RI – What Went Wrong: Unemployment Insurance Taxes

Another singular component of Rhode Island’s tax system is unusually high unemployment insurance taxes. Unemployment insurance taxes don’t get very much attention (they are excluded from the graph of the distributional effect of taxes in the previous column, for instance), but they can have a very real effect on the economy, particularly in a time of high unemployment. The unemployment insurance tax system is hideously complex, with four different components and rates that go up when the company conducts layoffs. The result is a payroll tax that hits the working class far harder than anyone else, as this graph shows.

Unemployment insurance tax rates in Rhode Island, including the Employment Security Tax, the Job Development Fund Tax, the Temporary Disability Insurance Tax, and the Federal Unemployment Insurance Tax.

High unemployment insurance taxes can help exacerbate an economic collapse because once a business is forced to make layoffs, its tax rate can skyrocket. This tends to help push struggling businesses over the line, and Rhode Island’s high unemployment insurance tax rate pushed us over the line. In the Tax Foundation’s 2013 Business Tax Climate Index, the gold standard for biased conservative tax climate rankings, the unemployment insurance tax is the only tax category where Rhode Island ranks last.  There is relatively little evidence that a better tax climate ranking helps a state become more competitive, but there are real competitiveness issues that do matter, and they are the subject of tomorrow’s column.

Related posts:
  1. RI – What Went Wrong: Tax Cuts for the Affluent
  2. RI – What Went Wrong: The Carcieri Effect

I am the Rhode Island State Coordinator for the Progressive Democrats of America. My primary interest is Rhode Island's economy and what we can do to fix it.

3 responses to “RI – What Went Wrong: Unemployment Insurance Taxes”

  1. Moderate

    There is so much wrong with this post it makes no sense to go any further than to say that the UI tax is an ‘employer’ tax – not an ‘employee’ tax.  Individuals do not pay into the unemployment insurance fund – their companies do.

    To talk about what is broken with RI’s UI fund, all you have to do is look at the imbalance of contributions versus withdrawals from the fund by experience rating.  Almost every experience rating runs a surplus except for the highest tax rate, where withdrawls from the fund run almost double their contributions.

    I couldn’t figure out how to post the DLT-provided chart which shows this.  If anyone can tell me how to post a JPG file I will gladly do so.

         
       

         

  2. Tom Sgouros

    In the mid-1990s, I noticed that some of the companies complaining about their egregious UI tax rates were exactly the companies who were shipping jobs south.  Cranston Print Works, for example, claimed that its UI taxes in North Carolina were just a tiny fraction of the rate it paid in Rhode Island.  A closer look showed that this was hardly surprising: Cranston had been laying off people here for a few years, and only hiring in North Carolina.  So their rate was high here because they had produced lots of unemployed people, and low down south where they had produced none.  

    The remarkable thing about this story to me is that Cranston had the nerve to use that as a public excuse for a round of layoffs here, and even complained to the press about it — who duly blamed it on state government, because that’s what they are trained to do.  (See Peter Phipps’s business column of 4/28/96 for an example.)

    Also, about this statement:

    “Almost every experience rating runs a surplus except for the highest tax rate, where withdrawls from the fund run almost double their contributions.”

    UI is an insurance system, but the rates are capped, which means that it was designed to be like this.  This will be true in every state, almost by definition.  One can argue that unemployment compensation should not be an insurance system, or that the top rate should not be capped.  But this observation is not evidence that the system isn’t working as designed.  Quite the opposite, in fact.

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