Expected SUTA Rate Changes

Pennsylvania, Montana, and California have announced new unemployment tax rates for 2021. The legislatures of Michigan and Florida recently introduced new bills that will affect the unemployment insurance rates payable in both states. There are currently no official processes or actions to increase the rate of SUTA tax levied in Arizona and Texas.

SHORT-TERM CHANGES

The official position of all seven state governments has been to exclude employee benefit claims directly resulting from the impact of COVID-19 from employers’ experience rating. The exclusion consequently means that the increased unemployment benefit claims triggered by the current pandemic will not immediately result in employers paying significantly higher State Unemployment Tax Act (SUTA) rates in the next fiscal year, 2021. Below are the expected short term changes in the SUTA rates of each state.

PENNSYLVANIA

  • The Pennsylvania Office of Unemployment Compensation administers the unemployment insurance scheme in the state. The charges paid by employers in the state under the scheme are subject to yearly review.
  • In March 2020, the Governor of Pennsylvania, Governor Tom Wolf, announced that the state will not charge unemployment claims resulting from the impact of COVID-19 to specific employers account, indicating that the computations of unemployment insurance rates for 2021 will remain about the same.
  • The current unemployment insurance rate in Pennsylvania for new employers is 10.2238% for businesses in the construction industry and 3.6890% for non-construction employers. The state’s taxable wage base is $10,000. For experienced employers, the unemployment insurance rate ranges from 1.2905% to 9.9333%.
  • In August 2020, the Pennsylvania Office of Unemployment Compensation announced new unemployment tax rates for the fiscal year 2021. According to the statement, unemployment tax rates for both new and experienced employers will remain the same. The unemployment insurance tax rate for experienced employers will remain at 1.2905% to 9.9333%, while those for new employers will also stay at 10.2238% for businesses in the construction industry and 3.6890% for non-construction employers. The state’s taxable wage base for 2021 is also $10,000.

MICHIGAN

  • The Michigan unemployment compensation scheme is administered by the state’s Unemployment Insurance Agency (UIA). The charges paid by employers in the state under the scheme are subject to yearly review.
  • The unemployment insurance rate in Michigan for new employers is 2.7 percent plus 1/3 of the employer’s calculated CBC. The state’s unemployment insurance computation is based on annual wages of $9,000. For seasoned employers, the unemployment insurance rate ranges from 0.06% to 10.3%.
  • In March 2020, the Governor of Michigan, Gretchen Whitmer, declared that the state will not consider unemployment claims resulting from the impact of COVID-19 in the computations of unemployment insurance rates for 2021.
  • The UIA Compensation Fund dropped below $2.5 billion in July, triggering a mandatory increase in unemployment tax as contained in the Michigan Employment Security Act.
  • In September 2020, the Michigan Legislature introduced a bill to reduce tax burden for employers by exempting employers from paying higher unemployment taxes in cases of business closure mandated by an executive order. The bill is still being discussed in the House.

MONTANA

  • The Montana unemployment compensation scheme is administered by the state’s Department of Labor and Industry. The charges paid by employers in the state under the scheme are subject to yearly review.
  • The unemployment insurance rate in Michigan for new employers ranges from 1.00% to 2.40%, depending on the industry. The state’s taxable wage base is $34,100. For seasoned employers, the unemployment insurance rate ranges from 0.00% to 6.12%.
  • In March 2020, the Governor of Montana, Steve Bullock, announced that the state will not charge unemployment claims resulting from the impact of COVID-19 to specific employers account, indicating that the computations of unemployment insurance rates for 2021 will remain about the same.
  • The Montana Department of Labor and Industry announced in September 2020 that the state’s taxable wage base will rise to $35,300 from $34,100 in January 2021.

TEXAS

  • The Texas unemployment compensation scheme is administered by the Texas Workforce Commission (TWC). The charges paid by employers in the state under the scheme are subject to yearly review.
  • The unemployment insurance rate in Texas for new employers is 2.7 percent based on annual wages of $9,000. For seasoned employers, the unemployment insurance rate ranges from 0.31% to 6.31%.
  • The Texas Workforce Commission announced in April that Texas employers will not be charged for any claims filed due to COVID-19, and unemployment benefits paid to former employees will not be considered when computing an employer’s future tax rate.
  • There are currently no official processes or actions to increase or alter the unemployment tax levied in Texas. The Texas Workforce Commission refused to comment on the issue when asked in September 2020.

ARIZONA

  • The Arizona unemployment compensation scheme is administered by the state’s Department of Economic Security. The charges paid by employers in the state under the scheme are subject to yearly review.
  • The unemployment insurance rate in Arizona for new employers is 2 percent based on annual wages not exceeding $7,000. For experienced employers, the unemployment insurance rate ranges from 0.04% to 11.8%.
  • In March 2020, the Governor of Arizona, Doug Ducey, announced that the state will not charge unemployment claims resulting from the impact of COVID-19 to specific employers account, indicating that the computations of unemployment insurance rates for 2021 will remain about the same.
  • There are currently no official processes or actions to increase the unemployment tax levied in Arizona. However, there have been new appeals to increase the taxable base and tax rate in the state.
  • According to a recent policy paper by the Grand Canyon Institute, the state of Arizona should increase the taxable wage base to $12,000 and open the scheme to self-employed workers.

FLORIDA

  • The state unemployment compensation scheme in Florida is under the “Reemployment Assistance Program Law,” and the charges are known as “reemployment tax.”
  • Currently, the reemployment tax rate in Florida for new employers is 2.7 percent based on annual wages of $7,000.
  • The reemployment tax rate in Florida is adjusted yearly and computed based on the benefit-ratio formula — that is, the administrators adjust future reemployment tax rates based on past drawings from the Unemployment Compensation Trust Fund.
  • In December 2019, Governor Ron DeSantis announced that the state’s reemployment tax rate will continue to remain low into the foreseeable future. The Governor added that the state remains committed to “maintaining Florida’s business-friendly environment by lowering taxes.”
  • The Florida Department of Economic Opportunity, the administrating agency of reemployment benefits in the state, announced in September 2020 that the reemployment tax rate for the next fiscal year, FY 2021, will not be affected by drawings and benefits paid to past employees as a direct result of COVID-19.
  • According to a report by EY, the Department’s announcement forestalled the drastic increase expected to characterize the reemployment tax in the next fiscal year as a result of benefits paid out for COVID-19-induced unemployment.
  • In October 2020, the Florida Legislature introduced a bill that will effectively increase the unemployment tax rates payable by employers operating in the state. The bill aims to raise the minimum benefits employees can collect from $32 to $100, and the maximum from $275 to $500. The bill also plans to expand overall eligibility for the scheme by making unemployment insurance available to part-time, self-employed, and gig workers. The bill is still being discussed in the Senate.

CALIFORNIA

  • The state unemployment compensation scheme in California is regulated by the California Unemployment Insurance Code (CUIC) and is administered by the Employment Development Department (EDD).
  • At the moment, the unemployment insurance rate in California for new employers is 3.4 percent and based on annual wages not exceeding $7,000. For seasoned employers, the unemployment insurance rate ranges from 1.5% to 6.2%.
  • In August 2020, the Governor of California, Gavin Newsom, declared that computations of employment insurance rates for the next fiscal year 2021 will not be affected by unemployment benefit claims resulting from COVID-19.
  • The Department’s announcement suggests that there will not be an increase in the state’s unemployment insurance rate for the fiscal year 2021, according to a report by EY.
  • In October 2020, the California Employment Development Department announced new unemployment tax rates for the fiscal year 2021. According to an article published by Bloomberg Tax, unemployment tax rates for both new and experienced employers will remain the same. The unemployment insurance tax rate for experienced employers will remain between 1.5% to 6.2%, while those for new employers will also stay at 3.4%. The state’s taxable wage base for 2021 is also $7,000.

MEDIUM-TERM CHANGES

  • Several independent studies and reports have highlighted the need to increase SUTA rates across the United States in the near future. This evaluation has been reiterated by reputable tax consulting bodies such as EY, Bloomberg, and Equifax.
  • The COVID-19 pandemic has triggered an unprecedented level of unemployment claims in the United States, exceeding the unemployment trust funds of 22 states and forcing them to draw loans from the US Treasury.
  • An independent report by EY identified the states of California and Texas as some states that may witness a substantial increase in their SUTA rates, as both states currently have outstanding unemployment insurance (UI) loan balances with the US Treasury.
  • Reviewing past trends in SUTA rates, unemployment tax rates begin to rise about 2–3 years after the commencement of a crisis, as observable in the SUTA rates pattern of the last recession. This lag exists because governments try to avoid overburdening an ailing economy by suddenly increasing the SUTA rates in a bid to recover lost revenue.
  • Also, computing SUTA rates require more than a single year of operation because governments typically consider past and present payments and claims when computing the figure. The use of past data ensures that SUTA rates increase slowly after a crisis.
  • Based on these insights, we can expect the average SUTA rate to steadily increase over the next 2–3 years, or in the medium to long term, across the United States.
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