95-742 EPW
Updated June 8, 1998
CRS Report for Congress
Received through the CRS Web
Unemployment Benefits: Legislative Issues in the
105th Congress
James R. Storey
Specialist in Social Legislation
Education and Public Welfare
Summary
The authorization for Trade Adjustment Assistance (TAA) expires at the end of
FY1998. President Clinton will propose a 5-year extension of TAA that incorporates
several major program changes. Changes in the federal-state unemployment
compensation (UC) system may also be considered. One major issue, addressed by H.R.
3684 introduced by House Ways and Means Subcommittee Chairman Shaw, is whether
to shift some federal UC responsibilities and related funding to the states. The Clinton
Administration backs a proposal (H.R. 3697) to increase the availability of extended
benefits during recessions and expand coverage of workers with limited job tenure.
Background
The UC system, funded by both federal and state payroll taxes, pays benefits to
covered workers who become involuntarily unemployed for economic reasons and meet
state eligibility rules. Federally funded TAA extends UC benefits for workers displaced
by import competition and provides them with job training. Federal administration of UC
and TAA is under the U.S. Department of Labor (DoL). The UC system, established by
the Social Security Act of 1935 (P.L. 74-271), operates in each state, the District of
Columbia, Puerto Rico, and the Virgin Islands. Federal law sets rules that the 53 state
programs must follow and levies a payroll tax on employers under the Federal
Unemployment Tax Act (FUTA), but states set most of the rules for eligibility, benefits,
and financing, process the claims, and pay the benefits. The UC system helps counter
economic trends. When the economy grows, UC revenue rises and spending falls, thereby
slowing growth. In a recession, revenue falls and spending rises, stimulating the
economy. Benefits totaling $20.3 billion were paid to 7.5 million UC claimants in
FY1997.
Coverage. Federal law defines the jobs a state UC program must cover to avoid its
employers’ having to pay the maximum FUTA tax rate (6.2%) on the first $7,000 of each
employee’s annual pay. If a state complies with all federal rules, the net FUTA tax rate
Congressional Research Service ˜ The Library of Congress

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is only 0.8%. A state must cover jobs in firms that pay at least $1,500 in wages during
any calendar quarter or employ at least one worker in each of 20 weeks in the current or
prior year. The FUTA tax is not paid by governmental or nonprofit employers, but state
programs must cover government workers and all workers in nonprofits that employ at
least four workers in each of 20 weeks in the current or prior year.
Benefits. To receive UC, claimants must have enough recent earnings to meet their
state’s requirements. States usually disqualify claimants who lost their jobs because of:
inability to work or unavailability for work; voluntarily quitting without good cause;
discharge for job-related misconduct; refusal of suitable work without good cause; or a
labor dispute. Generally, benefits are based on wages in covered work over a 12-month
period. Most state benefit formulas replace half of a claimant’s average weekly wage up
to a weekly maximum. Maximums range from $133 (Puerto Rico) to $573
(Massachusetts, including dependents’ allowances). The average weekly benefit
nationwide was $185 in FY1997. Benefits are available for up to 26 weeks (30 weeks in
Massachusetts and Washington). The average benefit duration in FY1997 was 14.6
weeks. A federal-state extended benefits (EB) program offers benefits for an additional
13 to 20 weeks in states with unemployment rates above certain threshold levels.
The TAA program can extend UC benefits for up to 26 weeks, or for up to 52 weeks
for claimants who are in approved job training. TAA claimants eligible for the North
American Free Trade Agreement Transitional Adjustment Assistance Program (NAFTA-
TAAP) cannot receive benefits unless enrolled in training. Other TAA claimants are
required to enroll in training unless the requirement is waived by the Secretary of Labor.
Financing. The 0.8% FUTA tax funds federal and state administration, the federal
share of EB, loans to insolvent state UC accounts, and state employment services. States
levy their own payroll taxes to fund UC benefits. State ceilings on taxable wages range
from the $7,000 FUTA ceiling (12 states) up to $26,400 (Hawaii). State UC tax rates are
experience-rated. (Employers generating the fewest claimants have the lowest rates.)
State tax rates averaged 2.3% of taxable wages and 0.8% of total wages in FY1997.
State UC revenue is deposited with the U.S. Treasury and counts as federal revenue
in the budget. State Unemployment Trust Fund accounts are credited for this revenue.
These credits allow Treasury to reimburse states for their benefit payments without annual
appropriations. These reimbursements count as federal budget outlays. If a state trust
fund account becomes insolvent, the state may borrow federal funds. Unemployment
Trust Fund revenue has exceeded outlays each year since FY1995 (Table 1).
Although considered an entitlement, TAA is funded through annual appropriations.
Funding levels for FY1998 are: TAA cash benefits, $208 million; TAA training, $97
million; NAFTA-TAAP cash benefits, $22 million; NAFTA-TAAP training, $22 million.
Legislative Issues in the 105 Congress
th
Reauthorization of Trade Adjustment Assistance

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The authorization for TAA expires after FY1998. A bill (H.R. 2621) reported by the
House Ways and Means Committee to restore “fast-track” authority for congressional
approval of trade agreements would extend TAA unchanged through FY2000.
Table 1. Revenue and Spending Associated With Unemployment
Compensation, FY1992-FY1998 (in billions of dollars)
1992
1993
1994
1995
1996
1997
1998
UC revenue, total
23.0
25.2
28.0
28.9
28.5
28.2
27.8
FUTA tax
5.4
4.2
5.5
5.7
5.8
6.1
6.2
State UC taxes
17.6
21.0
22.5
23.2
22.7
22.1
21.6
UC outlays, total
40.4
38.9
29.7
24.6
25.6
23.8
23.2
Regular benefits
25.6
21.9
21.7
20.9
22.0
20.3
19.6
EB
*
0
0.3
0.1
*
*
*
Emergency UC
11.1
13.2
4.2
*
(*)
(*)
—
Administration
3.7
3.8
3.5
3.6
3.6
3.5
3.6
Source: U.S. Dept. of Labor. UI Outlook: Midsession Review of the 1999 Budget, May 1998.
*Less than $50 million.
President Clinton has proposed a 5-year TAA extension with certain changes in the
program. He would extend TAA eligibility to workers left jobless because of plant
relocation to any other country. Currently, plant relocation triggers eligibility only under
NAFTA-TAAP when a plant is moved to Canada or Mexico. He also would raise the cap
on funds for TAA training and make the TAA training requirement the same as for
NAFTA-TAAP. (For further discussion, see CRS Issue Brief 98023, Trade Adjustment
Assistance: Proposals for Renewal and Reform, by James R. Storey.)
Administration Proposals to Reform Unemployment Compensation
The Clinton Administration has submitted legislation, introduced by Representatives
Levin, English, and Rangel (H.R. 3697), that would: offer states financial aid to
implement use of a more current wage base for benefit determination; require that the EB
eligibility trigger be based on a state’s total unemployment rate instead of the insured
unemployment rate most states now use; set a target for states to meet in funding benefit
costs; and increase federal funding for state UC administration.
A budget proposal would speed up collection of UC taxes. Employers generally pay
federal and state UC taxes quarterly. The President proposes that these taxes be paid
monthly by firms with more than 20 employees, effective in 2003, arguing that faster
collection would reduce tax delinquency. Opponents claim that added administrative
costs would be imposed on employers solely to realize a one-time gain in federal revenue.
Proposals to Reduce the Federal Role in the Unemployment
Compensation System

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Some states urge a “devolution” (turning over) of FUTA revenue to them. They
argue that the redistribution of FUTA revenue by DoL away from states where FUTA
revenue is high relative to UC administrative costs is unfair. They also argue that
Congress holds back FUTA funds to reduce budget outlays, that states could collect
FUTA revenue at less cost, and that state control of administrative funding would provide
more flexibility to meet local needs. Opponents fear that devolution might weaken state
administration and threaten EB funding. The impact on the federal budget is also an
issue. (For further discussion, see CRS Report 97-369, Unemployment Compensation:
Proposals to Reduce the Federal Role, by James R. Storey.)
Representative Shaw, Chairman of the House Ways and Means Subcommittee on
Human Resources, has introduced H.R. 3684 to address these issues. His bill calls for
state collection of the FUTA tax and would give states control over setting spending
levels for UC administration. Funding would come from their own tax revenue,
supplemented by federal grants in the smallest states. States would be required to
continue offering the EB program during economic downturns. This bill has broad
support from state organizations. A hearing on the bill is expected.
Other Pending Unemployment Compensation Issues
Offsetting Benefits from Multiemployer Pension Plans. Since 1980, federal law
has forced states to offset certain pension income against a claimant’s UC benefits. This
law results in a disparate treatment of pensioners whose benefits come from
multiemployer pension plans versus single employer plans. If a retiree under a
multiemployer plan returns to work for a different employer under the same plan, then
loses that job and applies for UC, the state must offset the entire pension against any UC
benefit claimed, even though only a small part of it resulted from the last job. However,
a pensioner who returns to work for a new employer under a single-employer plan has
only the pension from the most recent job offset against any claimed UC benefit. Bills
introduced by Representative English (H.R. 841) and Senator Hatch (S. 1123) would alter
this law for claimants in the entertainment industry, a group that is often affected by this
pension offset.
Status of Indian Tribal Governments Under UC. There is confusion in the UC
system over the status of Indian tribal governments. Some have been treated like private
firms and made subject to the FUTA tax, while others have been treated as state
governments or nonprofit agencies and exempted from FUTA. H.R. 294, offered by
Representative Shadegg, would treat tribal governments like other governments.
Extension of UC Self-employment Program. Senator Wyden (S. 897) and
Representative English (H.R. 3773) propose that authority granted states in 1993 to pay
UC benefits to claimants while they start new businesses be made permanent. Without
this authority, which expires in November 1998, states will have to require that such
claimants seek new jobs and accept job offers.
Exclusion of Trust Funds from the Federal Budget. Senator Hollings has
proposed (in S. 1588) to exclude trust funds from the budget figures Congress uses to
determine if spending and revenue legislation comply with limits imposed by the
congressional budget process. Although the Unemployment Trust Fund is intended to
accumulate spending authority for drawdown during recessions, legislated increases in

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UC benefits count under the budget rules as new spending that must be offset by spending
cuts or tax increases unless Congress waives the budget limits. If trust funds were
removed from budget accounting, the financing of UC legislation would be judged by the
status of the Unemployment Trust Fund, not by other spending and tax priorities.
However, its removal would have increased federal budget deficits in recent years.
Tobacco Worker Transition Assistance. A Senate-passed bill (S. 1415) to regulate
the production and marketing of tobacco products includes a provision to aid tobacco
industry workers made jobless because of these regulations. Cash benefits and job
retraining would be offered on the same basis as under the TAA program, with annual
dollar ceilings on spending of $25 million on cash benefits and $12.5 million on training.
Unemployment Compensation Changes in P.L. 105-33 and P.L. 105-34
Legislation enacted in 1997 to implement a bipartisan balanced budget agreement
(P.L. 105-33, P.L. 105-34) included the UC provisions described below.
The Pennington Decision. A federal court in Pennington v. Doherty1 overturned
an Illinois UC eligibility rule that, if applied nationally, would add to the cost of most
state UC programs. The case concerns how states determine claimants’ wage histories.
Illinois and most states count covered wages in the first 4 of the last 5 completed calendar
quarters to determine if a claimant meets the state’s wage threshold for eligibility. The
plaintiff argued that an alternative base period (the last 4 completed quarters) used by
several states could be used by Illinois and would help many claimants. The court agreed
that use of the last 4 quarters was feasible and would better execute federal law, which
requires states to employ methods to ensure full payment of UC “when due.” Illinois
argues that the court has broadened the scope of the “when due” clause beyond
congressional intent. An Urban Institute analysis by Wayne Vroman of six states that
now use alternative base periods found that use of the 4 most recently completed quarters
increased eligibility by 6% to 8% and benefit costs by 4% to 6%. The newly eligible
claimants were mainly low-wage, part-time, and intermittent workers. The balanced
budget bill revised federal law so that state base period procedures need not be changed.
This provision will reduce the federal budget deficit by $37 million over FY1998-
FY2002. S. 1126 introduced by Senator Boxer proposes repeal of this enacted provision.
FUTA Surtax Extension. Though the net FUTA tax rate is 0.8%, the permanent
rate is only 0.6% (Table 2). The 0.2% “surtax” was adopted in 1976 to repay loans made
to the Unemployment Trust Fund during the 1974 recession. That debt was paid off in
1987, but Congress extended the surtax in 1987, 1990, 1991, and 1993. While the added
revenue raised trust fund balances, the main reason for the extensions was to offset costs
of new spending for unrelated programs. Budget rules force pay-as-you-go funding of
legislated hikes in entitlement spending and tax cuts.
Employers argue that the need for this surtax, which had been set to expire in
January 1999, has vanished. President Clinton, on the other hand, proposed its extension
through 2007 to anticipate the demands of the next recession. Extension, coupled with
1 U.S. District Court for the Northern District of Illinois, No. 85 C 6327, February 1, 1996.

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changes in certain account ceilings, will increase federal revenue by $6.4 billion for
FY1998-FY2002. The bipartisan budget agreement included the FUTA surtax extension.
State Funding. The balance in the trust fund account for UC administration at the
end of a fiscal year is transferred to other accounts to the extent that it exceeds 40% of the
prior year’s appropriation for administration. Because states have complained that they
need these “excess” funds to operate their programs effectively, the budget bill earmarked
$100 million of funds that otherwise would be transferred and required that it be
distributed to the states in the same proportion as each state’s share of the appropriation
for administration. The budget bill also authorized appropriations over 5 years ($89
million in FY1998) for “program integrity activities” such as claims review and employer
tax audits to assist state efforts to reduce administrative error and fraud.
Table 2. FUTA Tax Rates and Taxable Wage Ceilings
Calendar
Net tax
Taxable
Calendar
Net tax
Taxable
years
rate (%)
wage ceiling
years
rate (%)
wage ceiling
1937-1939
0.3
none
1972
0.5
$4,200
1940-1960
0.3
$3,000
1973
0.58
4,200
1961
0.4
3,000
1974-1976
0.5
4,200
1962
0.8
3,000
1977
0.7
4,200
1963
0.65
3,000
1978-1982
0.7
6,000
1964-1969
0.4
3,000
1983-2007
0.8
7,000
1970-1971
0.5
3,000
2008 & later
0.6
7,000
The Federal Unemployment Account, a trust fund account that finances federal loans
to insolvent state UC benefit accounts, had a ceiling equal to 0.25% of annual wages in
covered employment. The budget bill raised that ceiling to 0.5% starting in FY2002.
Without this change, excess funds would have “spilled over” into state benefit accounts,
thereby increasing net federal spending in FY2003 and thereafter.
The new law encourages higher state trust fund account balances. States can receive
interest-bearing loans from federal funds if their account reserves are depleted. They will
now be eligible for interest-free federal advances if they meet a funding goal set by DoL.
Coverage. States must cover their government employees under UC, with certain
exceptions. The 1997 budget law allows states a new exception for election workers.
States already could exclude from UC coverage wages earned by inmates in penal
institutions. The new law requires exclusion as well of outside earnings by inmates in
work-release programs, to avoid creating UC entitlements for inmates upon discharge
from prison. The FUTA exemption for organizations controlled by religious groups was
extended to schools that are religious in nature but under lay control.

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