Opinion ID: 588226
Heading Depth: 1
Heading Rank: 1

Heading: The FUTA Scheme

Text: 6 FUTA is part of a joint federal-state unemployment insurance program. The program began, in 1935, with the enactment of the Social Security Act. Pub.L. No. 271, 49 Stat. 620 (1935). Prior to 1935, very few states had enacted unemployment compensation schemes. Absent federal encouragement, states had been reluctant to impose an unemployment tax for fear of placing themselves at a competitive disadvantage with respect to business interests. Steward Machine Co. v. Davis, 301 U.S. 548, 588, 57 S.Ct. 883, 891, 81 L.Ed. 1279 (1936). 7 The 1935 Act dispelled this fear by imposing a uniform federal tax on all employers, offset by a credit for unemployment tax paid pursuant to state unemployment compensation schemes. The federal tax ensured that employers would pay tax to someone; the credit encouraged states to set up their own plans so that employers would pay the tax to them, rather than to the federal government. H.R. 7260, 74th Cong., 1st Sess., Sec. 902 (1935). 8 While the offset credit encouraged states to set up their own unemployment compensation plans, the credit did nothing to encourage employers to stabilize their employment. For example, states might decide to charge a lower unemployment tax rate to those employers with a stable employment record. If only the offset credit were allowed under the federal scheme, good employers who merited a lower state tax rate would end up paying the same combined federal and state unemployment tax total as bad employers. Put another way, although good employers would pay less to the state, they would pay more to the federal government because their federal offset would be lower. To address this problem, Congress enacted an additional credit. See S.Rep. No. 628, 74th Cong., 1st Sess. 14 (1935). 9 The additional credit was set at the amount of state unemployment tax which the employer had saved as a result of its favorable employment experience. Under this credit, the state unemployment tax savings enjoyed by good employers would be honored by the federal taxation scheme. Thus, a good employer in a state which charged a lower unemployment tax rate to employers with favorable employment experiences could offset against the uniform federal tax the amount the employer actually paid to the state, plus the amount that the employer saved in state taxes as a result of the employer's favorable employment history. 10 This scheme is embodied in FUTA. 26 U.S.C. §§ 3301, et seq. Section 3301 establishes a uniform federal unemployment tax rate of 6.2% for the years applicable in this case. Section 3302(a) describes the offset credit; section 3302(b) the additional credit.