, 1995. 

Reducing Noncharged 

Benefits Would Restrict UI 

Eligibility or Impose 

Additional Costs on 

Employers 
Page 30 GAO-06-769 Unemployment Insurance 

Eliminating noncharged benefits would restrict the breadth of coverage of 

state unemployment insurance programs. For example, nearly all states 

will, in some situations, pay benefits to unemployed workers who 

voluntarily quit their last job. Elimination of such benefit payments would 

leave such workers uncovered by the unemployment insurance system. 

Elimination of benefit payments in some noncharge situations would also 

restrict a state’s ability to promote broader policy objectives though the 

unemployment insurance system. For example, an official of the Illinois 

Department of Employment Security told us that during a 2003 debate 

over statutory changes to the state’s unemployment insurance system, 

organized labor advocated for a noncharge in the event that a person 

became unemployed because of domestic violence. A person might, for 

example, be unable to go to his or her former place of work because the 

abuser might stalk that person there. In considering how to reduce 

noncharges, states are faced with the choice of paying these noncharges or 

denying benefits to individuals in such a situation. 

On the other hand, charging many noncharges to employers could be seen 

as contrary to the experience-rating principle, because, in theory, the 

employer was not responsible for the unemployment. Further, state 

officials told us that such an action would likely be strongly resisted by 

employers. For example, in describing the domestic violence noncharge 

mentioned above, an Illinois official said that employers concurred with 

the change, but on the condition that individual employers should not be 

charged because responsibility for the unemployment would not be theirs. 

States could take various other measures to improve experience rating 

and reduce cross-subsidies. For example, they could improve experience 

rating by lowering or eliminating minimum tax rates. This would improve 

experience rating for firms that impose little to no cost on the trust fund. 

However, a very low minimum tax rate—especially a zero tax rate—could 

also have drawbacks. For example officials of the Michigan 

Unemployment Insurance Agency noted that the tax rate in their state 

could be too low, given that shared costs need to be recovered, and that 

the current minimum rate may not be sufficient to ensure that firms at the 

minimum rate pay their share. Others have noted that a zero tax rate 

would not be consistent with the notion of social insurance, which 

requires that an entity receiving coverage pay some premium, even if the 

entity imposes no costs on the system. 

States could also make other adjustments to improve experience rating, 

such as taking into account the time value of money or, in the case of the 

Other Actions to Improve 

Experience Rating 
Page 31 GAO-06-769 Unemployment Insurance 

reserve ratio state, eliminating the practice of writing off negative 

balances. Such actions would better ensure that a firm’s experience rating 

reflects the full costs it has imposed on the UI system. However, such 

actions might have little effect on the actual tax payments of firms that are 

at the maximum tax rate and receive subsidies year after year. Further, 

California officials told us that the practice of writing off negative balances 

prevented negative balance employers from falling into too deep a deficit 

position. Without such write-offs, the employer would have no incentive to 

improve its experience rating by reducing its number of layoffs. 

Cross-subsidies in state unemployment insurance systems are a longstanding part of the system, and the subsidies occur because 

unemployment insurance taxation systems are not fully experiencerated—a fully experience-rated system would ensure that, over time, the 

costs that an employer imposed on the unemployment insurance programs 

were equal to the taxes it paid. As with other insurance systems, such as 

automobile insurance, many of the potential beneficiaries may never 

receive benefits, understanding that the premiums paid protect them 

should the need for benefits arise. Several aspects of state unemployment 

insurance systems cause this shortfall from full experience rating, and 

states could improve experience rating and reduce these cross-subsidies 

by adjusting these aspects. 

In considering measures to increase the experience rating of state UI 

systems, it is important to note that stabilizing employment through 

experience rating is one of several goals of unemployment insurance. The 

program was also established to provide temporary, partial wage 

replacement for unemployed workers, and to stabilize the economy 

though maintenance of consumer purchasing power in time of high 

unemployment. Further, federal law and regulations provide very limited 

guidance regarding the degree of experience rating or the acceptable size 

of a cross-subsidy. Instead, they have left it to the states to design 

financing systems that are experience-rated to one degree or another. 

States could nonetheless increase experience rating and reduce subsidies, 

but they have chosen to balance these considerations against other policy 

goals. For example, all states have chosen to limit the financial liability of 

employers by establishing a maximum tax rate. It is possible that the 

subsidies arising from these policies provide benefits that extend beyond 

those directly subsidized. Subsidized industries may be large employers in 

a given state or represent core parts of a state’s economy. Subsidies may 

have other intended effects. For example, they may encourage employers 

Concluding 

Observations 
Page 32 GAO-06-769 Unemployment Insurance 

to continue contributing to the system, even if they provide only a part of 

the contribution they should make. Under the current framework, state 

policy makers decide the appropriate balance between experience rating 

and the other policy objectives of a state’s unemployment insurance 

program. 

We provided a draft of this report to the Department of Labor for its 

review. Overall, Labor agreed with our findings, and noted that the report 

provided a succinct analysis of the issues we sought to address. Labor also 

cautioned that an emphasis on “full experience rating” may obscure the 

fact that employers in the United States pay an amount much closer to the 

benefits assigned to them than do employers in any other country. We 

concur with this view, and it is in fact consistent with our conclusions. We 

also modified the report slightly to reflect these issues more explicitly. 

Labor’s formal comments are reproduced in appendix III. 

Labor also provided technical comments on the draft report, which we 

have incorporated where appropriate. 

As arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 7 days from the 

date of this letter. At that time, we will send copies to interested 

congressional committees and members, and the Secretary of Labor. We 

will also make copies available to others upon request. In addition, our 

report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

Agency Comments 

and Our Evaluation 
Page 33 GAO-06-769 Unemployment Insurance 

Contact points for our Office of Congressional Relations and Office of 

Public Affairs may be found on the last page of this report. GAO staff that 

made major contributions to this report are listed in appendix IV. 

Sincerely yours, 

Sigurd R. Nilsen, Director 

Education, Workforce, 

 and Income Security Issues 
Appendix I: Objectives, Scope, and 

Methodology 

Page 34 GAO-06-769 Unemployment Insurance 

Our objectives were to address the following questions: 

1. How have states ensured that individual employers pay unemployment 

insurance taxes based on their experience with unemployment, and 

what aspects of state unemployment insurance systems limit such 

experience rating? 

2. To what extent do employers pay unemployment insurance taxes 

commensurate with unemployment benefits paid to their former 

employees, and how does this vary by industry? 

3. What steps could states take if they wished to ensure that the taxes 

paid by individual firms more closely matched the benefits paid to the 

former employees of each firm? 

To answer the first and third questions, we reviewed pertinent literature 

and interviewed Department of Labor officials, and officials of national 

organizations representing the perspectives of business, labor, and state 

unemployment insurance agencies, as well as nationally recognized 

experts on unemployment insurance. We also conducted in-depth 

interviews with representatives of unemployment insurance agencies in 

5 states—California, Illinois, Michigan, Texas, and Washington. We 

selected these states because they are relatively populous and 

geographically dispersed, and because they take different approaches to 

ensuring experience rating. We discussed each state’s approach to 

financing unemployment insurance benefits, and the implications that 

various aspects of these systems had for experience rating and the 

existence of cross-subsidies. We also reviewed pertinent documents 

describing the unemployment insurance financing systems in each of these 

5 states. In addition, we obtained and analyzed the Department of Labor’s 

experience-rating index, an annual measure of experience rating in the 

state and territorial unemployment insurance programs. 

To answer the second question, we identified and reviewed 10 studies 

published between 1972 and 2000 that measured how closely taxes paid by 

firms and industries matched the benefit costs they imposed. These 

studies used a variety of techniques to measure whether some categories 

of employers consistently pay more or less in taxes than benefits paid to 

their former workers. Two GAO economists reviewed these studies and 

determined that they were sufficiently reliable to use in this report. We 

confirmed with the U.S. Department of Labor and national experts on 

unemployment insurance that these 10 studies constituted the definitive 

work done to date on this subject. To supplement these studies, we asked 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology 

Page 35 GAO-06-769 Unemployment Insurance 

the 5 states that we contacted to provide data on tax and benefits 

payments by industry type according the North American Industry 

Classification System (NAICS). Three of the 5 selected states—Illinois, 

Texas, and Washington—provided such data for all or some of the years 

from 1999 to 2004. We interviewed officials knowledgeable about these 

data and determined that the data were sufficiently reliable to include in 

this report. Using these data, we developed updated comparisons of the 

balance between taxes paid and benefits received for industry groups.1

 1

Illinois and Texas provided data on taxes due rather than taxes paid. However, state 

officials told us there should be little difference between the two figures. 
Appendix II: Example of a State’s 

Unemployment Insurance Tax Schedules 

Page 36 GAO-06-769 Unemployment Insurance 

Table 6: California Unemployment Insurance Tax Schedules 

Reserve ratio Contribution rate schedules stated as a percentage 

Exceeds or equals Less than 

 AA A B C D E F *F+ 

Less -0.20 5.4 5.4 5.4 5.4 5.4 5.4 5.4 6.2 

-0.20 -0.18 5.2 5.3 5.4 5.4 5.4 5.4 5.4 6.2 

-0.18 -0.16 5.1 5.2 5.4 5.4 5.4 5.4 5.4 6.2 

-0.16 -0.14 5.0 5.1 5.3 5.4 5.4 5.4 5.4 6.2 

-0.14 -0.12 4.9 5.0 5.3 5.4 5.4 5.4 5.4 6.2 

-0.12 -0.11 4.8 4.9 5.2 5.4 5.4 5.4 5.4 6.2 

-0.11 -0.10 4.7 4.8 5.1 5.3 5.4 5.4 5.4 6.2 

-0.10 -0.09 4.6 4.7 5.1 5.3 5.4 5.4 5.4 6.2 

-0.09 -0.08 4.5 4.6 4.9 5.2 5.4 5.4 5.4 6.2 

-0.08 -0.07 4.4 4.5 4.8 5.1 5.3 5.4 5.4 6.2 

-0.07 -0.06 4.3 4.4 4.7 5.0 5.3 5.4 5.4 6.2 

-0.06 -0.05 4.2 4.3 4.6 4.9 5.2 5.4 5.4 6.2 

-0.05 -0.04 4.1 4.2 4.5 4.8 5.1 5.3 5.4 6.2 

-0.04 -0.03 4.0 4.1 4.4 4.7 5.0 5.3 5.4 6.2 

-0.03 -0.02 3.9 4.0 4.3 4.6 4.9 5.2 5.4 6.2 

-0.02 -0.01 3.8 3.9 4.2 4.5 4.8 5.1 5.4 6.2 

-0.01 0.00 3.7 3.8 4.1 4.4 4.7 5.0 5.4 6.2 

0.00 0.01 3.4 3.6 3.9 4.2 4.5 4.8 5.1 5.9 

0.01 0.02 3.2 3.4 3.7 4.0 4.3 4.6 4.9 5.6 

0.02 0.03 3.0 3.2 3.5 3.8 4.1 4.4 4.7 5.4 

0.03 0.04 2.8 3.0 3.3 3.6 3.9 4.2 4.5 5.2 

0.04 0.05 2.6 2.8 3.1 3.4 3.7 4.0 4.3 4.9 

0.05 0.06 2.4 2.6 2.9 3.2 3.5 3.8 4.1 4.7 

0.06 0.07 2.2 2.4 2.7 3.0 3.3 3.6 3.9 4.5 

0.07 0.08 2.0 2.2 2.5 2.8 3.1 3.4 3.7 4.3 

0.08 0.09 1.8 2.0 2.3 2.6 2.9 3.2 3.5 4.0 

0.09 0.10 1.6 1.8 2.1 2.4 2.7 3.0 3.3 3.8 

0.10 0.11 1.4 1.6 1.9 2.2 2.5 2.8 3.1 3.6 

0.11 0.12 1.2 1.4 1.7 2.0 2.3 2.6 2.9 3.3 

0.12 0.13 1.0 1.2 1.5 1.8 2.1 2.4 2.7 3.1 

0.13 0.14 0.8 1.0 1.3 1.6 1.9 2.2 2.5 2.9 

0.14 0.15 0.7 0.9 1.1 1.4 1.7 2.0 2.3 2.6 

0.15 0.16 0.6 0.8 1.0 1.2 1.5 1.8 2.1 2.4 

Appendix II: Example of a State’s 

Unemployment Insurance Tax Schedules 
Appendix II: Example of a State’s 

Unemployment Insurance Tax Schedules 

Page 37 GAO-06-769 Unemployment Insurance 

Reserve ratio Contribution rate schedules stated as a percentage 

Exceeds or equals Less than 

 AA A B C D E F *F+ 

0.16 0.17 0.5 0.7 0.9 1.1 1.3 1.6 1.9 2.2 

0.17 0.18 0.4 0.6 0.8 1.0 1.2 1.4 1.7 2.0 

0.18 0.19 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 

0.19 0.20 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 

0.20 or more 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 

Source: California Employment Development Department.. 

California determines which of the eight tax schedules to use based on the 

balance in the trust fund as a percentage of gross wages reported by all 

employers. This calculation establishes the rate schedule used as outlined 

in table 7. 

Table 7: Basis for Rate Schedule Used 

In percent 

Greater than Equal to or less than 

Contribution rate 

schedules 

1.8 AA

1.6 1.8 A

1.4 1.6 B

1.2 1.4 C

1.0 1.2 D

0.8(or equal to) 1.0 E

0.6(or equal to) 0.799 F 

(less than) 0.6 F+

Source: California Employment Development Department. 
Appendix III: Comments from the Department 

of Labor 

Page 38 GAO-06-769 Unemployment Insurance 

Appendix III: Comments from the 

Department of Labor 
Appendix III: Comments from the Department 

of Labor 

Page 39 GAO-06-769 Unemployment Insurance 
Appendix IV: GAO Contacts and 

Acknowledgments 

Page 40 GAO-06-769 Unemployment Insurance 

Sigurd R. Nilsen, Director, (202) 512-7215, nilsens@gao.gov. 

Patrick di Battista, Assistant Director, and Michael Hartnett, managed this 

assignment. Others who made key contributions throughout the 

assignment include Sharon Hermes and Dan Meyer. Dan Schwimer, 

Pauline Seretakis, Scott Spicer, and Shana Wallace provided key support. 

Appendix IV: GAO Contacts and 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 
Related GAO Products 

Page 41 GAO-06-769 Unemployment Insurance 

Unemployment Insurance: Enhancing Program Performance by 

Focusing on Improper Payments and Reemployment Services. 

GAO-06-696T. Washington, D.C.: May 4, 2006. 

Improper Payments: Federal and State Coordination Needed to Report 

National Improper Payment Estimates on Federal Programs. 

GAO-06-347. Washington, D.C.: April 14, 2006. 

Financial Management: Challenges Continue in Meeting Requirements 

of the Improper Payments Information Act. GAO-06-581T. Washington, 

D.C.: April 5, 2006. 

Unemployment Insurance: Factors Associated with Benefit Receipt.

GAO-06-341. Washington, D.C.: March 7, 2006. 

Trade Adjustment Assistance: Most Workers in Five Layoffs Received 

Services, but Better Outreach Needed on New Benefits. GAO-06-43. 

Washington, D.C.: January 31, 2006. 

Workforce Investment Act: Labor and States Have Taken Actions to 

Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. 

Washington, D.C.: November 14, 2005. 

Unemployment Insurance: Better Data Needed to Assess Reemployment 

Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. 

Unemployment Insurance: Information on Benefit Receipt. GAO-05-291. 

Washington, D.C.: March 17, 2005. 

Trade Adjustment Assistance: Reforms Have Accelerated Training 

Enrollment, but Implementation Challenges Remain. GAO-04-1012. 

Washington, D.C.: September 22, 2004. 

Workforce Investment Act: States and Local Areas Have Developed 

Strategies to Assess Performance, but Labor Could Do More to Help.

GAO-04-657. Washington, D.C.: June 1, 2004. 

Financial Management: Fiscal Year 2003 Performance and 

Accountability Reports Provide Limited Information on 

Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: 

April 15, 2004. 

Related GAO Products 
Related GAO Products 

Page 42 GAO-06-769 Unemployment Insurance 

Workforce Training: Almost Half of States Fund Employment Placement 

and Training through Employer Taxes and Most Coordinate with 

Federally Funded Programs. GAO-04-282. Washington, D.C.: February 13, 

2004. 

Workforce Investment Act: One-Stop Centers Implemented Strategies to 

Strengthen Services and Partnerships, but More Research and 

Information Sharing Is Needed. GAO-03-725. Washington D.C.: June 18, 

2003. 

Multiple Employment and Training Programs: Funding and 

Performance Measures for Major Programs. GAO-03-589. Washington, 

D.C.: April 18, 2003. 

Unemployment Insurance: States’ Use of the 2002 Reed Act Distribution. 

GAO-03-496. Washington, D.C.: March 6, 2003. 

Unemployment Insurance: Increased Focus on Program Integrity Could 

Reduce Billions in Overpayments, GAO-02-697 Washington, D.C.: July 12, 

2002. 

Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is 

Limited. GAO-01-181. Washington, D.C.: December 29, 2000. 

(130522) 
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