Michigan’s Muddled Unemployment Insurance Taxes
Have you read The Tax Foundation’s State Business Tax Climate Index? No? Well, this document enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. We found the section on unemployment insurance particularly interesting.
Unemployment insurance (UI) is a social insurance program jointly operated by the federal and state governments. Taxes are paid by employers into the UI program to finance benefits for workers recently unemployed. Compared to the other major taxes assessed in the State Business Tax Climate Index, UI taxes are much less well known. Every state has one, and all 50 of them are complex, variable-rate systems that impose different rates on different industries and different bases depending upon such factors as the health of the state’s UI trust fund.
One of the worst aspects of the UI tax system is that financially troubled businesses, for which layoffs may be a matter of survival, actually pay higher marginal rates as they are forced into higher tax rate schedules. In the academic literature, this has long been called the “shut-down effect” of UI taxes: failing businesses face climbing UI taxes, with the result that they fail sooner.
Which states have the worst UI taxes? Pennsylvania, Rhode Island, Massachusetts, Kentucky and yes, Michigan. These states tend to have rate structures with high minimum and maximum rates and wage bases above the federal level. They also tend to feature more complicated experience formulas and charging methods, and have added benefits and surtaxes to their systems.
UI tax rates in each state are based on a schedule of rates ranging from a minimum rate to a maximum rate. The rate for any particular business is dependent upon the business’s experience rating: businesses with the best experience ratings will pay the lowest possible rate on the schedule while those with the worst ratings pay the highest. The rate is applied to a taxable wage base (a predetermined fraction of an employee’s wage) to determine UI tax liability.
Confused? Understandably so. Rates are variable, wide-ranging, and complicated. Make sure you’re in compliance and paying no more than you have to. Talk to your Cole Gavlas tax consultant.