Unemployment Insurance in Washington: A hand up or a hand out?

By Jason Mercier, Evergreen Freedom Foundation

While states compete with each other for auspicious national rankings, Washington has earned the dubious distinction of ranking among the highest in the nation for unemployment. But more disturbing than the number of unemployed citizens in Washington is the system we have set up to respond to them. Instead of providing temporary help out of a tough spot, our unemployment insurance (UI) program pits employees against their employers, offers incentives to remain unemployed, and costs businesses a bundle. In fact, according to Boeing CEO Allan Mulally, Washington UI tax rates are the highest of all the places in the world the company does business.(1)

The idea of having a transitional safety net in case a worker unexpectedly loses his or her job has plenty of merit. But the state's current program to provide this safety net has five major drawbacks that contribute to the problem instead of reducing it:

1. UI rates are inflated—an unfair financial burden for employers.

2. UI benefits are inordinately high—an incentive to remain unemployed.

3. The program suffers from a lack of enforcement and accountability—fraud and overpayments occur too frequently.

4. Washington receives insufficient returns for the money it invests in the federal program.

5. State officials play favorites when they disperse UI benefits.

The result of these key problems is that our unemployment insurance program does not do what it was intended to do and is, in fact, contributing to our state's anti-business climate. It is time for Governor Locke and state legislators to enact necessary reforms and look at allowing businesses and employees to take control by privatizing the system.

1. UI rates are inflated—an unfair financial burden for employers.
Washington determines its UI tax rate using a formula based on the state's average annual wage. Washington law (RCW 50.04.355) defines the average wage as follows:

(1) The "average annual wage" is the quotient derived by dividing the total remuneration reported by all employers for the preceding calendar year by the average number of workers reported for all months of the preceding calendar year and if the result is not a multiple of one dollar, rounding the result to the next lower multiple of one dollar.

However, the UI tax rate is not based solely on the state's real average wage, but includes additional compensation like stock options (which have been popular with companies during the last few years) and benefit packages. This means businesses operating in Washington are burdened with UI rates substantially higher than businesses in other states.

The actual tax rate on the average annual wage is calculated through a process called "experience rating." The total amount of benefits paid by an employer to unemployed individuals over a period of four years is divided by the employer's total taxable payroll over those same four years to determine the employer's UI tax percentage. Based on this calculation, an employer is assigned one of twenty different UI tax rates ranging from .47 percent to 5.4 percent.(2)

Washington businesses currently pay an average of 2.2 percent on the first $28,500 of each employee's wage. By comparison, California only taxes the first $7,000 dollars of an employee's earnings.(3) Our state ranks fourth nationwide in total taxes collected as a percentage of total wages.

The problem with this structure is that those in the highest tax bracket do not pay enough to cover former employees who claim unemployment insurance, due to an artificial cap on rates. This shifts the burden to employers who would otherwise pay less. Employees bear the burden as well in the form of lower salaries and benefits.

2. UI benefits are inordinately high—an incentive to remain unemployed.
Washington UI recipients are eligible for as much as $496 a week. The average weekly benefit paid in our state for the year's second quarter was $333,(4) the second highest nationally. Despite having one of the highest minimum wage laws in the nation ($7.01/hr starting in January 2003), the average Washington UI check pays more than a full-time minimum wage job.

Washington had 144,839 initial UI claims filed during the second quarter of 2002. Based on current statistics, these claimants will remain on UI for 18.5 weeks (second longest nationally), collecting an average of $7,367 each (which ranks Washington third highest for payments per individual).(5)

These figures may sound less extravagant when compared with the average earnings in Washington, but for anyone more inclined to stay home than work, they are a comfortable incentive, especially for individuals who can collect both UI benefits and severance pay.

3. The UI program suffers from a lack of enforcement and accountability.
The purpose of the UI program is to give displaced workers a helping hand while they transition into a new job. It assumes they will be actively seeking a new job, but the program does not have adequate checks to hold recipients accountable.

As was illustrated in the case of state Senator Joe Zarelli, who received UI benefits while in the legislature, Washington is overpaying many UI claimants. While the state did lower its overpayment rate from 16.52 percent last year down to 10.90 percent this year, it is still above the national average of 8.2 percent. Washington overpaid UI claims last year by $134 million. Taking into account the $4 million in documented underpayments, our UI program handed out $130 million more than it should have.(6) False claims and overpayments are, in essence, a tax on all other employees.

Another problem is the lack of face-to-face contact between UI claimants and state officials. Due to legislation passed in 1998 (SB 6420), UI claimants are required to do nothing more than place and log at least three phone inquiries about employment opportunities each week. They are not required to set foot in any place of business, or personally report to any state UI offices to show they are putting reasonable effort into the job search.

Individuals who belong to full referral unions are not even required to make three phone calls. As long as they are a member in "good standing" (dues are current) and they follow the rules for union dispatch (acceptance of appropriate available jobs), they fulfill all of the job search requirements for UI eligibility. Unfortunately, oversight of this program is severely lacking. (To read more, see EFF's Policy Highlighters Volume 12 numbers 20 and 21 on the National Electrical Contractors Association.)

While many UI recipients are diligent and serious about moving on to new endeavors, the system is openly vulnerable to abuse.

4. Washington receives insufficient returns for the money it invests in the federal program.
Currently, states send a portion of their UI taxes to the federal Department of Labor to build an emergency fund in case a specific state hits hard economic times. Funds are then sent in the form of a federal loan to states in need so they can respond to a crisis of unemployment.

Unfortunately, many states are getting insufficient return for their federal unemployment taxes (called FUTA, after the Federal Unemployment Tax Act). While all states pay into the federal UI program administered by the Department of Labor, only a portion of these UI payments ever make it back to the states. Washington sends about $141 million a year to Washington, DC, but only gets around $92 million back.(7)

A FUTA tax of 0.6% is charged on each employee's wages (up to $7,000 of wages a year). On top of that, Congress added a 0.2% surtax to replenish the trust fund after the recession of 1973-75. The fund has been replenished, and then some, but Congress maintains the surtax for a total tax rate of 0.8%.

While, in theory, a federal UI tax sounds good, it doesn't pan out in practice. Not only are the returns insufficient compared to the investment, the federal government uses some of the money to pay down the national debt instead of keeping it in a trust. It is crucial to remember that the sources of these funds are state businesses.

Even if the federal emergency program worked as it was intended, the core principle is flawed. Businesses in Washington should not be forced to subsidize businesses in other states, nor should those businesses subsidize our state.

5. State officials play favorites when they disperse UI benefits.
Rather than benefit eligibility being uniformed for all the state's employment sectors, state officials in essence play favorites allowing different benefit periods for different workers. The clearest example can be found with former Boeing employees who are able to claim UI longer than other laid off individuals. UI claimants receive benefits based upon wages which already reflects the difference in the state's job market. There is no justification for different time eligibilities based upon the type of former employment.

Solutions
Four clear solutions exist to remedy the problems in Washington's current UI program:

1. Privatize UI. Allow individuals and businesses to invest in specifically tailored, private unemployment insurance accounts. This will give workers and employers the flexibility to maximize and widen the safety net of transitional unemployment income to those who have earned this fiscal security through their previous employment.

2. Request that Congress eliminate the state's mandatory contribution to the federal program. This will keep the UI funds contributed by our state's employers in our own community and allow us to creatively invest these funds for a larger state UI trust. It also leaves the potential for lowering the tax burden on businesses while still maintaining a healthy UI trust fund.

3. Prompt job searches for claimants. An immediate revision to the system requiring prompt job search and re-employment is mandatory to improve our state's UI program. Much like the Jobs Plus program in Oregon, if unemployed individuals in our state are not able to quickly find a job, the state should find one for them. When given the choice of finding a job or having one chosen for them, individuals will be motivated to aggressively seek employment.

4. Aggressive enforcement of the law. Overpayments should not be a systematic occurrence. Eligibility must be fully verified before payments are made. Misuse of UI by some individuals is robbing other workers of funds which could be available for wage increases.

The Evergreen Freedom Foundation understands that many are facing life-changing economic hardships as a result of our state's current economic crisis. We are not advocating a community that turns its backs on those in need, but rather one that provides the maximum incentives and opportunities for workers to rejoin the state's workforce and productively contribute to the state's economy. All can support a system that offers a helping hand. What needs to be addressed is the current hand-out mentality of the UI program. Employers should not be forced to choose between higher salaries and benefits for employees, or increased UI taxes. By reforming the state's UI program we will be putting the needs of workers first and enabling our state's residents to be self-sufficient in their pursuit of the American dream.

Notes:

1) Alan Mulally testimony before the Washington State House Labor Committee on January 16, 2002.

2) ESD. "Annual 2002 Tax Rate."
<http://www.wa.gov/esd/taxrates.htm>

3) U.S Department of Labor. "2002 State Taxable Wage Base and Tax Rates."
<http://workforcesecurity.doleta.gov/unemploy/statetax.asp>

4) ESD. "How Much Will I Get on My Check?"
<http://www.wa.gov/esd/ui/wba.htm>

5) U.S Department of Labor. "UI summary data (2nd quarter 2002)."
<http://ows.doleta.gov/unemploy/content/data_stats/datasum02/
2ndqtr/ sum.asp#wag>

6) U.S Department of Labor. "Calendar Year 2001 Benefit Accuracy Measurement Data Summary."
<http://www.workforcesecurity.doleta.gov/unemploy/pdf/
bamcy2001.pdf>

7) U.S Department of Labor. "Calendar Year 2001 Benefit Accuracy Measurement Data Summary."
<http://www.workforcesecurity.doleta.gov/unemploy/pdf
/bamcy2001.pdf>

The Evergreen Freedom Foundation is a non-profit public policy research organization dedicated to preserving and advancing individual liberty, free enterprise and limited and accountable government.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org