Taxes under State Unemployment Tax Act (or SUTA) are those designed to finance the cost of state
unemployment insurance benefits in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, which make up all of unemployment insurance expenditures in normal times, and the majority of unemployment insurance expenditures during
downturns, with the remainder paid in part by the
federal government for "emergency" benefit extensions.
The
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
is unique in two primary aspects. First, the tax is
experience rated which means that tax rates are firm-specific and the rate a firm faces updates each year to reflect the cost of the benefits that firm's former employees have received recently. Because it is primarily firms in stress that generate
layoffs
A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing (reducing the ...
, these tax increases target firms that are already under strain. For this reason, states limit how high they allow taxes to rise, but these limits vary by almost an order of magnitude from state to state.
The second unique feature of
UI taxes under SUTA is that the taxable base is ~$10,000 (on average, varies by state) per employee, much less than the average yearly earnings of a given worker. Because of this feature, firms pay a fixed "lump sum" tax per worker they employ. This provides a modest incentive for firms to reduce unskilled and part-time work in favor of skilled and full-time work.
One interesting feature of the UI tax is that it targets firms that have recently had layoffs, potentially hitting distressed firms. Recent work shows that UI tax increases significantly reduce hiring and employment in affected firms, potentially eroding the
macroeconomics stabilizing influence of the UI program.
References
Taxation in the United States
Welfare economics
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