In 2016 and 2017, more than half the unemployment agencies increased their taxable wage base for the given year. As we begin 2018, eight states decreased their taxable wage base, eighteen states increased their taxable wage base, and all other states remained unchanged. Why are state taxable wage bases fluctuating?

In many states, the taxable wage base is fixed within the legislation; those states can only change their taxable wage base by amended legislation. In the states where you see fluctuation in the taxable wage base from year to year, either they have a building component that gradually increases the taxable wage base from year to year, like Illinois and New York just implemented; or they base their taxable wage base on the level of the trust fund balance as of the computation date.Trustfall

It is important for state unemployment agencies to have a healthy trust fund balance. An example of what can happen to a state if their unemployment trust fund is not at an optimal level occurred during the Great Recession.  At that time, many states trust fund balances were depleted because employers were paying less into the unemployment system than the states were paying out to the record numbers of eligible claimants.  This resulted in states borrowing from the federal government to continue to pay claimants.

State unemployment agencies borrowed under the federal Title XII loan provision, which requires the states (ultimately employers) to repay the amount borrowed, plus interest. The volume of loans resulted in the US DOL setting new standards requiring states to build their trust funds to higher levels and more accurately measure the balance needed to pay claimants during a major downturn of the economy. The calculation the DOL requires is referred to as the Average High-Cost Multiple (AHCM).

States can ensure they remain in federal compliance with the AHCM by adjusting the taxable wage base and/or the tax rate schedule. With the upturn of the economy, more jobs are available, and more payments are being made into the unemployment trust fund. This has resulted in most states obtaining a healthy trust fund balance. As a result, some states are choosing to reduce the taxable wage base and/or the unemployment tax rate schedule.


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