Unemployment Benefits: Legislative Issues in the 108th Congress
Released: 2005-01-27T00:00:00

95-742 -- Unemployment Benefits: Legislative Issues in the 108th Congress

Updated January 27, 2005

Summary

Changes in the federal-state unemployment compensation (UC) system wereconsidered during the 108th Congressas legislation was introduced to reform and expand the UC system. The 107th Congress enacted the Temporary Extended Unemployment Compensation (TEUC) program ( P.L. 107-147 ), which included a 13-week extension of UC benefits, an $8 billion distributionto states, and 13 additional weeks of extendedUC benefits in high unemployment states. These temporary benefits were extended twice during the108th Congress, ( P.L. 108-1 and P.L. 108-26 ) extendingeligibility through the week ending before December 31, 2003. The 108th Congress enacted specialTEUC benefits for displaced airline related workers, knownas TEUC-A ( P.L. 108-11 ). The 108th Congress also enacted the SUTA Dumping Prevention Act of2004 ( P.L. 108-295 ). This report will not be updated.

Background

The UC system, funded by both federal and state payroll taxes, pays benefits to covered workers who become involuntarily unemployed for economic reasonsand meet state-established eligibility rules. Federal administration of UC is under the U.S. Department of Labor(DOL). The UC system, established by theSocial Security Act of 1935 (P.L. 74-271), operates in each state, the District of Columbia, Puerto Rico, and theVirgin Islands. Federal law sets broad rulesthat the 53 state programs must follow and levies a payroll tax on employers under the Federal Unemployment TaxAct (FUTA). States set most of the specificrules for eligibility, benefits, and financing. States also process the claims and pay the benefits. The UC systemhelps counter economic trends. When theeconomy grows, UC revenue rises and program spending falls, thereby slowing growth. In a recession, revenue fallsand program spending rises, stimulatingthe economy. Benefits totaling an estimated $45.3 billion were paid to an estimated 10.2 million UC claimants inall programs during FY2004.

Coverage. Federal law defines the jobs a state UC program must cover to avoid its employers' having to paythe maximum FUTA tax rate (6.2%) on the first $7,000 of each employee's annual pay. If a state UC programcomplies with all federal rules, the net FUTA taxrate is only 0.8% for employers. A state must cover jobs in firms that pay at least $1,500 in wages during anycalendar quarter or employ at least one worker ineach of 20 weeks in the current or prior year. The FUTA tax is not paid by governmental or nonprofit employers,but state programs must cover governmentworkers and all workers in nonprofits that employ at least four workers in each of 20 weeks in the current or prioryear (the states are reimbursed for theexpenditures on federal workers by the federal government). Table 1 lists the net FUTA tax ratesand taxable wage ceilings from 1937 and later.

Table 1. Net FUTA Tax Rates and Taxable Wage Ceilings

Calendar YearsNet Tax Rate(%)Taxable WageCeilingCalendar Years Net Tax Rate(%)Taxable WageCeiling1937-19390.3none19720.5$4,2001940-19600.3$3,00019730.584,20019610.43,0001974-19760.54,20019620.83,00019770.74,20019630.653,0001978-19820.76,0001964-19690.43,0001983-20070.87,0001970-19710.53,0002008 & later0.67,000

Source: CRS compilation of Federal Unemployment Tax Act changes.

Benefits. To receive UC benefits, claimants must have enough recent earnings to meet their state's earningsrequirements. States usually disqualify claimants who lost their jobs because of inability to work or unavailabilityfor work; voluntarily quitting without goodcause; discharge for job-related misconduct; refusal of suitable work without good cause; or a labor dispute. Generally, benefits are based on wages in coveredwork over a 12-month period. Most state benefit formulas replace half of a claimant's average weekly wage up toa weekly maximum. Weekly maximums in2004 ranged from $133 (Puerto Rico) to $508 (Massachusetts) and, in states that provide dependents' allowances,up to $762 (Massachusetts). The averageweekly benefit nationwide was $262 for FY2004. Benefits are available for up to 26 weeks (30 weeks inMassachusetts and Washington (1) ). The averagebenefit duration in FY2004 was 16.4 weeks. A federal-state extended benefits (EB) program offers benefits for anadditional 13 to 20 weeks in states withunemployment rates above certain levels.

Financing. The 0.8% FUTA tax funds federal and state administration, the federal share of the EB program,loans to insolvent state UC accounts, and state employment services. States levy their own payroll taxes to fundregular UC benefits and the state share of theEB program. State ceilings on taxable wages in 2004 ranged from the $7,000 FUTA federal ceiling (11 states) upto $31,000 (Hawaii). State UC tax rates areexperience-rated where employers generating the fewest claimants have the lowest rates. State tax rates averaged1.8% of taxable wages and 0.6% of totalwages in FY2003. State UC revenue is deposited in U.S. Treasury accounts as federal revenue in the budget. Stateaccounts in the Unemployment Trust Fund(UTF) are credited for this revenue. These credits allow Treasury to reimburse states for their benefit paymentswithout annual appropriations, but thesereimbursements do count as federal budget outlays. If a state trust fund account becomes insolvent, a state mayborrow federal funds. State UTF revenueexceeded outlays from FY1995 to FY2000, but outlays significantly exceeded trust fund revenue inFY2001-FY2004 ( Table 2 ).

Table 2. Revenue and Spending Associated With Unemployment Compensation, FY1997-FY2004 (in billions of dollars)

1997 1998 1999 2000 2001 2002 2003 2004b UC revenue, total 28.2 27.4 26.3 27.1 27.8 27.5 33.2 37.1 FUTA tax6.16.46.56.96.96.66.56.7 State UC taxes22.121.119.920.720.820.9126.732.4UC outlays, total 23.7 22.9 24.5 23.7 31.0 53.8 57.4 45.32 Regular benefits20.319.420.720.227.342.042.039.9 Extended benefitsa .02.02 a a 0.16 0.320.16 Emergency UCa -- -- -- -- 7.911.04.13Administration3.53.53.73.53.63.74.14.0

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

a. Less than $50 million.

b. Estimated for 2004.

Legislative Issues in the 108th Congress

Proposals to Extend Unemployment Compensation Benefits

The EB program provides for additional weeks of UC benefits up to a maximum of 13 weeks during periods of high unemployment, and up to a maximum of20 weeks in certain states with extremely high unemployment. EB benefits are funded half (50%) by the federalUTF while states fund the other half (50%). The EB program is triggered when a state's insured unemployment rate (IUR (2) ) or total unemployment rate (TUR (3) ) reaches certain levels. Congress has actedfive times -- in 1971, 1974, 1982, 1991, and 2002 -- to establish temporary programs of extended UC benefits. (4)

The Temporary Extended Unemployment Compensation (TEUC) Program. The TEUC program wasenacted on March 9, 2002, as part of the Job Creation and Worker Assistance Act of 2002 ( P.L. 107-147 ). TheTEUC program provided up to 13 weeks offederally funded benefits for unemployed workers who had exhausted their regular UC benefits. In addition, up toan additional 13 weeks were provided incertain high unemployment states that had an IUR of 4% or higher and met certain other criteria(TEUC-X). P.L. 107-147 also provided for a one-time $8billion distribution to states known as Reed Act funds. (5) TEUC benefits were payable to individuals who, in addition to meeting other applicable state UClawprovisions: (1) filed an initial claim that was in effect during or after the week of March 15, 2001; (2) exhaustedregular benefits or had no benefit rights due tothe expiration of a benefit year ending during or after the week of March 15, 2001; (3) had no rights to regular orextended benefits under any state or federallaw; and, (4) were not receiving benefits under Canadian law. (6) In addition, individuals must also have had 20 weeks of full-time work, or the equivalent inwages, in their base periods. (7)

These temporary benefits ended on December 28, 2002; however, the 108th Congress extended TEUC twice (through P.L. 108-1 (8) and P.L. 108-26 ). Thus,TEUC eligibility was possible through the week ending before December 31, 2003, and TEUC benefits were paidthrough the week of April 3, 2004.

A number of bills were introduced in the 108th Congress to further extend and expand the TEUC program. While some bills were superceded by P.L. 108-1 ,others went beyond the provisions of P.L. 108-1 . Some would have extended the program beyond the end of May2003; others would have provided foradditional weeks of benefits for unemployed who have exhausted their benefits; some would have temporarilyestablished alternative triggers for qualifyingstates as high-unemployment for the TEUC-X program. In addition, some bills would have also temporarilyexpanded regular UC eligibility in all states toinclude part-time and low-wage unemployed workers. After the enactment of P.L. 108-26 on May 28, 2003, severalbills were introduced to further extend andexpand TEUC.

On February 4, 2004, the House passed an amendment to the Community Services Block Grant program reauthorization bill, H.R. 3030 ( H.Amdt. 462 ), administered by the Department of Health and Human Services, that would have provideda six-month extension of TEUCbenefits. It was received in the Senate and referred to the Committee on Health, Education, Labor, and Pensions. No further action was taken.

Benefits for Certain Workers Unemployed by Terrorist Attack and The War on Iraq. In response to theunemployment of airline and airline related workers resulting from the September 11, 2001 terrorist attacks,subsequent security measures taken, and the warwith Iraq, P.L. 108-11 , was signed into law on April 16, 2003. This temporary program provided up to 39 weeksof extended benefits to qualified individualswhose regular UC claim is based in whole, or in part, on qualifying employment with a certified air carrier, at afacility in an airport, or with a producer orsupplier of products or services for an air carrier. (9) The program had two tiers of benefits, known as TEUC-A and TEUC-AX. These programs were authorizedthrough the week ending before December 29, 2003, and there was a phaseout period for individuals with anexisting claim that ran through the week endingbefore December 26, 2004. H.R. 3405 , which did not pass either house, would have made employees offoreign air carriers eligible for TEUC-Aand TEUC-AX.

Other Proposals in Unemployment Compensation

Tax Avoidance and Other Abuses of the UC system. In 2004, the Administration proposed to require statesto amend their state unemployment tax laws to deter schemes to avoid paying UC taxes through such means astransfers from businesses to shell companies(commonly referred to as State Unemployment Tax Acts, or SUTA, dumping) and to reduce UC benefitoverpayments and fraud and abuse.

On August 28, 2004, the SUTA Dumping Prevention Act of 2004 ( P.L. 108-295 ) was enacted. The law amended Title III of the Social Security Act (SSA), requiring the states to amend their UC laws to provide substantial penalties for SUTA Dumping Activities. Itdirected the Secretary of Labor to study and reporton implementation of the requirement. P.L. 108-295 also revised Title IV part D of the SSA, directing the Secretaryof Health and Human Services to discloseinformation on individuals and their employers in the National Directory of New Hires to a state agency for purposesof UC administration. The Secretary is toprovide states access to the directory of the names and Social Security account numbers for faster detection ofindividuals who have gone back to work, but whocontinue to collect UC benefits.

Personal Reemployment Accounts. The Bush Administration initially proposed Personal ReemploymentAccounts (10) (PRAs) in its 2003 economic stimuluspackage. On January 29, 2003, H.R. 444 , the Back to Work Incentive Act was introduced. A$3.6 billion proposal, this would have amended the Workforce Investment Act (WIA) of 1998 and authorized theSecretary of Labor to establish a personalreemployment accounts (PRAs) grant program. A voucher program, it would have made individuals eligible fora PRA who (1) were identified as likely toexhaust UC benefits and in need of job search assistance to make a successful transition to new employment; (2)were receiving regular UC under any federal orstate UC program administered by the state; and, (3) were eligible for at least 20 weeks of regular UC benefits. Itwould have allowed PRAs to be used topurchase intensive services, training services, or supportive services through the existing Employment Service'sone-stop delivery system on a fee-for-servicebasis, or through other providers. It would have provided cash reemployment bonuses consisting of 60% of thebalance of their PRAs, to recipients whoobtained full-time employment before the end of the 13th week of unemployment for which UCbenefits were paid, and the remaining 40% if recipientsremained in those jobs for six months.

On March 20, 2004, H.R. 4444 , Worker Reemployment Accounts Act of 2004, was introduced. The bill amended WIA to authorize the Secretaryof Labor to establish and implement a demonstration project on PRAs. H.R. 444 was amended by the Committeeon Education and the Workforce bysubstituting the language of H.R. 4444. Also inserted in H.R. 444, as passed by the House, were the texts of H.R. 4409 (Teacher TrainingEnhancement Act) and H.R. 4411 (Priorities for Graduate Studies Act). On June 3, 2004, the House passedH.R. 444 as amended by H.R. 4444. The bill was received in the Senate and referred to the Committee on Health, Education, Labor, and Pensions. Nofurther action was taken.

Expansion of Eligibility. H.R. 1802 , introduced on April 11, 2003, would have required statesto expand eligibility for UC benefits to workers seeking part-time work and to use an individual's most recentearnings in determining UC eligibility (oftenreferred to as the alternate base period ), which would have made it easier for certain new or low-wageworkers to qualify for UC benefits. States would havebeen prohibited from denying UC benefits to individuals solely because they were seasonal workers, because theyleft employment due to sexual harassment,because of loss of adequate child care for children under age 13, or because the individual was a victim of domesticviolence. The bill expanded the UC taxwage base from the first $7,000 of employee wages to the taxable wage base used for Social Security taxes ($87,000in 2003), and lowered the gross FUTA taxfrom 6.2% to 5.59%. No action on the bill was taken.

H.R. 2188 (in addition to extending and expanding TEUC ) would have provided several reforms to the UC system. The bill would have loweredthe permanent EB program's insured unemployment rate (IUR) triggers from 5% to 4%, provided for variableearnings to be credited to state UC trust fundaccounts depending on the state's ability to meet certain funding goals, and provided interest-free advances to stateUC accounts only to states which metcertain funding goals. The bill would have also provided a two-year suspension of federal income tax on UCbenefits for taxable years beginning afterDecember 31, 2002, and permitted states to collect FUTA taxes from employers in the state instead of FUTA taxesbeing sent to the Secretary of Labor fortaxable years beginning after December 31, 2003. No action on the bill was taken.

Footnotes

1. (back) The maximum duration of UC benefitsin Washington for laid-off workers who file new claims on Apr. 4, 2004, or later was 26 weeks.

2. (back) The IUR is the ratio of UC claimantsdivided by individuals in UC covered jobs.

3. (back) The TUR is the ratio of unemployedworkers to all workers in the labor market.

4. (back) For more information on extended UCbenefits, see CRS Report RL31277, Temporary Programs to Extend Unemployment Compensation ,by Jennifer E.Lake.

5. (back) For more information on the Reed Act,see CRS Report RS22006(pdf) , The Unemployment Tax Fund and Reed Act Distributions , by Julie M.Whittaker.

6. (back) DOL, Unemployment Insurance ProgramLetter No. 17-02.

7. (back) A worker's benefit rights are determinedon the basis of his/her employment in covered work over a prior period, called the base period. In most states, anindividual's base period is a four- quarter, 52-week period that depends on when the worker first applies for benefitsor first begins drawing benefits. However,several states lengthen the base period under specified conditions.

8. (back) See CRS Report RS21397, Unemployment Benefits: Temporary Extended Unemployment Compensation (TEUC) Program , by[author name scrubbed] for additionaldetails.

9. (back) For more detailed information, see U.S.Department of Labor, Special Temporary Extended Unemployment Compensation for Displaced AirlineRelatedWorkers , at http://www.workforcesecurity.doleta.gov/unemploy/factsheetteuc_a.asp .

10. (back) For more information on PRAs andsubsequent activity in the 108th Congress, see CRS Report RL31825 , Personal ReemploymentAccounts: Results fromBonus Experiments , by [author name scrubbed] and [author name scrubbed].