Future of Unemployment Insurance

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Multiple readers have asked about unemployment insurance and how it is going to fare after the pandemic.  This will give you an idea of how the system works.

State unemployment insurance (SUI) is largely funded by employers.  Most employers are charged tax that depends on two things:  the overall health of the fund into which SUI tax is collected, and the claims history of the employer.  So, an employer with a long history of chargeable claims, for example, will pay more than others.  Also, if there is lots of money built up in the fund then the tax rate goes down for everyone.

The health of the fund determines the proper tax rate schedule.  The schedules are named after a letter of the alphabet, with A the least costly schedule and H the most expensive.  The fund health is measured at the end of the year, and that measurement is used to set the rate for the following year.  Here is a chart of the SUI rate schedule for the past 20 years:

Source:  DLIR Reports compiled by Tax Foundation of Hawaii.

Although the Great Recession of 2008 and related events caused the fund to run out of money and we needed to borrow around $180 million from Uncle Sam, employers were not subjected to the dreaded Schedule H because our lawmakers passed special legislation to control the SUI rates and override the normal formulas for the years 2010 through 2012 (the orange bars in the diagram).  

What can we expect once the year ends?  Lately, the volume of unemployment claims has been so great that the authorities set up a processing center at the Hawaii Convention Center.  Our fund started off the year at nearly $600 million but has been draining rapidly.  A news release dated July 2, 2020, said that the Department of Labor and Industrial Relations already has paid out $1.85 billion in benefits.  Fortunately, federally funded benefits such as the extra $600 per week paid to those on unemployment are not charged to employers because that money does not come from our fund.  The State’s budget bill, Senate Bill 126, section 38, appropriates federal CARES act money to fund an additional weekly unemployment benefit of $100 per week once the federal $600 per week runs out.  Those benefits will not affect the SUI fund either and should not count against employers for the same reason.

Nevertheless, with an unemployment rate peaking at 23.8% in April, a tremendous strain has been placed on the fund.  There will be a spike in SUI rates next year unless our government does something to prevent it, as it did for the years 2010-12.  Is our government simply going to wait around for the automatic increases to take effect from the beginning of 2021?  Some businesses might not survive another hit at that time.  Perhaps some thought should be given sooner rather than later to the impact of elevated SUI rates.

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.