Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

October 11, 2015

Get Rid of Regressive Payroll Taxes

The Great Recession is now a full six years behind us, but many of its effects continue to linger. One of these is in the way we pay unemployment compensation taxes, which is one of the most regressive tax burdens borne by low-income workers. To understand this, you must first comprehend one of the most byzantine federal tax programs ever devised. Let me try to explain.

The slide into the Great Recession caused well more than half of states to borrow from the federal government to help pay unemployment claims. This debt is supposed to be paid back as the economy recovers. Indiana will be able to pay off that debt sometime next year, but there is a catch.

Businesses are levied a tax to pay off this debt, but each year the state owes a balance to the federal government causes the businesses in a state to face an escalating tax. The tax grows by 0.3 percent annually and so in 2015 it is already large. The extra tax stops once the amount is paid off, but there’s another catch.

Businesses pay these federal taxes, which are different from the state unemployment taxes most of us are familiar with. The federal tax levies a flat rate on the first $7,000 earned by each new employee, each year. The state tax levies a tax based upon an insurance-like formula to collect money from firms that are more likely to lay off workers. Firms that rarely lay-off workers pay much lower rates. That means the federal tax has two problems the state taxes don’t.

Though businesses pay the tax administratively, it is the workers, not the businesses, who actually bear most of the burden of this tax through lower wages or fewer working hours. This is called the ‘incidence’ of taxation. The reason for this is that the state tax is levied more heavily on firms that frequently lay-off workers, and these businesses tend to have a more specialized, better-compensated labor force. That makes them less likely to get stuck with the cost of the tax, and more likely to benefit from it down the road. But that isn’t the only problem; the tax is unfair in more fundamental ways.

The federal unemployment tax is a flat tax on the first $7,000 of income. So, a retail worker making $10 an hour pays twice the share of his income as a manufacturing worker who makes $20 an hour. So, the federal unemployment tax is a terribly regressive tax, but there is more. Because the tax is charged to each new worker, anyone who changes jobs pays it twice in a year. That is almost always lower-wage workers.

Indiana can end this federal tax in 2015 by paying off the debt early with general fund reserves. We’ll still have to build up our unemployment trust fund reserves. But, by my estimate, paying off this debt early will add something like 5,100 jobs and $220 million of Hoosier incomes in 2016. More importantly, it’ll eliminate one of the most regressive taxes now facing low-income workers in Indiana.

Link to this commentary: https://commentaries.cberdata.org/807/get-rid-of-regressive-payroll-taxes

Tags: taxes, jobs and employment


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close