Unemployment insurance in the United States
Unemployment insurance in the United States, colloquially referred to as unemployment benefits, refers to social insurance programs which replace a portion of wages for individuals during unemployment. The first unemployment insurance program in the U.S. was created in Wisconsin in 1932, and the federal Social Security Act of 1935 created programs nationwide that are administered by state governments. The constitutionality of the program was upheld by the Supreme Court in 1937.
Each of the 50 U.S. states, as well as the District of Columbia, Puerto Rico, and U.S. Virgin Islands, administer their own unemployment insurance programs. Benefits are generally paid by state governments, funded in large part by state and federal payroll taxes levied on employers, to workers who have become unemployed through no fault of their own. Employees in Alaska, New Jersey and Pennsylvania are also required to contribute into the program.[1][2] Benefit amounts for eligible workers vary by state, ranging from maximum weekly payments of $1,015 in Massachusetts to $235 in Mississippi as of 2022.[3][4] According to the Internal Revenue Code, these benefits are classified as "social welfare benefits" and as such are included in a taxpayer's gross income.[5] The standard duration of available unemployment compensation is six months, although extensions are possible during economic downturns. During the Great Recession, unemployment benefits were extended by 73 weeks.[6]
Eligibility requirements for unemployment insurance vary by state, but generally speaking, employees not fired for misconduct ("terminated for cause") are eligible for unemployment benefits, while those fired for misconduct (this sometimes can include misconduct committed outside the workplace, such as a problematic social media post or committing a crime) are not.[7] In every state, employees who quit their job without "good cause" are not eligible for unemployment benefits, but the definition of good cause varies by state. In some states, being fired for misconduct permanently bars the employee from receiving unemployment benefits, while in others it only disqualifies the employee for a short period.
History[edit]
As many European countries created unemployment insurance programs in the early 20th century (beginning with Britain in 1912), Progressive Era reformers advocated for a similar policy in the United States, but to little avail.[8] In the early 20th century, some trade unions and employers set up private unemployment insurance programs for workers, but these were only available to a small portion of the workforce.[9][10] Following the onset of the Great Depression, advocates pushed Congress and state legislatures to create public unemployment insurance programs.[9] In 1931, governors from New York, Ohio, Massachusetts, Pennsylvania, New Jersey, and Connecticut organized an interstate commission on unemployment insurance.[9] In 1932, Wisconsin passed the first public unemployment insurance program in the United States, offering 50% wage compensation for a maximum of 10 weeks, funded through a payroll tax imposed on employers.[11][12]
Programs were created in other states following the passage of the federal Social Security Act of 1935. Under Title III of the Act, the federal government would levy a payroll tax on almost all employers to fund unemployment insurance programs run by state governments, conditional on states following certain minimum requirements concerning program administration. In states that levied their own taxes to administer programs that exceeded the requirements, the federal government would forgive this payroll tax.[8] The terms of this federal-state cooperation are set by the Federal Unemployment Tax Act (FUTA), which authorizes the Internal Revenue Service (IRS) to collect an annual federal employer tax used to fund state workforce agencies. In 1937, the Supreme Court held that federal unemployment law is constitutional and does not violate the Tenth Amendment in Steward Machine Company v. Davis, 301 U.S. 548.
Beginning in 1954 under the Reed Act, the federal government transfers unemployment funds to state governments when the federal balance exceeds a certain threshold.[13] Additionally, FUTA provides a fund that states can borrow from when needed to continue paying UI benefits.[14] In 1970, FUTA was amended to create an extended benefits program where the federal government pays half the cost of extended benefits triggered during periods of high state-level unemployment.[13]
In 1986, the Tax Reform Act required that unemployment compensation be considered taxable income for the purposes of federal taxes.[15][16][17] In 2003, Rep. Philip English introduced legislation to repeal the taxation of unemployment compensation, but the legislation did not advance past committee.[15][18] Most states with income tax consider unemployment compensation to be taxable.[15] Under the American Recovery and Reinvestment Act of 2009, the first $2,400 worth of unemployment income received during the tax year of 2009 was exempted from being considered as taxable income on the federal level.
Structure[edit]
Taxation[edit]
Unemployment insurance is funded by both federal and state payroll taxes. In most states, employers pay state and federal unemployment taxes if: (1) they paid wages to employees totaling $1,500 or more in any quarter of a calendar year, or (2) they had at least one employee during any day of a week for 20 or more weeks in a calendar year, regardless of whether those weeks were consecutive. Some state laws differ from the federal law.[14]
Since June 2011, the Federal Unemployment Tax Act (FUTA) has set the taxable wage base as the first $7,000 of wages paid to each employee during a calendar year, and the tax rate as 6% of taxable wages.[14][a] Employers can deduct up to 90% of the amount due if they paid taxes to a state to support a system of unemployment insurance which met Federal standards.[20] Employers who pay the state unemployment tax on time receive an offset credit of up to 5.4% regardless of the rate of tax they pay their state. Therefore, the net FUTA tax rate is generally 0.6% (6.0%–5.4%) on the taxable amount of $7,000, for a maximum FUTA tax of $42.00 per employee per year.
State law determines individual state unemployment insurance tax rates and taxable wage bases.[14] Although FUTA mandates a taxable wage base of $7,000 per employee, only Arizona, California, and Puerto Rico use this minimum as of 2020.[21] The taxable wage base ranges significantly, with Washington using the highest amount of $52,700.[22] All states use experience rating to determine tax rates, meaning that employers using the system more often have to pay additional taxes.[23] As such, the range of state unemployment tax rates varies widely. For example, as of 2020, the state employer tax rage for unemployment insurance is 0.05%–6.42% in Arizona, 1.5%–6.2% in California, 0.94%–14.37% in Massachusetts, and 0.1%–5.5% in Oklahoma.[24]
An exception to the federal-state joint funding mechanism is the Pandemic Unemployment Insurance (PUA) program created during the COVID-19 pandemic, which is funded entirely by the federal government.[25]
Temporary benefit extensions[edit]
Temporary federal extensions[edit]
During national recessions, the federal government often extends unemployment insurance benefits temporarily as part of a broader countercyclical economic policy. This has occurred in 1958, 1961, 1971, 1974, 1982, 1991, 2002, 2008, and 2020.[42]
The below table, based on research by the Congressional Research Service, summarizes the temporary extensions until 2008:[41]