over expenditures in any year as a reserve to cover deficits in the later years. The employer representative favored maintaining the $3,000 tax base, and increasing the tax rate along the following lines: Raise the Federal unemployment tax from 3 percent to 4 percent. Continue initially the 90-percent credit offset. The State standard rate would then become 3.6 percent; 0.4 percent going to the Federal Government. Divert onefourth of the tax collections brought in by the 0.4 percent into an administrative contingency fund. Continue this diversion for such length of time as would be necessary to establish a $250 million fund. After the establishment of this fund, reduce the Federal "take" (for the next calendar year) to 0.3 percent. However, continue the computation of the 90-percent offset credit on a 4-percent Federal tax basis. If, in any calendar year, the contingency fund falls below $150 million, the Federal "take" in the ensuing calendar year would be returned to 0.4 percent and be continued at this level until the fund again amounts to $250 million. The public and employee representatives' views and the employer representative's views supporting their recommendations on this point are attached. 3. Benefit financing In response to the request of the Legislative Review Committee, the Committee considered alternative methods of benefit financing. 'It was the Committee's conclusion that any increase in benefit costs has a differential impact in different States because of the different incidence of unemployment and its costs resulting from differences in wage levels, different composition of industries, etc. In view of these variations between States, it is our view that each State will have to study its own needs before it can reach a decision as to which benefit financing methods are appropriate for that State. If increased benefit financing is required, there are at least four principal alternative methods: (1) increase the taxable wage base from the present limitation of the first $3,000 of each individual's earnings; (2) increase the tax rate above the present "standard" State rate of 2.7 percent; (3) provide that no employer contribution rate shall be below a specified minimum; (4) require an employee contribution. APPENDIX A STATEMENT OF POSITION IN SUPPORT OF INCREASED FEDERAL UNEMPLOYMENT TAX BASE In order to meet the need for increased income to meet the rising State and Federal administrative expenditures, the undersigned favor a slight increase in the taxable wage base to $3,600, rather than an increase in the tax rate because (1) Under the Social Security Act, as enacted in 1935, total wages were taxable for unemployment compensation purposes. The $3,000 wage base limitation, which was enacted in 1939, was inserted in the Federal Unemployment Tax Act only to make it identical with the taxable wage base in the Old-Age and Survivors Insurance program; the latter has since been raised to $4,800. The $3,000 limitation in 1939 represented approximately 95 percent of total covered payrolls; now the $3,000 limitation results in only about 65 percent of total wages being taxed. (2) A slight increase in the wage base, to say $3,600, would not have a great impact on taxpayers. It would result in an increase in Federal tax collections of about $40 million, or about 12 percent. (3) An increase in the Federal tax rate would work an additional hardship on new employers entering business, although the American economy is supposed to offer encouragement to new businesses in a competitive enterprise system. This increase would apply to all new employers for at least a year, until they could secure a lower experience rate. On the other hand, a State could revise its experience rating schedules so that older employers would not be affected by the rise in the Federal tax rate so far as State taxes are concerned. (4) A slight increase in the wage base, designed to produce only enough income for adequate administrative financing, appears more equitable to new employer taxpayers than an increase in the tax rate and does not appear to be an inequitable burden on high-wage-paying employers. (5) An increase in the tax rate would be regressive in character, since it would impose a higher tax in proportion to total payroll on low-wage-paying, employers than on high-wage-paying employers because of the limited taxable wage base. (6) In a social insurance program, it seems logical that employers paying high wages and with stable employment might reasonably be expected to share a slightly increased portion of the cost of the insurance program along with the less stable or low-wage employers. (7) There are probably not a great number of employers paying wages below $3,600 a year to most workers (though data to substantiate the point are not availabel to the Committee). (8) Twenty-six States already have taxable wage bases which are tied to the Federal base; if the Federal base is raised, bases will automatically be raised in these States without the necessity for State legislation. On the other hand, any increase in the tax rate to 4 percent under the Federal Unemployment Tax Act would require an increase in the "standard" rate in the State laws from 2.7 percent to 3.6 percent in order for the employers in the States to receive the full 90 percent tax credit against the Federal tax. The undersigned therefore recommend to the Council: That the taxable wage base in the Federal Unemployment Tax Act should be raised from the present level of the first $3,000 of wages paid to each individual worker in a year to $3,600. Public members: Fedele F. Fauri, Clarence W. Bird, Mrs. Eveline M. Burns, William Haber, John Holden, Charles A. Myers, Dale Yoder; employee members: Harry Boyer, George Brown, Jacob Clayman, Nelson Cruikshank, C. J. Haggerty, Kenneth J. Kelley, Leonard Lesser, Jesse C. McGlon. APPENDIX E STATEMENT OF POSITION ON INCREASED TAX INCOME FOR ADMINISTRATIVE PURPOSES The principal position covered by this statement is: If the Secre- The members of the Federal Advisory Council who subscribe to The Administrative Financing Committee, at its November 24, 1958, meeting, considered (1) the matter of a separate account in the Unemployment Trust Fund for administrative purposes, (2) alternative methods of benefit financing, and (3) methods of providing additional administrative funds. With respect to the first item, the committee unanimously recommended to the Council on December 3, 1958, that collections under the Federal Unemployment Tax Act be put in a separate account in the Unemployment Trust Fund, from which account administrative expenditures will be made. With respect to the alternative methods of benefit financing, the committee unanimously concluded that, because of the different incidence of unemployment and its costs resulting from differences in wage levels, composition of industries, etc., in the various States, each State must determine for itself the financing methods appropriate for that State. With respect to providing additional funds for State and Federal administrative expenditures, the labor representative and public representative favored increasing the taxable wage base from the present level of the first $3,000 of wages to a level of $3,600. The employer representative does not agree with this position, and it is the purpose of this report to set out the reasons for disagreement and to propose a more desirable method of providing additional funds-one which calls for an increase in the tax rate rather than an increase in the tax base. (1) The first question to be resolved: Is there an immediate need for a permanent change in either the taxable wage base or the tax rate for the purpose of providing administrative funds? In the fiscal year 1957 there was approximately a $71 million difference between income and outgo for administrative purposes; in fiscal 1958 the difference was approximately $33%1⁄2 million. The narrowing of difference in 1958 between income and outgo was attributable to a very great extent to heavier than usual unemployment. While it is true that administrative expenses have been coming closer each year to tax revenue, and costs of administration may in a year to come exceed tax revenue, serious consequences need not result. There is nothing whatsoever in present law on which any committee of the Congress, or the Congress, could argue that appropriations must not exceed tax collections in any particular year. Title III of the Social Security Act has through the years provided that it is the obligation of the Congress to provide such sums for the administration of the employment security program "as deemed necessary for proper and efficient administration." Thus, insofar as the present law is concerned, it is clear that the Congress is in no manner obliged to appropriate moneys in the amount requested by the Bureau just because Federal tax revenue has exceeded the amount requested; nor can the Congress, acting according to law, appropriate less than the amount deemed necessary for proper and efficient administration on the grounds that the Federal tax revenue was not sufficient to meet the full costs of proper and efficient administration. During the Senate Finance Committee consideration of the 1954 act, the Department of Labor pointed out the possibility that, at some time in the future, tax collections might not equal cost disbursements. (The bill made no provision for utilizing any future excess tax collections to meet administrative cost deficits.) The Department took the position that before any excess tax collections should be diverted to a loan fund and to the States, any past administrative costs in excess of past tax collections should be liquidated first. An amendment was offered the Senate Finance Committee to achieve this result, but it was disregarded. With respect to the possibility that Congress might in the future fail to appropriate sufficient administrative funds, there are indications to the contrary. The attitude of the House Appropriations Committee early this year toward the Department of Labor's first supplemental budget was one of concern that the amount requested might not be enough, and so an additional $5 million was appropriated on its own initiative. In summary, then, the situation is this: (a) There is no existing relationship in law between the Federal 0.3 percent tax collection and appropriations to meet administrative costs of employment security programs. Congress is obligated to provide sums necessary for proper and efficient administration without reference to tax collections. The record does not reflect that congressional committees, in addressing themselves to the problem of providing the necessary funds, have evidenced the slightest interest in the amount of Federal tax collections. As a matter of fact, almost a billion dollars more in taxes has been collected than has been spent for administration of the program. If there is a contention that there is at least an implied relationship between revenue and disbursements, one could properly argue that the amount of excess collections prior to 1954 (approximately threequarters of a billion dollars) should be appropriated before additional taxes are imposed on payrolls for administrative purposes. (b) There is no basis for an assumption that the Congress will cut back administrative appropriations if FUTA revenues are not sufficient to meet costs. In fact, there are indications to the contrary. (2) The next question: Is there a need for a substantial contingency fund to meet unanticipated expenses (particularly during periods of increased unemployment), or for other reasons? (a) The Administrative Financing Committee of the Council was initially established for this specific purpose: "To develop legislation that will provide adequate Federal funds for the administration of the employment security program in periods of increased unemployment." Granting that the Congress will afford adequate administrative financing, there is still a problem of the timing of congressional appropriations. This problem arises primarily from the inability of the States and the Bureau to anticipate and make provision for normally high unemployment periods in the budgeting procedure. The States must make an estimate of their administrative cost needs some 14 to 16 months prior to the beginning of a fiscal year. Thus it is practically impossible in the budgeting process for the States to make estimates to be presented by the Department to the Congress which can reflect any appreciable recession that might lie in the offing. An attempt was made to meet this problem, in part at least, through an inclusion in the 1946 budget of a small contingency fund. This was to be made available to the States to meet unforseen expenses, such as increased costs in 3967859 curred by changes in law, salary adjustments not contemplated, and workloads in excess of budget estimates. This fund has been continued each year. However, there has been a rather marked conflict between the Labor Department and the Bureau of the Budget as to how and when the fund will be used, Further, the congressional committees have apparently for a number of years clearly provided the amount of the contingency fund by reducing the basic budget in a like amount, so that the contingency fund provides no “over and above" fund, but only the possibility of a more flexible use of a fraction of the basic budget estimate in meeting unanticipated expenses. (b) Another problem will come about if the recommendation of our committee that collections under the Federal Unemployment Tax Act be put in a separate account is accepted. If such a separate account is established, a surplus will have to be accumulated in the fund, or advances made to it each year, to meet administrative costs until Federal unemployment tax collections are made. This is because the employment security program is operated on a fiscal year basis (July 1 to June 30) while tax collections are made in January. A substantial contingency fund, with clear-cut ground rules for its use, might solve these problems, as it would: (a) Provide a quick and ready source for funds to cover unanticipated expenses, including those resulting from higher-than-expected unemployment, and (b) Provide a reserve from which annual advances could be made to the proposed separate administrative account until Federal taxes are collected. A PROPOSAL FOR A CONTINGENCY FUND It might be possible to scure an appropriation from past excesses to establish the proposed contingency fund. However, since the Council is recommending that an appropriation from past excesses be requested for loan purposes, it is felt that another source should be proposed for contingency fund purposes. Additional revenue for contingency fund purposes could be provided either by an increase in the 3 percent tax rate or in the $3,000 tax base. It is the employer representative's position that the additional money should be raised by an increase in the tax rate, with no change in the taxable wage base. The following specific proposal is recommended: Raise the Federal unemployment tax from 3 percent to 4 percent. Continue initially the 90 percent credit offset. The State standard rate would then become 3.6 percent; 0.4 percent going to the Federal Government. Divert oneforth of the tax collections brought in by the 0.4 percent into an administrative contingency fund. Continue this diversion for such lengths of time as would be necessary to establish a $250 million fund. After the establishment of this $250 million fund, reduce the Federal "take" (for the next calendar year) to 0.3 percent. However, continue the computation of the 90 percent offset credit on a 4 percent Federal tax basis. If, in any calendar year, the contingency fund falls below $150 million, the Federal "take" in the ensuing calendar year would be returned to 0.4 percent and be continued at this level until the fund again amounts to $250 million. The language making provision for this contingency fund should make it as clear as possible that the fund is for the specific purpose of providing funds to meet extraordinary and nonbudgeted costs of both Federal and State operations, over and above the basic budget; for example, the nonbudgeted costs during periods of increased unemployment. AN INCREASE IN THE TAX RATE VERSUS AN INCREASE IN THE TAXABLE WAGE BASE The committee unanimously concluded that each State is in the best position to determine for itself an appropriate method for financing benefits. It was with reference to administrative financing that the labor and public representatives recommended an increase in the taxable wage base. It must be recognized, however, that an increase in either the Federal tax base or the tax rate for administrative purposes has the practical effect of increasing the tax base or maximum tax rate under State laws for benefit financing purposes. It is the position of the employer representative that if the Secretary of Labor decides to ask the Congress to amend the Federal Unemployment Tax Act so as to provide additional revenue, an increase in the employer's tax rate of 3 percent should be proposed rather than an increase in the taxable wage base. It is the position of the labor representative and the public representative that an increase in the employer's tax base from the present $3,000 to $3,600 should be proposed, rather than an increase in the tax rate. The following is the employer representative's answer to the reasons advanced by the labor representative and the public representative in support of their recommended increase in the tax base. (1)It is the contention of the labor representative and public representative that an increase in the base would bring it more nearly in line with the 1939 provision for taxing 95 percent of total wages, and more nearly in line with the OASI tax base. It is true that the ratio of taxable wages to total wages is considerably lower now than in 1939; it is also true that there is considerable difference between the unemployment insurance tax base and the OASI tax base. These are facts, but have they any real significance? If so, what? 'With respect to equating the tax base for unemployment insurance and OASI, in 1956 the Council had this to say in its unanimous report: The "From a program standpoint, there is no sound rationale for equating the tax base for unemployment insurance and old-age and survivors insurance. programs are for different purposes. Unemployment insurance is a short-range program in which there need not be a connection between taxable wages and wages used for benefits; in a long-range program such as old-age and survivors insurance, there is more justification for using the same wage base for taxes and benefits since all taxable wages are used in determining benefits. Also, in OASI, there is no experience rating. Finally, under OASI there are employee contributions on the wages used to determine benefits." "While it would result in some simplification in reporting by employers to have an identical wage base for unemployment insurance and old-age and survivors insurance, the administrative savings would be relatively small and would be far outweighed by at least temporary increases in taxes for employers * With respect to the ratio of taxable wages to total wages, it is true that the gap has been widening each year. It is true that now only about 65 percent of current wages are taxed, instead of 95 percent. These are facts, but are they significant? Have they had an adverse effect on the program? Is there a basis for any general assumption that the original $3,000 base was correct since it comprehended 95 percent of total wages? Or, for the assumption that the 95 percent ratio between the wage base and total wages should be maintained through an adjustment of the present tax base in relation to total wages? 1 In order to reestablish the 1939 ratio of taxable wages to total wages, the tax base would have to be increased to $9,500. Further, if we are to accept the notion that the unemployment insurance tax base and OASI tax base should remain the same in relation to each other and in relation to total taxable wages, then the tax base for both unemployment insurance and OASI should be increased to $9,500. 1 It is noted that the labor representative and the public representative are not recommending an increase to $9,500, or to $4,800, or to $4,200-but to $3,600, on the basis that this does not represent a substantial step. Of course, an increase to $3,600 is not as substantial a step as an increase to $4,800 would be, but it is the position of the employer representative that even this less substantial step should not be taken if it is a step in the wrong direction-and one which will result in substantial inequities. (2) The public representative and labor representative, in supporting their position for a tax base increase, refer to a "regressive" relationship between taxes and wages. Say they, “Under the $3,000 tax base, employers at the maximum tax rate of 2.7 percent on taxable wages pay effective rates on total wages inversely proportional to the wage levels of their workers—a regressive relationship." The meaning of this regressive relationship appears to be that an employer at a 2.7 percent rate of $3,000 pays only 1.35 percent on total wages that average $6,000 per employee and 0.9 percent on total wages if they average $9,000 per employee. This is regressive in the sense that the higher the total wage, the smaller the tax rate in relation to total wages. But what has this to do with the problem at hand? Further, it is improper to apply this so-called regressive tax idea only to the 2.7 percent employer; the regressive feature extends throughout the rating schedule. For example, an employer having a 0.3 percent rate would be paying only 0.15 percent on $6,000 per employee payroll and 0.1 percent on a $9,000 per employee payroll; and any employer with a favorable experience rating will pay less in proportion to total wages than an employer with unfavorable experience. Technically, regressive taxation means a tax that decreases in rate as income and ability to pay increases. An income tax would be a regressive tax rather |