The Unemployment Compensation (UC) program is constructed as a joint federal-state partnership providing temporary and partial wage replacement to involuntarily unemployed workers. Federal law sets broad guidelines regarding UC benefits and financing. States administer UC benefits with U.S. Department of Labor (DOL) oversight. State laws establish the program's specifics, resulting in 53 different UC programs operating in the states, the District of Columbia, Puerto Rico, and the Virgin Islands. Titles III, IX, and XII of the Social Security Act (P.L. 74-271, as amended) establish the framework of the UC program. Title III of the SSA authorizes grants to states for the administration of state UC laws, Title IX authorizes the various components of the federal Unemployment Trust Fund (UTF), and Title XII authorizes advances or loans to insolvent states. The financing arrangement for UC is specified within the Federal Unemployment Tax Act (FUTA) of 1939. Revenue for the program is provided through payroll taxes levied by both the federal government and the states on a portion of wages paid by covered employers. Total UC expenditures include benefit payments and administrative costs. During periods of economic expansion or stability, states fund approximately 90% of all UC expenditures—as almost all of the benefits are state financed by state unemployment taxes. By comparison, federal expenditures are relatively small during these expansions (approximately 10%), in which federal expenditures are primarily administrative grants to the states and are financed by federal unemployment taxes. Federal unemployment taxes are deposited with the U.S. Treasury and credited to the federal accounts within the UTF. Federal unemployment taxes pay for state administrative costs, half the cost of Extended Benefits (EB), and loans to insolvent state UC programs. (Federal agencies transfer funds into the UTF to pay for benefits for former employees and are not paid by federal unemployment taxes.) Likewise, state unemployment taxes are deposited into the UTF and credited to the corresponding state account. The funds within state UTF accounts are limited to paying each state's regular UC benefits and the state's half of EB costs. During periods of economic growth, the federal role in financing UC is small relative to the overall size of UC revenues and expenditures. Federal unemployment taxes are dedicated to pay for UC administration grants to the states and the federal share of the EB program, and to fund a federal account within the UTF for state loans. As shown in Table 1 , federal unemployment tax revenue for FY2016 is projected to be $5.8 billion of the $46.7 billion in all unemployment taxes collected (approximately 12%). Likewise, the projected $5.0 billion in federal spending on administration ($4.2 billion), EB ($0), and benefits for former federal employees (UCFE) and former servicemembers (UCX) ($0.8 billion combined) is much smaller than the projected state spending on regular UC benefits ($32.3 billion). When economic recessions occur, the UC program is designed to stabilize the economy as federal unemployment expenditures increase through the EB program and additional administrative grants. In addition, the federal government often has augmented the regular UC benefit with temporary unemployment benefit expansions. Thus, at the height of the recent recession, federal expenditures accounted for 60% of the $156 billion paid in total benefits (about $93 billion). All unemployment tax revenue and expenditures for benefits and administration flow through the U.S. Treasury, and thus affect federal revenue, outlays, and the overall financial position (deficit or surplus) of the federal government. However, as a practical matter, all UC and EB financial transactions occur within the trust fund. Both federal and state unemployment tax revenue as well as administrative and benefit expenditures within the UTF are accounted for in the federal budget. Federal unemployment taxes are deposited into the UTF. The Treasury invests all receipts in federal securities that bear interest. Similarly, state unemployment taxes are credited to each state's account within the UTF, and the Treasury invests all receipts in federal securities that bear interest. The investment of state unemployment revenue in federal securities increases the federal debt. When states pay UC benefits to unemployed individuals, the Treasury redeems those securities held within that state's UTF account. Thus, the payment of regular state UC benefits decreases the federal debt. In budgetary terms, UC benefits are mandatory spending because the underlying law authorizes the Treasury to transfer funds to the states for UC benefit payments without the need for further appropriation. In other words, UC benefits are not subject to the annual appropriations process. Because UC benefits are mandatory entitlements, even if a state's trust fund account is depleted, the state remains legally required to continue paying benefits. To do so, the state might borrow money either from the dedicated loan account within the UTF or outside sources. Each fiscal year, Congress appropriates funds through the federal budget process to pay for both the federal and states' costs of administering unemployment compensation programs. The Secretary of Labor determines ( certifies ) the amount of the administrative payments and permits the Secretary of the Treasury to make the payments to the states. FUTA imposes a 6.0% gross federal unemployment tax rate on the first $7,000 of each worker's yearly earnings. However, FUTA provides tax incentives to states, which may lower the net tax rate, if states meet federal UC program guidelines. Employers in states with UC programs approved by the U.S. Labor Secretary and with no outstanding federal loans may credit up to 5.4 percentage points of state unemployment taxes paid against the 6.0% tax rate, making the minimum net federal unemployment tax rate 0.6%. This tax credit is provided by two separate Internal Revenue Code (IRC) provisions. 1. Section 3304 of the IRC provides for a state tax credit for all employers of up to 5.4%. 2. Section 3303 of the IRC provides an additional tax credit for state employers if the employer paid less than 5.4% in state taxes if the state unemployment tax schedule is such that employers generating the fewest claimants have the lowest tax rates (e.g., experience rates its employers). The total of the state tax credits (state plus additional) cannot exceed 5.4%. Conventionally, these two tax credits are generally aggregated and discussed as the 5.4% state tax credit. This report follows this convention. The taxable wage base for federal unemployment tax is limited to no more than the first $7,000 of each worker's yearly earnings. Because most employees earn more than the $7,000 taxable wage ceiling in a year, the federal unemployment tax typically is $42 per worker per year. That is, $7,000 × 0.6%, or just over two cents per hour for a full-time, year-round worker. As to be expected, the federal unemployment tax has changed substantially since 1936. The Appendix provides a comprehensive list of changes in the federal unemployment tax law that altered either the taxable wage base or the tax rate. There have been many other changes within FUTA, including the expansion of covered work and specific uses of tax revenue, which are not explored in this report. DOL provides a chronology of major changes to UC law, accessible at http://workforcesecurity.doleta.gov/unemploy/pdf/chronfedlaws.pdf . The original Social Security Act of 1935 imposed the federal unemployment tax on total annual wages (and required the states to implement a state unemployment tax on wages as well). The decision to tax total wages "was in keeping with the principle of imposing a tax that would apply uniformly throughout the country so that no state would have an advantage over another." However, in 1939, the Social Security Board recommended that taxes be limited to the first $3,000 of annual wages—the same taxable wage base to which Social Security payroll taxes were applied at the time. Because the $3,000 ceiling exceeded annual wages of 98% of all workers in 1939, it reduced revenues from the unemployment tax only slightly. Since 1940, Congress has increased the FUTA wage base three times: from $3,000 to $4,200 in 1972; from $4,200 to $6,000 in 1978; and from $6,000 to $7,000 in 1983. These increases did not keep pace with inflation or wage growth, and the divergence between taxable and total wages continues to grow as shown in Figure 1 . Applying the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to adjust for inflation, the $7,000 taxable wage base in 2015 is equivalent to $487 in 1940, approximately one-sixth of the actual tax base ($3,000) in 1940. The original Social Security Act of 1935 provided for a gradual increase in the net tax rate (from 0.1% in 1936, to 0.2% in 1937, to 0.3% in 1938) and was applied to all covered annual wages. Since 1939, Congress has permanently increased the net FUTA tax rate three times: from 0.3% to 0.4% in 1965, 0.5% in 1970, and 0.6% in 1983. These increases partially offset the erosion of the taxable wage base. (See the previous section " Changes in the Taxable Wage Base " for details.) In addition to these three permanent tax increases, there have been three temporary ( surtax ) increases of short duration. In addition to these short-term changes, a temporary 0.2% surtax began in 1977 and was continually reauthorized (nine times) until finally lapsing at the end of June 2011—a span of over 34 years. Figure 2 depicts the changes of the net federal unemployment tax rate since 1954. In addition, it provides information on the effective tax rate (i.e., the total federal revenue as a proportion of total wages in covered employment).