[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
UNEMPLOYMENT INSURANCE ISSUES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HUMAN RESOURCES
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
APRIL 24, 1997
__________
Serial 105-42
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERMENT PRINTING OFFICE
50-099 cc WASHINGTON : 1998
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Human Resources
E. CLAY SHAW, Jr., Florida, Chairman
DAVE CAMP, Michigan SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana FORTNEY PETE STARK, California
MAC COLLINS, Georgia ROBERT T. MATSUI, California
PHILIP S. ENGLISH, Pennsylvania WILLIAM J. COYNE, Pennsylvania
JOHN ENSIGN, Nevada WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona
WES WATKINS, Oklahoma
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of April 17, 1997, announcing the hearing............... 2
______
WITNESSES
American Federation of Labor and Congress of Industrial
Organization, Jonathan Hiatt................................... 70
American Trucking Associations, Kenneth Simonson................. 37
Association of Christian Schools International, William Bentley
Ball........................................................... 96
California Health and Welfare Agency, Thomas P. Nagle............ 92
Doherty, Lynn Quigley, Illinois Department of Employment
Security, and State of Illinois................................ 60
English, Hon. Phil, a Representative in Congress from the State
of Pennsylvania................................................ 9
Farr, Hon. Sam, a Representative in Congress from the State of
California..................................................... 14
Georgia Department of Labor, David B. Poythress.................. 22
Gilbert, Gay, Ohio Bureau of Employment Services, and Interstate
Conference of Employment Security Agencies..................... 66
Hiatt, Jonathan, American Federation of Labor and Congress of
Industrial Organization........................................ 70
Illinois Department of Employment Security, and State of
Illinois, Lynn Quigley Doherty................................. 60
Interstate Conference of Employment Security Agencies, Gay
Gilbert........................................................ 66
Masur, Richard, Screen Actors Guild.............................. 98
Miller, Albert R., Phoenix Closures, Inc......................... 76
Nagle, Thomas P., California Health and Welfare Agency........... 92
Norwood, Janet L., Urban Institute............................... 45
Ohio Bureau of Employment Services, Gay Gilbert.................. 66
Oxfeld, Eric J., UBA, Inc........................................ 25
Peterson, Hon. Collin, a Representative in Congress from the
State of Minnesota............................................. 85
Phoenix Closures, Inc., Albert R. Miller......................... 76
Poythress, David B., Georgia Department of Labor................. 22
Red Lake Band of Chippewa Indians, Bobby Whitefeather............ 86
Screen Actors Guild, Richard Masur............................... 98
Shadegg, Hon. John, a Representative in Congress from the State
of Arizona..................................................... 15
Simonson, Kenneth, American Trucking Associations................ 37
Thomas, Hon. Bill, a Representative in Congress from the State of
California..................................................... 7
UBA, Inc., Eric J. Oxfeld........................................ 25
Upton, Hon. Fred, a Representative in Congress from the State of
Michigan....................................................... 12
Whitefeather, Bobby, Red Lake Band of Chippewa Indians........... 86
Wilson, Mark, Heritage Foundation................................ 30
SUBMISSIONS FOR THE RECORD
Allen, W. Ron, National Congress of American Indians, statement
and attachment................................................. 138
American Legislative Exchange Council, Duane Parde, statement and
attachment..................................................... 124
American Society for Payroll Management, New York, NY, Clark G.
Case, letter................................................... 127
Anderson, Marge, Mille Lacs Band of Ojibwe Indians, Onamia, MN,
statement...................................................... 135
California Correctional Peace Officers Association, West
Sacramento, CA, Don Novey, statement........................... 128
Case, Clark G., American Society for Payroll Management, New
York, NY, letter............................................... 127
Coalition on Human Needs, Jennifer A. Vasiloff, statement........ 129
Crooks, Hon. Stanley, Shakopee Mdewakanton Sioux (Dakota)
Community, Prior Lake, MN, statement and attachments........... 179
Eastern Band of Cherokee Indians, Cherokee, NY, statement........ 130
Echohawk, John E., Native American Rights Fund, statement and
attachment..................................................... 144
Fond du Lac Band of Lake Superior Chippewa Indians, Cloquet, MN,
Robert B. Peacock, statement and attachments................... 132
Knight-Frank, Judy, and Clement J. Frost, Ute Mountain Ute Indian
Tribe, Towaoc, CO, and Southern Ute Indian Tribe, Ignacio, CO,
joint statement................................................ 187
Mille Lacs Band of Ojibwe Indians, Onamia, MN, Marge Anderson,
statement...................................................... 135
National Congress of American Indians, W. Ron Allen, statement
and attachment................................................. 138
Native American Rights Fund, John E. Echohawk, statement and
attachment..................................................... 144
Navajo Nation, statement......................................... 142
New Hampshire, State of, Department of Employment Security,
Concord, NH, Joseph Weisenburger, statement.................... 150
Novey, Don, California Correctional Peace Officers Association,
West Sacramento, CA, statement................................. 128
Ohio State, Hon. George V. Voinovich, Governor, statement and
attachment..................................................... 152
Parde, Duane, American Legislative Exchange Council, statement
and attachment................................................. 124
Peacock, Robert B., Fond du Lac Band of Lake Superior Chippewa
Indians, Cloquet, MN, statement and attachment................. 132
Pennington, Luella, Chicago, IL, statement....................... 173
Shakopee Mdewakanton Sioux Community, Prior Lake, MN, Hon.
Stanley Crooks, statement and attachments...................... 179
Sheridan, Mike, Texas Workforce Commission, Austin, TX, letter
and attachments................................................ 187
Southern Ute Indian Tribe, Ignacio, CO, Judy Knight-Frank, and
Clement J. Frost, joint statement.............................. 187
Texas Workforce Commission, Austin, TX, Mike Sheridan, letter and
attachments.................................................... 187
Ute Mountain Ute Indian Tribe, Towaoc, CO, Judy Knight-Frank, and
Clement J. Frost, joint statement (see listing under Knight-
Frank, Judy)................................................... 187
Vasiloff, Jennifer A., Coalition on Human Needs, statement....... 129
Voinovich, George V., Governor of Ohio, statement and attachment. 152
Weisenburger, Joseph, New Hampshire Department of Employment
Security, Concord, NH, statement............................... 150
UNEMPLOYMENT INSURANCE ISSUES
----------
THURSDAY, APRIL 24, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:35 a.m., in
room B-318, Rayburn House Office Building, Hon. E. Clay Shaw,
Jr. (Chairman of the Subcommittee), presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
April 17, 1997
No. HR-6
Shaw Announces Hearing on
Unemployment Insurance Issues
Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on
Human Resources of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on certain unemployment
insurance issues. The hearing will take place on Thursday, April 24,
1997, in room B-318 Rayburn House Office Building, beginning at 10:30
a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include State unemployment insurance directors,
employers, and other experts on unemployment insurance issues. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee or for
inclusion in the printed record of the hearing.
BACKGROUND:
The Federal-State unemployment insurance (UI) system is designed to
provide temporary benefits to individuals with a recent work history
who become involuntarily unemployed. Federal taxes generally support
the administrative expenses of the system, with State taxes supporting
benefits. Increased skepticism about the efficiency of the system, and
especially its administration, have been cited in calls by States and
employers for reform.
The Subcommittee is interested in various proposals to reform the
administrative financing of the system. One proposal, supported by nine
States (Kentucky, New Hampshire, Ohio, Georgia, Missouri, Virginia,
Texas, Mississippi, and Oklahoma) would allow States to collect all
taxes needed to pay for both administration and benefits (although the
Federal Government would continue to set the level of tax that pays for
administration). Another proposal would end the Federal tax and replace
it with a State-set tax supporting administration. Both would allow the
0.2 percent Federal surtax, currently authorized through December 31,
1998, to expire. Proponents argue that allowing States greater
authority to collect administrative funds would lead to lower payroll
taxes, reduced business paperwork, and improved efficiency in labor
markets across the country. While no pertinent bill has been introduced
in the current Congress, the Subcommittee is interested in suggestions
for change that promise increased employment and business growth while
preserving the principles of the current unemployment insurance system.
A second major area of interest involves State flexibility in
administering the UI system. In determining whether a worker's
employment record is sufficient to warrant benefits, 47 States consider
only wages earned over 4 of the last 5 completed calendar quarters
(called the worker's ``base period''). A few States also consider the
worker's eligibility under an ``alternative base period,'' increasing
the likelihood that these workers will qualify for benefits. A recent
Illinois Federal court decision (Pennington v. Doherty) called into
question what formerly was assumed by States--that the Social Security
Act provides States with the authority to select their own base period,
which need not include the use of an alternative base period. If every
State were required to use an alternative base period, as the
Pennington decision foreshadows, the consequences could be significant
in terms of higher benefit payments and higher payroll taxes.
In announcing the hearing, Chairman Shaw stated: ``Keeping the
unemployment insurance system operating smoothly and efficiently is
important to employees, employers, and the U.S. economy. This hearing
is part of our ongoing efforts to ensure that the current system is
working well and to explore ways of making it even better in the
future.''
FOCUS OF THE HEARING:
The hearing will focus on two main issues. First, the Subcommittee
will consider testimony on administrative financing reform proposals
that would allow greater State control in collecting taxes and
administering unemployment insurance programs. Second, witnesses will
discuss the implications of the Pennington case, a Federal court
decision that has drawn into question whether States have full
authority to set base periods used in determining eligibility for
unemployment insurance benefits. In addition, other witnesses will
discuss the way the UI system affects prisoners, Native Americans,
actors and poll workers, and others.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit at least six (6)
copies of their statement and a 3.5-inch diskette in WordPerfect or
ASCII format, with their address and date of hearing noted, by the
close of business, Thursday, May 8, 1997, to A.L. Singleton, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515. If those
filing written statements wish to have their statements distributed to
the press and interested public at the hearing, they may deliver 200
additional copies for this purpose to the Subcommittee on Human
Resources office, room B-317 Rayburn House Office Building, at least
one hour before the hearing begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be typed in single space on legal-size paper and may not exceed a total
of 10 pages including attachments. At the same time written statements
are submitted to the Committee, witnesses are now requested to submit
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, full address, a telephone number where the witness or the
designated representative may be reached and a topical outline or
summary of the comments and recommendations in the full statement. This
supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-225-1904 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Shaw. If everybody could take their seats we will
proceed.
Keeping the UI, unemployment insurance, system operating
smoothly and efficiently is important to more than a hundred
million employees, to millions of employers, and to the
strength and vitality of the U.S. economy.
In keeping with the Subcommittee's oversight of
unemployment insurance, this hearing has three goals: One, to
consider long-term changes to improve the system in years to
come; two, to examine steps Congress must take in the coming
months to keep the system running efficiently; and, three, to
hear about a variety of proposals to improve the individual
components of the system.
We have a distinguished panel of Members to lead off our
hearing, who will testify about a range of issues, including
the treatment of Indians, actors, poll workers and prisoners
under the current system.
After we hear from Members, our first panel will examine
proposals designed to increase State flexibility in operating
their unemployment insurance system. Bipartisan proponents
argue that reforms can lead to lower payroll taxes, less
paperwork, and improved efficiency in labor markets across the
country.
Significantly, nine States and employer groups led by UBA,
Inc., have come together to support a detailed reform proposal,
and the Subcommittee is eager to hear about this and other
proposals to strengthen the UI system.
It is my hope to draft legislation, hold a hearing on the
bill, and to proceed to markup on a reform proposal that
features the type of changes we will hear about today.
Our second panel involves an issue that demands our
immediate attention. Since its inception in the thirties, there
has been universal agreement that States have the right to set
base periods used to determine eligibility for unemployment
insurance benefits. Until now. A Federal court decision in
Illinois in the Pennington case means that more than 40 States
now face a possibility of being forced to adopt a new, more
liberal standard for determining eligibility for unemployment
benefits.
Unless Congress acts quickly, almost every State will be
forced to pay higher unemployment insurance benefits, resulting
in more redtape, higher taxes on employers, and less job
creation. Overall, added cost could reach as high as $1 billion
each year.
For our final panel, expert witnesses will present further
testimony about several issues that Members have raised.
Unfortunately, Charlton Heston could not join us again, which
means that we will have been spared the deluge of bad puns that
everyone had to endure at our last hearing on this particular
topic. Probably all for the best, so those of you who are
waiting to see Charlton Heston, I apologize, but he will not be
with us this morning.
[The opening statement follows:]
Opening Statement of Hon. E. Clay Shaw, Jr.
Keeping the unemployment insurance system operating
smoothly and efficiently is important to more than 100 million
employees, to millions of employers, and to the strength and
vitality of the U.S. economy. In keeping with this
Subcommittee's oversight of unemployment insurance, this
hearing has three goals: (1) to consider long-term changes to
improve the system in years to come; (2) to examine steps
Congress must take in the coming months to keep the system
running efficiently; and (3) to hear about a variety of
proposals to improve individual components of the system.
We have a distinguished panel of Members to lead off our
hearing, who will testify about a range of issues including the
treatment of Indians, actors, poll workers, and prisoners under
the current system.
After we hear from Members, our first panel will examine
proposals designed to increase state flexibility in operating
their unemployment insurance systems. Bipartisan proponents
argue that reforms can lead to lower payroll taxes, less
paperwork, and improved efficiency in labor markets across the
country. Significantly, nine States and employer groups led by
UBA have come together to support a detailed reform proposal,
and the Subcommittee is eager to hear about this and other
proposals to strengthen the UI system. It is my hope to draft
legislation, hold a hearing on the bill, and proceed to markup
on a reform proposal that features the type of changes we will
hear about today.
Our second panel involves an issue that demands immediate
attention. Since its inception in the 1930s, there has been
universal agreement that States have the right to set base
periods used to determine eligibility for unemployment
benefits. Until now. A federal court decision in Illinois in
the ``Pennington case'' means that more than 40 States now face
the possibility of being forced to adopt a new, more liberal
standard for determining eligibility for unemployment benefits.
Unless Congress acts quickly, almost every State will be forced
to pay higher unemployment insurance benefits resulting in more
red tape, higher taxes on employers, and less job creation.
Overall, added costs could reach as high as $1 billion each
year.
On our final panel, expert witnesses will present further
testimony about several issues Members raised earlier.
Chairman Shaw. Sandy, do you have an opening statement?
Mr. Levin. Yes, I do.
But I think other very charismatic people are here, so no
one should leave.
Mr. Chairman, I want to begin by thanking you for
scheduling this hearing. As we discuss the proposals on
administration financing reform and on the Pennington case that
are the stated focus of this hearing, I would strongly urge
that we keep in mind the overall features of the unemployment
insurance system so that we do not lose sight of the forest for
the trees.
First, unemployment is a national problem. The unemployment
insurance system was designed as a Federal-State partnership,
and we must maintain the basic structure of shared
responsibility and oversight between the Federal Government and
the States.
Unemployment hits regions of our country at different times
and to different degrees. People move from State to State
seeking new employment. It is a national priority to support
these individuals and assist in their transition to new
employment.
Second, fewer and fewer workers are qualifying for
unemployment benefits. This is especially true of low-wage
workers, even those who have a strong attachment to the labor
force, and the increasing proportion of our work force engaged
in part-time or temporary employment also experiences great
difficulty in obtaining income support and employment services
through the UI system.
Finally, more and more workers are facing permanent
dislocation. The rate at which unemployed workers exhaust
benefits has climbed steadily since 1945. Conversely, the
percent of individuals losing their jobs on a temporary basis
has fallen substantially since 1965.
Almost one-half of those workers permanently displaced from
their jobs end up making less than 80 percent of their prior
income or not finding employment at all. We must do a better
job of assisting these workers in their search for new skills
and new employment.
I recognize that our method of allocating administrative
funds is frustrating to the States and the employers who pay
these taxes. There ought to be ways of addressing these issues
on a bipartisan basis.
In approaching the issue, we should give due consideration
to the fact that the current allocations take workload and,
therefore, recipiency rates into account. The Federal taxable
wage base has not kept pace with wage growth in the economy.
And we should address the shortcomings of the extended benefits
program designed to fill in during tough economic times, which
nearly every expert agrees doesn't work.
But these issues cannot be considered in a vacuum. We must
reexamine the initial purpose of the unemployment insurance
system as a whole within the context of our rapidly changing
economy. Is the system still able to meet the goals of
providing temporary wage replacement to unemployed workers with
a labor force attachment?
Is the system still able to provide for the stabilization
of the economy? Until the UI system addresses the needs of
unemployed workers with a labor force attachment, including the
reemployment needs of the permanently displaced, I would argue
that we are failing to achieve the legitimate goals of the
system.
We cannot afford to do all that some would like, but we
should try to find some things we can all support. I look
forward, Mr. Chairman, to addressing these important issues
with you on a bipartisan basis.
[The opening statement follows:]
Opening Statement of Hon. Sander M. Levin
Mr. Chairman, I want to begin by thanking you for
scheduling this hearing. As we discuss the proposals on
administrative financing reform and on the Pennington case that
are the stated focus of this hearing, I would strongly urge
that we keep in mind the overall features of the unemployment
insurance system so that we do not lose sight of the forest for
the trees.
First, unemployment is a national problem. The
unemployment insurance system was designed as a federal-state
partnership, and we must maintain the basic structure of shared
responsibility and oversight between the federal government and
the states. Unemployment hits regions of our country at
different times and to different degrees--people move from
state-to-state seeking new employment. It is a national
priority to support these individuals and assist in their
transition to new employment.
Second, fewer workers are qualifying for
unemployment benefits. This is especially true of low-wage
workers, even those who have a strong attachment to the labor
force. The increasing proportion of our workforce engaged in
part-time or temporary employment also experiences great
difficulty in obtaining income support and employment services
through the UI system.
Finally, more and more workers are facing
permanent dislocation. The rate at which unemployed workers
exhaust benefits has climbed steadily since 1945; conversely,
the percent of individuals losing their jobs on a temporary
basis has fallen substantially since 1965. Almost half of those
workers permanently displaced from their jobs end up making
less than 80% of their prior income or not finding employment
at all. We must do a better job of assisting these workers in
their search for new skills and new employment.
Now, I recognize that our method of allocating
administrative funds is frustrating to the states and the
employers who pay these taxes. There ought to be ways of
addressing these issues on a bipartisan basis. In approaching
the issue, we should give due consideration to the fact that
current allocations take workload, and therefore recipiency
rates, into account, and that the federal taxable wage base has
not kept pace with wage growth in the economy. And we should
address the shortcomings of the extended benefits program--
designed to fill in during tough economic times--which nearly
every expert agrees doesn't work.
But these issues cannot be considered in a vacuum. We must
re-examine the initial purpose of the unemployment insurance
system as a whole within the context of our rapidly changing
economy. Is the system still able to meet the goals of
providing temporary wage replacement to unemployed workers with
a labor force attachment? Is the system still able to provide
for the stabilization of the economy?
Until the UI system addresses the needs of unemployed
workers with a labor force attachment, including the
reemployment needs of the permanently displaced, I would argue
that we are failing to achieve the legitimate goals of the
system. We cannot afford to do all that some would like, but we
should try to find some things that all can support. I look
forward to addressing these important issues with you on a
bipartisan basis.
Chairman Shaw. Thank you, Mr. Levin.
We have our panel of members. I see Mr. Farr is not with us
yet, but he hopefully will be joining us. We will lead off with
two Members of our Committee, a senior Member, Mr. Bill Thomas,
and Phil English, who is not only a Member of the Full
Committee, but also of this Subcommittee; Fred Upton from
Michigan; and John Shadegg from Arizona.
We're pleased to have you gentlemen with us. As usual we
have your full statement which will be made a part of the
record. You may feel free to summarize as you might wish.
Mr. Thomas.
STATEMENT OF HON. BILL THOMAS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Mr. Thomas. Thank you very much, Mr. Chairman. It's a
pleasure to be with you to discuss a bill that I have, H.R.
562, and there are several others that I would like to mention
at the end of my statement as well. I would tell my friend from
Michigan that I think a mobile labor force indeed argues for a
national labor policy.
But my bill, and perhaps several others, will, I think,
focus on some anomalies that when States make judgments that
for themselves seem prudent, and you have a national labor law,
oftentimes there are some catch-22 situations. And I would like
to address what I believe to be one of those in the bill that I
have offered which would correct the problem.
California voters established what was called a joint
venture program in 1990. It was a work program for inmates
incorporating private contractors and other folks. The wages
that the prisoners were to earn were to be used for a number of
purposes, among them, to compensate victims, to offset
incarceration costs, and then some set-aside funds--about 20
percent--so that when they're released from prison they would
have some money available for them.
Because of the mix with Federal labor law, the Department
of Labor said that you can deny unemployment benefits in only
three instances. One, if a worker's income exceeds certain
limits; two, if the claim is fraudulent; or, three, the
employee was fired for misconduct.
Well, the reason the prisoners lost the jobs under this
program was because they left prison. And the Department of
Labor argued that these prisoners then deserved unemployment
compensation at the time they left prison, because it didn't
meet any of the three Federal requirements for not giving them
unemployment compensation.
The people of the State of California passed last year
Proposition 194, which was an initiative on the ballot that
said we want to deny unemployment compensation upon release of
these prisoners who were in a program that we otherwise think
is a good program. This created a situation which I hope will
be resolved with the Committee and the Congress in the signing
into law of H.R. 562, because all this does is basically say,
that the conundrum that the States are now in would be
resolved.
H.R. 562 changes the law to treat all prison inmates who
participate in work programs the same. Their services would be
exempt from the FUTA tax, and that you don't get into this
anomaly because it's a private structure which we happen to
think provides job opportunities that enhance the chances of
the prisoner once they leave prison, that when they leave
prison, because they're in that program, they deserve
unemployment compensation.
That's the sum and substance of H.R. 562, Mr. Chairman, and
if I might just very briefly, as Chairman of House Oversight
that oversees all Federal election laws, this deals with
another anomaly between Federal law and States.
The gentleman from Michigan and the gentleman from
California have H.R. 961, and I would like to speak very
briefly in favor of the idea of not allowing poll workers who
are designated to have a job for 1 day out of the year to be
eligible for unemployment compensation, and I would underscore
our friend from Illinois, Mr. Crane's H.R. 125, to overturn the
Federal court decision as well.
And with that, Mr. Chairman, I thank you for your time.
[The prepared statement follows:]
Statement of Hon. Bill Thomas, a Representative in Congress from the
State of California
Mr. Chairman, I appreciate this opportunity to explain my
bill, H.R. 562, to the Subcommittee. Briefly, I want to give
States an extra tool for reforming criminals. Today, federal
law is discouraging States from adopting innovative approaches
to reintegrating prisoners into the workforce by requiring
states to pay unemployment benefits to some criminals just
because they are released from prison. That should be a matter
states decide for themselves in choosing methods for reforming
prisoners.
As background, California voters established the Joint
Venture Program in 1990, creating a private work program for
inmates. Prisoners' wages are used to compensate victims,
offset incarceration costs, and set aside funds (20%) for the
inmate's support upon his or her release from prison. Last
year, California voters overwhelmingly passed an initiative
(Proposition 194) to deny unemployment benefits to criminals
participating in the Joint Venture Program. That is where the
trouble started.
The Department of Labor says unemployment benefits have to
be paid to ex-prison inmates who worked for private companies
in these cooperative work programs. Since FUTA taxes are paid
on behalf of some prisoners, Labor ruled that these prisoners
must be paid unemployment benefits upon their release from
their ``job''--essentially, when they are released from prison.
Failure to comply is serious: California employers, for example
would lose tax credits worth $1.7 billion for FUTA taxes they
pay on other workers if the California program is disqualified.
Why does Labor take this position? The federal unemployment
insurance program only permits denial of employment benefits in
three cases: if the worker's income exceeds certain limits; the
claim is fraudulent; or the employee was fired for misconduct.
Since prisoners lose their jobs when paroled or released from
prison, they do not fit the exceptions.
This creates a conundrum for states: if they have someone
work in the prison laundry, they do not have to pay benefits,
but if they try to create an innovative program in cooperation
with a private company, the prisoners in that program must be
paid unemployment when they are released. For states like
California where voters have clearly said unemployment benefits
are not to be paid in such cases, the only answer may turn out
to be foregoing cooperative ventures with the private sector
that could very well help prisoners prepare themselves for
reentry into society. Allowing employers to lose $1.7 billion
in credits for taxes they pay on the services of ordinary
working people is not an option, needless to say.
H.R. 562 changes the law to treat all prison inmates who
participate in work programs the same: their services would be
exempt from the FUTA tax. This would effectively deny
unemployment benefits to released prisoners and prohibit the
Department of Labor from placing such a ridiculous requirement
on the states. The bill's enactment would give states an
additional tool to use in trying to reform criminal behavior
and I hope you will report the bill in the near future.
Chairman Shaw. Thank you.
Mr. English.
STATEMENT OF HON. PHIL ENGLISH, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA
Mr. English. Thank you, Mr. Chairman. I want to thank you
for the opportunity to testify, and I wanted to thank you and
our fellow Members of the Subcommittee for having this hearing
to focus on some, I think, important issues in improving the
Federal system of UC, unemployment compensation.
As many of you know, early in my career I served as
research director of the State Senate Labor and Industry
Committee dealing with many of the issues being discussed
today. And from my own personal perspective, I think the
current unemployment insurance system is badly in need of basic
structural reform.
Earlier this year I introduced legislation designed to
empower States to meet the needs of the long-term unemployed.
The current UC system is structured to help States combat
short-term unemployment. Unfortunately, many skilled workers
who are laid off from their jobs now are less likely to return
to their previous jobs than in the past, and I think the system
needs to be moved to adequately address that.
H.R. 940, the legislation that I introduced, will make
several important changes to the current UC system. First of
all, we will provide extended unemployment benefits to workers
who have been unemployed for long periods of time, by
broadening the trigger States use to access extended benefits.
Research has shown that the combination of the reduction on
the insured unemployment rate, and the increase in the trigger
level during the recession of the eighties resulted in the
failure of extended benefits to trigger on as unemployment
continued to rise.
In my view, it is absolutely essential to reform this part
of the program prior to the onset of the next recession.
Second of all, this legislation would encourage States to
maintain sufficient UC trust fund balances to cover the needs
of unemployed workers in the event of a recession. In the early
eighties, Pennsylvania was one of a number of States that had a
problem of a massive structural deficit in the UC program.
States under my bill that would maintain adequate reserves
based on their own experience to cover expenses in future
recessions would receive slightly increased interest earnings
on part of their trust fund. States that fall short would
receive slightly reduced interest earnings, a financial
incentive to do the right thing.
Third, this legislation would allow interest-free cash flow
Federal loans only for those States that have sufficient trust
fund reserves to last through a future recession.
Fourth, it would allow States to collect the Federal share
of unemployment insurance taxes from employers, allowing
employers to fill out one form, and write one check, not two.
Fifth, it would require States to distribute information
packets explaining fully unemployment insurance eligibility
conditions to unemployed individuals. All of these provisions
are based on recommendations by the Advisory Council on
Unemployment Compensation's Collected Findings and
Recommendations for 1994 through 1996.
If these provisions were enacted into law, as I propose,
States like Pennsylvania would have the tools to assist workers
facing long-term unemployment.
Another issue I would like to briefly address is the
current tax on unemployment compensation benefits. Prior to
1979, UC benefits were excluded from income for tax purposes.
UC benefits are currently placed on a par with wages and
other ordinary income, with regard to taxation. I have
introduced H.R. 937, the Unemployment Tax Repeal Act, to once
again exclude UC benefits from Federal taxation.
The UC tax is not a tax on income. It is a tax on benefits,
benefits received during one of the most difficult times in a
person's life. The UC tax imperils the economic security of
workers throughout America. Our unemployment insurance system
should be structured to extend a safety net, not dump penalties
on the unemployed.
The tax on unemployment compensation kicks workers when
they're down. Unemployment benefits are intended to stabilize
the income of individuals and families that face layoffs, yet
someone who experiences lengthy unemployment will face a large
and usually unexpected tax liability the next year.
For many of those who are struggling to survive a layoff
and get back on their feet, this tax bill is the last straw.
I urge the Subcommittee to review these issues, and to also
hear the testimony from the Screen Actors Guild later on in
this hearing in support of another bill that I have introduced,
H.R. 841, which corrects a section of the Federal Unemployment
Tax Act that operates to the detriment of senior entertainment
industry professionals.
Mr. Chairman, in conclusion, by emphasizing my strong
support for reforming our unemployment system, it is my hope
that our Subcommittee will give its strongest consideration to
moving forward legislation to encompass many of the suggestions
heard today.
Following through on these recommendations will be a big
boon for American workers.
Thank you.
[The prepared statement follows:]
Statement of Hon. Phil English, a Representative in Congress from the
State of Pennsylvania
Mr. Chairman and fellow Members of the Subcommittee, I want
to thank you for scheduling this important public hearing and
for affording me the opportunity to address the Subcommittee on
the urgent issue of unemployment insurance reform. As most of
you may know, early in my career, I served as Research Director
for the Senate of Pennsylvania's Labor and Industry Committee.
During my tenure, I dealt with many of the issues being
discussed today and I can tell you from my own hands-on
experience that the current unemployment insurance (UI) system
is badly in need of basic structural reform. States are poorly
positioned to tackle unemployment in the 90's with a UI system
that has changed very little since its inception and in some
important respects become frayed over the last two decades. I
want to take this opportunity to discuss several changes to the
system I am proposing as well as the unfair taxation of
benefits during my testimony today.
Earlier this year, I reintroduced legislation designed to
empower states to meet the needs of the long-term unemployed.
The current unemployment insurance system is structured to help
states combat short-term unemployment. Unfortunately, many
skilled workers who are laid off from their jobs now are less
likely to return to their previous jobs as in the past--and
long-term unemployment is increasing. The current system cannot
adequately address long-term unemployment.
Unemployment is hard enough on families, without the worry
that benefits will not be available because of the arcane
structure of the system. H.R. 940, the legislation I
introduced, will make several important changes to the current
system:
1.) Make it easier for states to provide extended
unemployment benefits to workers who have been unemployed for
long periods by broadening the trigger states can use to access
benefits.
Research has shown that the combination of the reduction in
the Insured Unemployment Rate and the increase in the trigger
level during the recession of the 1980's resulted in the
failure of the Extended Benefits program to trigger ``on'' as
unemployment continued to rise. As a result, Congress found it
necessary to pass a series of emergency extensions of UI
benefits. Put simply, no state was able to tap into Extended
Benefits during the most recent recession. Therefore, it is
absolutely necessary to reform the program prior to the onset
of the next recession. Emergency extensions of benefits are a
jerrybuilt policy prescription neither well-timed nor well-
targeted.
2.) Encourage states to maintain sufficient unemployment
trust fund balances to cover the needs of unemployed workers in
the event of a recession. States that maintain adequate
reserves (based on their own experience) to cover expenses in
future recessions would receive slightly increased interest
earnings on part of their trust fund; states that fall short
would receive slightly reduced interest earnings.
3.) Allow interest-free, cash-flow federal loans only for
states that have sufficient trust fund reserves to last through
a future recession.
4.) Allow states to collect the federal share of
unemployment insurance taxes from employers, allowing employers
to fill out one form and write one check, not two.
5.) Require states to distribute information packets
explaining unemployment insurance eligibility conditions to
unemployed individuals.
All of these provisions are based on the Advisory Council
on Unemployment Compensation's Collected Findings and
Recommendations for 1994-1996. As most of you know, the
Advisory Council was established under the Emergency
Unemployment Compensation Act of 1991. That law instructs the
Council to evaluate the unemployment compensation program and
make recommendations for improvement. The long process of
drafting H.R. 940 (previously H.R. 3738 in the 104th Congress)
allowed me to utilize my experience when considering the
effects each recommendation would have on the UI system. I have
concluded that if the recommendations were enacted into law, as
I propose in H.R. 940, states (like Pennsylvania) would have
the tools to assist workers faced with long-term unemployment.
Another important issue I would like to address is the
current tax on unemployment compensation (UC) benefits. Before
1979, UC benefits were excluded from inclusion in income for
tax purposes. UC benefits are currently fully subject to tax.
This tax treatment, in place since 1987, puts UC benefits on a
par with wages and other ordinary income in regard to income
taxation. I introduced H.R. 937, the ``Unemployment Tax Repeal
Act,'' to again exclude UC benefits from inclusion in gross
income for tax purposes. The pre-1979 exclusion was upheld by
Internal Revenue Service rulings based on three arguments: 1.)
the law did not explicitly require taxation of UC, 2.) the
benefits were viewed as part of the social welfare system and
not regarded as wages, and 3.) taxation would undercut UC's
income support objectives. I feel the final justification is
particularly true. The UC tax is not a tax on income, it is a
tax on benefits--benefits received during one of the most
difficult times in a person's life. The UC tax hurts the
economic security of workers throughout America. Our system
should be structured to provide benefits to taxpayers, not dump
penalties on the unemployed.
Mr. Chairman, I have talked to literally dozens of people
in Western Pennsylvania who have collected unemployment
benefits--and then paid taxes on the benefits as normal income.
Their experiences highlight how grossly unfair the tax is.
The tax on unemployment compensation kicks workers when
they are down. Unemployment benefits are intended to stabilize
the income of individuals and families in the face of layoffs.
Yet someone who experiences lengthy unemployment--a situation
which depletes the financial reserves of most middle class
families--will face a large (and usually unexpected) tax
liability the next year. For many who have struggled to survive
a layoff, this tax bill is the last straw.
Simply allowing tax withholding on these benefits is no
solution: it merely depletes the value of compensation that is
already merely adequate. I would argue that however this tax is
administered, it is fundamentally inequitable and perversely
burdensome to a beleaguered middle class.
At a time when many in Congress have expressed the
creditable concern that the tax code taxes certain kinds of
income more than once, we need to recognize that the UC tax
represents what amounts to double taxation of a very vital
stream of income for workers. These benefits are financed by
taxing workers' jobs, with most of the practical consequences
of a direct tax on the workers themselves. To further tax these
benefits adds a new layer of taxation, dramatically increasing
the tax burden on vulnerable working families at the expense of
tax equity.
You will also have the opportunity today to hear from Mr.
Richard Masur, President of the Screen Actors Guild, in support
of another bill I introduced, H.R. 841. As he will describe,
H.R. 841 would correct a section of the Federal Unemployment
Tax Act (FUTA) that operates to the detriment of senior
entertainment-industry professionals.
Mr. Chairman, I will conclude by emphasizing my strong
support for reforming our unemployment system. It is my hope
that our Committee will give its strongest consideration to
developing legislation that will encompass many of the
suggestions heard here today. Following through on these
recommendations will result in a more manageable system and a
more secure U.S. workforce.
Thank you for the opportunity to testify today.
Chairman Shaw. Thank you, Mr. English.
Mr. Upton
STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF MICHIGAN
Mr. Upton. Thank you, Mr. Chairman. I'm going to submit my
full statement for the record. But I just want to say that I
appreciate your holding this hearing and allowing us again to
testify as you did last year.
I want to read briefly a letter that I received this week
from our Secretary of State, parts of her letter.
Under current Federal regulations, an elections official
who files for unemployment benefits is entitled to those
benefits even though he or she may work only 2 or 3 days a
year.
Recently, a claim was filed against the city of Grand
Rapids by an elections inspector who only worked the August
primary and the November general election. Incredibly, the city
was responsible for paying a portion of his unemployment
benefits, primarily because he lost his job through no fault of
his own--the election was over. The polls closed at 8 o'clock.
When our legislature tried to amend Michigan law to remedy
the problem, the U.S. Department of Labor informed them the
change would first need to be made on the Federal level. The
bill that Sam and I have introduced, H.R. 961, makes the
necessary changes in Federal law and allows States to make
their own individual changes should they so choose.
Ordinarily, those who work in the polls are volunteers who
feel working at elections is part of their civic duty or is
service to the community. They are compensated, but their
position is not treated as full-time employment opportunity.
The possible abuse to our unemployment system under the
current regulations places an unjust burden on local
governments and I encourage--this is a letter to Chairman
Archer--I encourage your full support of and leadership in
passage of the bill, H.R. 961.
Earlier this week, I might note that Bill Archer did send
me a letter, and it says this: Our intent at this point is to
consider this issue in the context of a larger unemployment
bill this year. Using our vehicle, I expect your provision to
be included along with a few others, and I expect the Committee
will act on this this year.
So even though last year I had the great job of sitting
next to Charlton Heston, our bill didn't move. This year when I
don't sit next to him, if our bill moves, I'll be even happier,
and I appreciate the bipartisan support and certainly the
leadership of my colleague Sam Farr on this issue as well.
[The prepared statement follows:]
Statement of Hon. Fred Upton, a Representative in Congress from the
State of Michigan
Chairman Shaw, thank you for allowing me to testify today
on this important issue. I applaud your commitment to reforming
our nation's unemployment system.
The 105th Congress is looking for as many ways as possible
to relieve local governments from unnecessary federal
regulations. HR 961 accomplishes this goal by eliminating the
requirement that States pay unemployment compensation on the
basis of services performed by election workers.
Under current law, cities in our districts are responsible
for paying unemployment benefits for people who work as an
election official, even if they only work two days a year. An
unemployment claim was filed against one city in Michigan by an
Election Inspector who worked the August Primary and November
General elections in 1994. Amazingly, the city is now
responsible for paying unemployment benefits to this worker.
Recognizing this injustice, the Michigan State Legislature
attempted to change unemployment laws in Michigan. However, the
U.S. Department of Labor was quick to point out that this
situation must first be corrected by amending the Federal
Unemployment Tax Act, known as FUTA. HR 961 makes this
correction in FUTA and allows the States to provide this
exemption, if they chose to do so.
The Congressional Budget Office has assured me that this
bill is budget neutral. HR 961 simply gives the States the
freedom to run their unemployment compensation programs as they
see fit.
Municipal budgets are already tightly stretched to provide
our constituents with the services that they need and deserve.
I know of no opposition to this bill and have received many
letters of support from local governments across the country.
I'm pleased that you, Mr. Chairman, expressed support for
my bill during a hearing on this issue last year and I look
forward to working with you in the months ahead. It is time to
free local governments from a costly and unnecessary
requirement and pass HR 961.
Chairman Shaw. Charlton Heston, I saw him move a sea. It
seems like he could have done something with legislation.
[Laughter.]
Mr. Upton. Well, I was with Mohammed Ali yesterday, and he
still can move a sea.
Chairman Shaw. Mr. Farr.
STATEMENT OF HON. SAM FARR, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF CALIFORNIA
Mr. Farr. He could move a sea, but we couldn't move a bill.
Thank you, Mr. Chairman. I am here to support Congressman
Upton's legislation that we cosponsored together.
There is a problem that needs fixing. Federal law
determines who must be covered by unemployment compensation,
and who may not be. And the interpretation of that law has
rendered an incredible problem that I think you would all agree
is just outrageous.
We had a poll worker in Santa Cruz County come volunteer to
be a poll worker, and was paid the minimum amount to be a poll
worker. And then, because it was a 1-day event, he filed for
unemployment compensation. And because he had been a prior
county employee, the elections department had to pay him
$12,000.
And if you can imagine how many people could take advantage
of this loophole--I think Los Angeles County has 40,000 people
that work for them on election day--it's just unfathomable how
many people could take advantage of a law that never intended
to be that way.
It is a loophole, and this bill closes it. It's a very
simple bill. It leaves it up to the States, and it uses the
same threshold the Federal Government has already determined
and used in other cases for income tax and Medicare--that is, a
$1,000 threshold.
And so this bill would continue to leave it up to the
States. The State of California did repeal the law last year,
but it is dependent upon Federal action to be implementable.
I think this bill remedies the problem, and we hope you
will move it in due haste. I'd be glad to answer any questions
you might have.
[The prepared statement follows:]
Statement of Hon. Sam Farr, a Representative in Congress from the State
of California
Mr. Chairman, Members of the Subcommittee, I appreciate the
opportunity to testify on behalf of H.R. 961, legislation
introduced by myself and Congressman Fred Upton to fix a
serious flaw in the unemployment compensation system.
Unemployment compensation is designed to give temporary
assistance to workers who would otherwise suffer from serious
hardship due to a sudden, unexpected loss of employment. It
provides unemployed workers with a small ``cushion'' of support
while looking for a new job, easing a tremendous burden for
those who lose their sole source of income.
Interestingly, election poll workers--individuals who serve
their community on election day at a polling place--are also
eligible for unemployment compensation. This seems odd, since
the very nature of the job is temporary (for one day only). And
because poll workers receive a small reimbursement for their
time and expenses (usually fifty-five to eighty dollars) they
generally do not rely on their service as a poll worker as
their main source of income.
In the majority of cases, unemployment compensation is
reserved for long-term employees, preventing poll workers from
qualifying for these benefits. But more and more have exploited
their eligibility to obtain significant unemployment benefits,
creating a financial drain on local governments and increasing
costs to the American taxpayer.
In my own district, a poll worker was eligible to receive
up to $12,000 in unemployment compensation after ``losing his
job'' when the election ended. Because he had held, and retired
from, a prior job with the county elections board, the county
was liable for the entire benefit--an enormous financial burden
they could scarcely afford.
States have tried to close this loophole themselves.
However, they have learned that only federal law can specify
who is not eligible for unemployment compensation.
H.R. 961 would allow states, if they so choose, to close
this loophole. It uses a $1,000 dollar per year compensation
threshold--based on the reimbursement reasonably expected to be
paid to the average poll worker volunteer--to separate poll
workers from longer-term, wage-based election workers. I would
note that election workers earning under $1,000 per year are
already exempt from paying Social Security and Medicare taxes.
Our legislation has been endorsed by county elections
offices and country clerks around the country, as well as the
California Secretary of State. It would prevent an abuse of the
unemployment compensation system which drains taxpayer dollars
and hurts the very people who need this assistance the most. I
thank the Subcommittee for their consideration of this
important measure.
Chairman Shaw. Thank you, Mr. Farr.
Mr. Shadegg.
STATEMENT OF HON. JOHN SHADEGG, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ARIZONA
Mr. Shadegg. Thank you, Mr. Chairman. I appreciate the
opportunity to be here today and to testify in support of H.R.
294, the Indian Tribal Government Unemployment Compensation Act
Tax Relief Amendments of 1997.
This bill is one bill of a package of three pieces of
legislation designed to promote economic development on
America's Indian reservations. You have already received
written testimony, and you will receive compelling testimony
today from people who will benefit from this legislation on why
it is needed and essential.
I would like to focus my remarks on why I introduced it,
since I represent a district which is urban in nature, has no
Indian reservations, and has a Native American population of
less than 2 percent.
The bottom line issue here is economic development on
America's Indian reservations. I believe that is essential for
the good of the Nation as a whole. Yet, since about the
seventies, the greatest economic development which has occurred
on America's Indian reservations has occurred in the form of
Indian gambling.
Indian gambling is now an explosion growth industry on all
of the reservations across America, and yet I believe if we
searched our consciences, we might conclude that it is not the
principle type of economic development we ought to be
encouraging on Indian reservations.
Based on my experience as a special assistant attorney
general in Arizona, I saw a number of problems associated with
professional gambling, from corruption of those operations, to
addiction to gambling, to moral decay. The price of gambling is
fairly high.
Recently, the National Indian Gambling Commission reported
that nearly one-half of the Nation's 273 tribal gambling
operations had failed to meet Federal standards designed to
keep their casinos free of crime.
Federal officials announced that information last week, and
also announced that 17 people, including several linked with a
prominent organized crime family, had been indicted on charges
of attempting to infiltrate and control the now-defunct
gambling casino at the Rincon Indian Reservation north of San
Diego.
I believe very firmly that in the long run, the Native
American communities and tribes of this Nation will suffer as a
result of Indian gambling. The Rincon indictments, I think, are
just the beginning.
What then is the right remedy? Well, the right remedy is, I
believe, legitimate economic development on Indian
reservations.
Congress has punted on that issue to date, and has not done
what it could and what it should do. A part of the answer is to
fix the Federal unemployment tax act, and the problem it is
creating for Indian reservations. The problem, Mr. Chairman, is
that under recent rulings by the IRS, the Internal Revenue
Service is now treating tribal governments as though they were
businesses for the collection of unemployment taxes. They are
treating them the same as private sector commercial employers.
That is, they are requiring them to pay in unemployment
insurance and employment taxes as though they were profitmaking
operations.
Congress didn't change this law. The IRS did. And the
result has been extremely unfair to some tribes, because the
IRS, on an ad hoc basis, is going after some tribes, requiring
them to be treated as though they were commercial businesses in
the payment of unemployment insurance taxes, but not after all
tribes.
H.R. 294 would solve this problem by amending the Federal
law to clarify expressly that tribal governments when they act
in their governmental capacity should be treated just like
States and local units of government for purposes of collection
of Federal unemployment insurance taxes.
H.R. 294 would also authorize tribal governments, like
State and local governments, and tax exempt organizations, to
contribute to a State unemployment insurance fund on a
reimbursable basis for unemployment benefits actually paid out
to former employees.
It's one step toward providing legitimate economic
development on America's Indian reservations. I believe it is a
step in the right direction. I believe it will help provide the
right framework to encourage legitimate economic development
which will be there at some point in time when, I hope, we can
see a reduction in Indian gambling on America's Indian
reservations.
And I urge your support for its passage, and appreciate the
time.
[The prepared statement follows:]
Statement of Hon. John Shadegg, a Representative in Congress from the
State of Arizona
Thank you, Mr. Chairman, for the opportunity to testify
today in support for H.R. 294, the Indian Tribal Government
Unemployment Compensation Act Tax Relief Amendments of 1997. I
appreciate your consideration of this legislation I sponsored.
H.R. 294 is one of three bills I have introduced which promote
economic development on Indian reservations.
You have received written testimony and will later hear
compelling testimony in support of this legislation from those
who would benefit. Additionally, I understand you have received
a number of letters of support which show broad support for
this legislation. I want to speak briefly about why I
introduced this legislation and why I think it is important in
the long term.
Economic development on American Indian reservations is
essential for the long-term prosperity of Native Americans.
Since the 1970s more and more Indian tribes have turned to
gambling as a solution to their economic needs. In 1988
Congress passed the Indian Gaming Regulatory Act to address
problems emerging with Indian gambling which was increasing at
a rapid pace across American Indian reservations and providing
significant economic development for the first time on many
reservations. Gambling, however, is not the principle type of
economic development which we should be encouraging on Indian
reservations and ultimately I believe it will be detrimental to
Native Americans and all Americans.
Based on my experience as a Special Assistant Attorney
General for the State of Arizona, I saw first hand the problems
associated with professional gambling. From corruption to
addiction to moral decay, the price of gambling is not worth
the temporary profits to be gained.
I believe that the passage of the Indian Gaming Regulatory
Act, while well-intentioned by some in Congress, was a mistake.
While I understand that at the time of its passage IGRA was
meant to provide a consistent regulatory framework for Indian
gaming, it has failed.
For example, the National Indian Gaming Commission recently
reported that nearly one-half of the Nation's 273 tribal
gambling operations had failed to meet a federal standards
deadline designed to keep casinos free of crime. Moreover,
federal officials announced last week that 17 people, including
several linked to a Pittsburgh organized crime family, have
been indicted on charges of attempting to infiltrate and
control the now-defunct gambling casino at the Rincon Indian
Reservation north of San Diego. I believe very firmly that in
the long run, the Native American communities and tribes in
this nation will suffer as a result of gambling. The Rincon
indictments, I fear, are only the beginning.
According to a 1994 study, for every dollar that a
community will receive from gambling revenues, three dollars
will be needed to cover the additional costs incurred by
gambling such as infrastructure expenditures, regulatory costs,
expenses to the criminal justice system and large social-
welfare costs.
Last year, Americans spent $550 billion in legal gambling--
a 3200 percent increase since 1974 when casino gambling was
prohibited in every state but Nevada. Close to 10 million
Americans now have a gambling habit that is out of control. The
cost of treatment for gambling addicts ranges from $18,000-
$50,000 per person.
Unquestionably, compulsive gambling is linked to the
accessibility and acceptability of gambling in communities.
According to one study, the number of compulsive gamblers will
increase between 100-550 percent when gambling is brought into
an area. Research now shows that gambling is the fastest
growing teenage addiction. In my state of Arizona alone there
are 14,000 young compulsive gamblers. And 20 percent of
compulsive gamblers attempt suicide.
Fundamentally, increased gambling results in ruined lives
and destroyed families and businesses. Apart from the social
price, gambling presents huge economic costs to our
communities.
Again, my commitment to sound economic development on
Indian reservations is sincere. I have felt very strongly for a
long time that promoting gambling on America's Indian
reservations as a way to assist Native Americans is dead wrong.
We owe Native Americans and their communities far more than
that. Congress, in effect punted on the issue of promoting
economic development in 1988 and it is our responsibility to
pick up the ball and provide legitimate, long-term solutions
for Native Americans. One way is to fix the Federal
Unemployment Tax Act (FUTA) problem.
The FUTA problem is this, Mr. Chairman--in the early part
of this decade the IRS reversed its prior practice and began to
treat more and more tribal governments as if they were private-
sector commercial business employers for purposes of
determining how they must participate in unemployment insurance
programs under FUTA.
But Indian tribes are essentially governmental in nature.
They are not businesses and there are important public policy
reasons for treating them differently from the private sector.
Congress did not change the law. What changed was the
interpretation given the law by some over-eager tax collectors
at the IRS. The result has been very unfair as the IRS has
begun to go after some tribes who have never paid into nor
taken anything out of the FUTA system.
My bill, H.R. 294, would amend FUTA to clarify, in express
terms, that tribal governments, when acting in their
governmental capacity, should be treated just like state and
local units of government are treated for FUTA purposes. Under
this bill the IRS would have no authority to assess federal
FUTA taxes against tribal governments, just as it cannot do so
against like state and local governments and tax-exempt
organizations.
In addition, H.R. 294 would authorize tribal governments,
like state and local governments and tax-exempt organizations,
to contribute to a state unemployment insurance fund on a
reimbursable basis for unemployment benefits actually paid out
to former employees. Simply, tribes would pay as they go. If a
tribe doesn't lay off anyone, it doesn't pay and if a tribe
lays off a lot of employees, the tribe reimburses the full
amount.
As I said before, H.R. 294 is one of three bills I have
introduced to provide additional, legitimate, economic
development for Native Americans. I appreciate your
consideration of H.R. 294 as a part of this legislation and
urge you to support its passage. It is a small step in
promoting economic development for Native Americans. Thank you
again for your time and attention to this important matter.
Chairman Shaw. Thank you, John.
Mr. Camp.
Mr. Camp. Thank you, Mr. Chairman. Thank you, Mr. Upton,
for taking the time to testify today. And I would ask--I notice
that you mentioned this letter you received from our Secretary
of State regarding this bill, and I would ask unanimous consent
to make the entire letter part of the record.
Chairman Shaw. Without objection.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T0099.056
Mr. Camp. And I appreciate that the State is supportive of
your fix, as well as the Chairman of the Committee. I know you
mentioned his support.
Can you tell me, Has the U.S. Department of Labor commented
officially in any way on your proposal?
Mr. Upton. I don't think they have commented. I can't
imagine there is a lot of objection to what we want to do. In
essence it allows the States to make a decision. Sam, do you
know if they've given any position?
Mr. Farr. Well, we have a letter here I'm just seeing for
the first time. Essentially, it says why we have to amend the
law.
Mr. Upton. It clearly needs a fix, because it can't happen
without a legislative fix, and that's why we're here today. And
again we're not aware of any objection to what we want to do.
I've talked to the Chairman, Chairman Archer, about it. It
really does close a loophole. Those of us that are opposed to
fraud and abuse--I think everybody here--I have got to believe
would be supportive of the effort, and it ought to be, as Mr.
Shaw said last year, a no brainer.
Mr. Camp. Well, I certainly support what you're doing, and
want to work with you.
Mr. Upton. You do support it, and I appreciate your help
here on the Subcommittee to get this thing done.
Thank you.
Mr. Camp. Thank you, Mr. Chairman.
Chairman Shaw. I think that provision has good bipartisan
support.
Mr. Levin.
Mr. Levin. I'll resist the temptation to ask questions. I
thought all the testimony was interesting, and I think we need
to explore further the activities of the Indian reservation
units as to why they're covered.
And also as to Mr. English's testimony, I personally very
much support its thrust, and I think it will be interesting to
see what comments some of the panelists who come have on it.
Thank you, Mr. Chairman.
Chairman Shaw. Thank you. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. Mr. Shadegg, as I
understand your proposal, you want to basically have tribal
governments treated as State and local governments with respect
to FUTA taxes.
But you also include another provision that would authorize
tribal governments to contribute to a State unemployment
insurance fund on a reimbursable basis.
Is that something the State and local governments are
authorized to do now, or must they do that?
Mr. Shadegg. I believe it is what they are authorized to do
now. I don't know that they are required to do it. They are
authorized to contribute. So we would make--in both regards--we
would make tribal governments, when they are acting in their
governmental capacity, the same as a State or local government,
or a tax-exempt organization.
Mr. McCrery. OK. Thank you.
Chairman Shaw. Mr. Collins.
Mr. Collins. No questions.
Chairman Shaw. Mr. Coyne.
Mr. Coyne. No questions.
Chairman Shaw. Mr. English.
Mr. English. No questions.
Chairman Shaw. Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman. I'm very interested
in this. We have a lot of Native Americans in Oklahoma, and I'm
trying to see how broad this would be as far as taxes in
dealing with the Indian tribes, because there is a great
question of them utilizing their funds today as a business or
industry or as a government, especially in contributions in
campaigns, a lot of them being heavily involved.
If they're going to be treated as a government entity,
would they be allowed also to contribute to campaigns?
Mr. Shadegg. Mr. Watkins, I am certainly not advocating
that they get some special status for contributing to
campaigns, and I, quite frankly, don't know their status for
contributing to campaigns.
Our goal here is simply to say--it's actually to correct an
inconsistency. The original interpretation of the law by the
IRS was that tribal governments when they employ people in a
governmental type capacity were to be treated, and in fact were
treated by the IRS, I think until the beginning of this decade,
routinely as being governmental entities and not required to
pay in on an advanced basis for the employees in anticipation
of an unemployment tax claim.
At some point in this decade, the IRS came along and with
regard to some tribes--and I think it's worth your looking into
the situation in Oklahoma, because it is not inconsistent
across the country with regard to some tribes the IRS has come
along and said, No, we don't think you really are a
governmental entity, and so we're now going to start treating
you as though you were a private business.
It would be intent, Mr. Watkins, that when the tribe acts
in a business capacity, let's say it owns, as some tribes in
Arizona do, a sand and gravel operation, or a block
manufacturing plant, or some other business enterprise, I think
it ought to be treated as a business in that capacity.
But in my view, when it is acting as a governmental entity,
administering the tribe, I think it ought to be treated like
other units of government. It's more governmental in nature at
that point.
Now, whether or not someone ought to take a look at whether
that governmental entity can make campaign contributions, that
might be a parallel question.
Mr. Watkins. I've read your letter, and it's very
interesting, because I agree with your letter here. I've been
trying to get some of the tribes in Oklahoma to not only lift
their vision, but to be able to do more in economic
development. And I helped tribes--two of them--in developing
their overall economic development plan, trying to move them
from just smoke shops and gambling, into more manufacturing and
other types of job opportunities.
Mr. Shadegg. Certainly, I think that's in the best interest
of all Americans.
Mr. Watkins. Definitely.
Mr. Shadegg. If we force them to rely solely on gambling,
then they are going to rely on gambling, and that's going to
create, I think, long-term problems.
For one thing, there is the danger that those operations
will be infiltrated, as this report suggests is a possibility,
and I'm not certain that those kinds of operations with that
large amount of cash aren't particularly susceptible to
exploitation.
Mr. Watkins. I look forward to working with you maybe on
some other things dealing with the problem.
Thank you.
Chairman Shaw. Mr. Ensign.
Mr. Ensign. No questions.
Chairman Shaw. I thank this panel, and now invite the next
panel to come to the table. Eric Oxfeld is president of UBA,
Inc., of Washington, DC; Mark Wilson, labor policy fellow at
the Heritage Foundation; Kenneth Simonson, vice president and
chief economist of the American Trucking Associations; Dr.
Janet Norwood, senior fellow at the Urban Institute; and the
gentleman from Georgia who will be introduced by Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. It's with pleasure
that we welcome again David Poythress, the commissioner of the
Georgia Department of Labor.
Mr. Poythress has been involved in State business for a
long time, having once served in the capacity as Medicaid
director, and medical services director in Georgia, and also
Secretary of State, and for some time has been commissioner of
the Department of Labor. He does an outstanding job, and I
welcome David Poythress.
STATEMENT OF DAVID B. POYTHRESS, COMMISSIONER, GEORGIA
DEPARTMENT OF LABOR, ATLANTA, GEORGIA
Mr. Poythress. Thank you, Mr. Collins. Mr. Chairman, I
appreciate the opportunity to be here.
Chairman Shaw. The Subommittee has all of your full
testimony which will be made a part of the record. Please feel
free to summarize. We have several other panelists today, so we
would appreciate your sticking with the 5-minute rule.
If you tend to go over, I will very politely go like this.
If you continue to go over, I will very rudely go like that. So
if you would continue.
Mr. Poythress. Thank you, Mr. Chairman. I will, indeed,
summarize.
As Mr. Collins implied, and as I think most Members of the
Subcommittee know, I have been pushing this rope for the last 3
years, and have briefed this Subcommittee before, and testified
last year.
Since then I am pleased to tell you that the proposal we
discussed then has been essentially adopted intact by nine
States as well as UBA. It has been renamed from devolution,
which we discussed last year, to administrative reform, and it
is essentially a composite proposal.
I think I can say that it has been studied in great detail
by lots of people in the private sector, as well as in
government, who are thoroughly familiar with this. While it is
a complex proposal, it is fairly simple to administratively
implement, if the Congress approves the legislation.
It is fiscally sound, and I think it is politically
realistic to see it accomplished.
The proposal does essentially four things. It combines the
FUTA administrative tax with the State benefit tax, to be
collected by the States. The savings to the Federal Government
and to the private business sector are very, very
consequential--about $100 million a year in IRS costs would be
eliminated simply by their duplicate collection of the tax. At
least $500 million would be saved by the private sector not
having to fill out duplicate forms and undergo duplicate audit
procedures.
Our proposal likewise eliminates or allows the two-tenths
Federal surtax on FUTA to expire at the projected December 31,
1998, deadline. Third, it lays the foundation to significantly
downsize the U.S. Department of Labor.
We are very mindful, as was pointed out, that there needs
to be a national system. There must be Federal oversight. But
we feel it can be done in a more general way than the current
level of micromanagement.
Finally, we believe, and we are quite confident that this
proposal lays the foundation for very, very significant tax
cuts at the State level in terms of both benefits and
administrative costs.
Mr. Chairman, again, in summary, I think it is a very
practical and a very opportune moment to truly return
responsibility to the States, to lighten the paperwork burden
on the private sector, to save millions on tax dollars, and to
lay the foundation for future tax cuts.
[The prepared statement follows:]
Statement of David B. Poythress, Commissioner, Georgia Department of
Labor, Atlanta, Georgia
Mr. Chairman and Members of the Subcommittee, my name is
David Poythress, and I am Commissioner of Labor in Georgia.
I appreciate the invitation to appear today and present my
views on both a multi-state Proposal to Restructure the
Employment Security System and my support for passage of H.R.
125 introduced by Congressman Phil Crane in response to a
recent Illinois Federal court ruling in the Pennington Case.
Restructuring of the Employment Security System
I testified to this Committee on July 11, 1996 in support
of my proposal as Georgia's Labor Commissioner to transfer the
Administration and Financing of the Employment Security System
to the States. I am pleased to announce that, subsequent to
that hearing, agreement has been reached to combine my proposal
with proposals from New Hampshire, Virginia and the UBA into a
single proposal to Restructure the Employment Security System.
A copy of this proposal has previously been submitted to the
Committee and distributed for today's hearing. Since this
agreement in early March, at least 9 sates have endorsed the
proposal and, based on discussions with administrators in other
states, I expect the majority of the states to be formally on
board by mid-year. A brief overview of the current system and
the proposed changes are included below.
The Employment Security System is composed of two major
components. The Unemployment Insurance System (UI), created by
the Social Security Act of 1935, is designed to provide workers
with insurance against involuntary unemployment by partial
replacement of lost wages. The Employment Service (ES),
established by the Wagner-Peyser Act of 1933, is designed to
provide job search assistance to individuals and recruitment
and referral services to employers to get workers back to work
as quickly as possible.
The UI and ES programs are highly integrated, and each
depends on the other for efficient administration, success in
serving job seekers and employers and keeping employer payroll
taxes as low as possible.
Currently each state sets and collects a state payroll tax
for UI benefits and deposits those funds into state-specific
Benefit Accounts maintained by the federal government as part
of the Unemployment Trust Fund (UTF). A separate federal
payroll tax, collected by the Internal Revenue Service (IRS)
under the Federal Unemployment Tax Act (FUTA) is a dedicated
employer tax to support administration of the Unemployment
Insurance (UI) laws and the Employment Service (ES). FUTA was
established as a contract with private sector business that
these dedicated taxes would be used only for unemployment and
employment services.
The concept of transferring most of the management of the
Employment Security System from the U. S. Department of Labor
to the states has been studied carefully for many years in
labor department circles. It is fiscally sound,
administratively simple and politically realistic. As I said
last July, I believe the time to implement it is now.
This very straightforward proposal does four main things.
1) It establishes a single payment, state-collected payroll
tax for both UI benefits and UI/ES administration,
--Eliminating the current duplicative tax system and saving
private sector employers approximately half a billion dollars
annually in filing costs;
--Eliminating IRS collection of the federal payroll tax,
thus saving $100 million each year;
--Making the marginal additional costs to the states to
collect ``both'' taxes negligible.
These savings could begin as soon as states--instead of the
IRS--begin collecting the FUTA tax. State FUTA collections
would be deposited in state specific accounts in the UTF to
avoid any adverse impact on the federal deficit.
2) It eliminates micro-management of state programs by the
U. S. Department of Labor (USDOL) and establishes the
foundation to downsize the USDOL bureaucracy by 50% to 75%.
3) It assures that the employers who pay FUTA taxes get the
full benefit of those taxes. Reduction of IRS and USDOL roles
will greatly reduce the costs and improve the efficiencies of
the system.
4) It allows the 0.2 percent Federal surtax, currently
authorized through December 31, 1998, to expire.
Mr. Chairman, as I stated in July 1996, this is a wonderful
opportunity to:
--Truly return responsibility to the states;
--Lighten the paperwork burden on American business;
--Save millions in wasted tax dollars; and
--Lay the foundation for future tax cuts.
I strongly encourage the Committee's favorable
consideration of this proposal.
Support of H.R. 125
The Social Security Act of 1935 gave states broad
discretion to design their own unemployment insurance programs
including allowable benefits, amount of earnings necessary to
qualify for benefits, and all other eligibility requirements
within broad fairness guidelines.
The 1994 decision by the Seventh Circuit Court of Appeals
(Pennington v. Doherty) ruled that the base period process used
by the Illinois Unemployment Insurance Act is an
``Administrative Provision'' subject to the ``when due'' clause
of the Social Security Act. This ruling is plainly contrary to
the universal understanding, throughout the 60 year history of
the Unemployment Insurance program that ``base period''
determination is an eligibility requirement within the ambit of
state authority. The base period concept is not a matter of
administrative convenience. It represents the public policy
judgment of states that UI benefits should be payable only to
persons with a demonstrated continued attachment to the
workforce.
The Social Security Act of 1935 clearly envisions broad
latitude by states in designing their unemployment insurance
programs. I urge you to support H. R. 125 making congressional
intent clear that states are responsible for determining the
terms and conditions under which unemployment benefits are paid
including the establishment of base period.
Thank you for this opportunity to present my views on both
Restructuring the Employment Security System and H.R. 125. I
respectfully request your favorable consideration of these
matters and welcome any questions you may have.
Chairman Shaw. Thank you.
Mr. Oxfeld.
STATEMENT OF ERIC J. OXFELD, PRESIDENT, UBA, INC.
Mr. Oxfeld. Thank you, Mr. Chairman. My name is Eric
Oxfeld. I'm the president of UBA. We're a business association
specializing in unemployment and workers' compensation.
We also head the Coalition for UC Tax Reform, which we
founded in 1995 to oppose the administration proposals to
extend the two-tenths FUTA surtax, and to require monthly
instead of quarterly payment of unemployment taxes.
We appreciate your commitment to strongly oppose those
objectionable proposals.
UBA supports a sound unemployment compensation program
which provides short-term wage replacement to individuals with
a strong attachment to work who involuntarily lose their jobs.
We think Congress can best help meet this objective by
restructuring the Federal and State roles in administrative
financing of the unemployment program rather than by increasing
FUTA taxes.
Legislation is also urgently needed, and I know it's the
subject of the second panel, to keep Federal courts from
preempting State discretion to efficiently determine the base
period used to measure eligibility for State benefits. That's
the Pennington-Bradshaw issue.
Restructuring administrative financing is a win/win/win. It
will improve services for workers who lose their jobs. It will
cut redtape for State unemployment agencies. We estimate it
will save about $4 billion for employers.
Now, payroll taxes, as this Subcommittee knows, make it
more costly to hire new workers. That's why it's especially
troublesome that the FUTA is already at a rate that is far
higher than necessary.
Currently, the Federal Government returns to the States
only about 60 cents on the dollar. Mr. Chairman, in your State
it's less than 40 cents on the dollar. And for all the Members
who are here, it's in the range of 60 to 40 cents on the
dollar, returned to the States. The rest piles up in the
Unemployment Trust Fund where it's improperly used to disguise
the true extent of the Federal budget deficit.
This money can only be spent on unemployment compensation.
Despite the large surpluses in FUTA, States are getting
less in grants than they need to administer the program
properly. As a result, this has led to a cutback in services to
jobless workers. It's no coincidence to us that the average
duration of an unemployment claim has been steadily getting
longer, even as unemployment has gone to record low levels.
That's driving up the expense of unemployment claims, which
is also included in the Federal budget. And many States have
made up the shortfall in money for administration by imposing
supplemental State taxes on employers. There are 18 States that
have done that.
We think it's time to clean up this mess, and we recommend
that--as Commissioner Poythress has mentioned--that each State
should decide and determine how much it needs to run its own
unemployment agency.
We reached agreement with nine States on a compromise plan
to do this. We can talk about how we did that and the
compromise, but in effect this will put the decisionmaking
closest to where it can be best made as to how much money a
State needs to run its program correctly.
Each State would have its own account for administration.
Surpluses in that account would automatically flow into the
State benefits account where it could be used to further reduce
unemployment taxes. And under this plan there are no reductions
in protections for workers, not one. In fact, some present
Federal restrictions would be repealed.
Although employers think that unnecessary taxes should be
returned to taxpayers, I should also point out that having
additional money in the State trust funds would give States the
opportunity, if they wish, to improve benefits for workers.
Another advantage would be tax simplification, because as
the Commissioner says, employers would only have to complete a
single form instead of the two. That would also improve FUTA
tax compliance.
The proposal would shorten unemployment claim duration by
not only increasing funding for administration to the proper
levels, but by tying employment services more closely to
unemployment claimants.
Using a very conservative estimate, if we could reduce
duration of claims by just 1 week on average, it would save
more than $1.5 billion a year, more if unemployment rates are
higher.
In addition to restructuring, we are strongly supportive of
Congressman Crane's bill on Pennington, H.R. 125.
Today the unemployment compensation program is at a turning
point. We can keep the status quo which ill serves workers and
employers. We can accept the administration's proposals to
increase the FUTA tax, or we can adopt legislation
restructuring the administrative financing of the unemployment
system and help keep it sound into the 21st century.
Mr. Chairman, and Members of the Subcommittee, thank you.
[The prepared statement and attachment follow:]
Statement of Eric J. Oxfeld, President, UBA, Inc.
Good morning, Mr. Chairman and members of the committee. My
name is Eric Oxfeld, and I am President of UBA. UBA is a
national association specializing exclusively in public policy
issues involving unemployment and workers' compensation. Our
members are employers across the country of all sizes and
industries, who pay federal and state unemployment taxes. UBA
advocates a sound unemployment compensation program for workers
and employers. We appreciate the opportunity to appear before
you this morning to discuss the need for U.C. legislation
relating to several important issues, principally
administrative financing of state U.C. administrative agencies
and clarification of federal law governing U.C. eligibility
(the Pennington issue).
From the inception of the unemployment compensation
program, there has been debate about the optimum role for the
states and the federal government. A significant part of that
debate has been whether states or the federal government should
be responsible for financing the state unemployment agencies
which administer the program. We believe that we have a need--
and a historic opportunity--to restructure the financing of
unemployment compensation administration, and thereby, improve
services for jobless workers, reduce taxes on employers, and
alleviate the financial pinch on administrators. Now that's
what I'd call a ``win/win/win'' situation.
UBA has developed a proposal to do just that. Before I
describe it, however, I would like to comment on terminology.
For better or for worse, and we think mostly for worse, the
short-hand name for this topic has come to be known as
``devolution.'' I believe, however, that there have been so
many different devolution concepts that the very word may deter
consideration of helpful changes in administrative financing.
For example, the word ``devolution'' inevitably seems to
distract attention to questions about ``winners and losers''
and ``federalism'' when what we should be thinking about is
really, how can we make sure the state unemployment agencies
have adequate but not excessive funds to provide high quality
services to jobless workers, while making sure that the tax
burden on employers is both fair and no more than necessary.
Consequently, we use the term ``administrative financing
reform'' rather than ``devolution'' as a more neutral
description of what we seek to accomplish.
Now I'd like to describe our proposal. First, let me
observe that it is a departure from past tradition at UBA that
we have decided to advance a ``UBA proposal.'' I would be the
first to acknowledge that there are several other
``devolution'' proposals, and I want to say that we have found
much of merit in all of them. We wanted to develop a proposal
that drew on the excellent work and thought that had already
been done. We sought to borrow the best of what we found.
Sensitive to what is politically and fiscally feasible, we
formed a representative working group from among our members
and asked them to focus on the bottom line for employers.
In preparing the proposal, we were guided by 3 principles:
1. Eliminate the 0.2% FUTA surtax on employers (rather than
extend it through the end of 2007, as recommended in the
administration's FY 1998 budget proposal).
2. Impose employer taxes to finance the system consistent
with sound unemployment compensation operations rather than
federal deficit reduction.
3. Provide financing for the unemployment program at levels
that are neither excessive nor inadequate.
Following the development of the original UBA proposal, we
entered into discussion with representatives of a number of
state officials who shared our interest in improving U.C.
administrative financing. In March, UBA and 9 states reached
agreement on a common proposal closely resembling the original
UBA plan--we refer to this agreement as the UBA/states
proposal.
Under the UBA/states proposal, the basic framework of the
federal-state U.C. partnership would remain intact, and all
benefits and legal protections for jobless workers would be
unchanged. There would be no change in the rules governing the
state unemployment trust accounts used to finance U.C.
benefits. The 0.2% surcharge would expire, and employers would
continue to pay FUTA and state unemployment taxes quarterly.
However, instead of pooling all FUTA payments in a single
national U.C. administration account (ESAA), FUTA taxes paid by
employers in each state would be credited to a new
administration account to be set up for each state. Each state
legislature, rather than Congress, would determine how much it
needs to administer its U.C. program. A small amount would be
transferred into a special account to be used for additional
grants to states which require additional funds to administer
their program. Funds that are not needed for administration--
about half or less of present FUTA revenues in many states, as
shown in the attachment--would automatically flow into the
state's U.C. benefit account. Employers would no longer be
required to fill out separate FUTA and state unemployment tax
forms. This approach would simplify tax payment and collections
for employers and states, as well as the federal government.
Each state would also be responsible for financing the portion
of federally mandated extended unemployment benefits (EB) now
financed out of the Federal Unemployment Tax. Accountability
for use of the money would be enhanced by requiring each state
agency to report annually to its legislature and the public on
services provided to U.C. claimants.
We believe our proposal would have many advantages over the
present system, under which the federal government collects
100% of FUTA receipts but returns only 60% back to the states--
in effect, keeping the remainder to disguise the true extent of
the federal budget deficit in general revenue funded programs,
and leading to enactment of many state add-on taxes on
employers to make up for the shortfall in federal grants. These
advantages are as follows:
More resources for administration of the U.C.
program. Nearly all states would be ``winners'' in a financial
sense, because few states currently receive administrative
grants equal to the amount of FUTA paid by employers in that
state.
Greater responsiveness to local needs and
circumstances. State legislatures, rather than federal
Department of Labor and OMB personnel in Washington, D.C.,
would determine how much is needed to run their U.C. programs,
resulting in greater flexibility for state U.C. agencies and
greater accountability for states, which already are
responsible for establishing benefit levels and eligibility,
salaries of state employees, and other factors that affect the
cost of administering the state program.
Jobless workers will receive better service
because states will have the necessary resources and
flexibility--as well as greater oversight by worker and
employer groups at the state level.
Less paperwork for employers, who would need to
complete a single unemployment tax form rather than separate
state and federal unemployment tax forms.
Greater accuracy in collection of the
administrative tax. Currently enforcement efforts relating to
the FUTA are low priority, but states would be motivated and
have the ability to catch delinquents more easily.
Savings to the Federal government. Staffing levels
at DOL and the Treasury Department would be reduced.
Lower net taxes on employers. Currently the
federal government keeps 40% of the FUTA contributed by
employers. If the additional revenue flows into state benefit
trust accounts, employers will pay lower state U.C. taxes, in
some cases automatically, and in other cases through reductions
in state U.C. tax rates.
Greater employment opportunities. Because U.C.
taxes are based on payroll, a reduction in these taxes will
make it easier for employers to hire additional workers--such
as individuals coming off welfare rolls.
Currently the federal government keeps 40% of the
FUTA contributed by employers. If the additional revenue flows
into state benefit trust accounts, employers will pay lower
state U.C. taxes, in some cases automatically, and in other
cases through reductions in state U.C. tax rates.
Elimination of the 0.2% FUTA surtax, which would
save employers $1.5 billion a year.
Additional savings are possible through release of
surpluses in FUTA receipts into state benefit accounts and
through repeal of state tax diversions, which would no longer
be necessary.
There would be no diminution in legal rights or
unemployment benefits for workers. However, better service to
U.C. claimants would reduce U.C. claim duration, which has been
growing as a result of the squeeze on state U.C. agencies. An
average reduction of as little as 1 week would save another
$1.5 billion a year for employers by reducing their state
unemployment tax. To many of our members, this is the element--
along with elimination of the 0.2% FUTA surtax--that offers the
greatest promise of future savings.
We recognize that today the U.C. program is not in a
``crisis'' mode and therefore may not be high on the agenda for
immediate action by Congress. However, this is the most
propitious time to institute meaningful reforms that can save
money for the federal government, free resources for the
states, reduce the tax burden on employers, and improve service
to jobless workers. The UBA/states administrative financing
reform plan is sound public and fiscal policy, and we
respectfully urge your support for it. Of course, we also urge
that Congress approve adequate funding for system
administration until a restructured system can be implemented.
Alternate Base Period Issue
We would also like to address another, more immediate
concern--the Pennington decision, which misinterpreted federal
law to require that states expand eligibility despite the
additional burden on state agencies and employers. This problem
was created by the U.S. Court of Appeals for the Seventh
Circuit, which has recently ruled that federal law requires
Illinois to expand eligibility. Pennington is not only a
dramatic expansion of the federal role in determination of
basic unemployment benefits after 60 years in which this was
considered a state issue, but--unless corrective action is
taken--it will add more than $1 billion a year to federal
spending and to the federal budget deficit. A similar lawsuit
has now been filed in federal court in California, California
AFL-CIO v. Bradshaw.
The specific issue in Pennington and Bradshaw is whether
the federal government can override state laws that govern the
qualifications for benefits. Under the U.C. program, an
eligible worker must demonstrate sufficient attachment to work
in order to qualify. In most states, a worker must have
sufficient wages during a specific period of employment as
provided in state law--the ``base period''--typically the first
4 of the most recent 5 completed calendar quarters. This method
is an efficient means of making these determinations, because
states do not have more recent wage information, and it is
prohibitively costly to collect it, while comparatively few
individuals would be affected. In Pennington, the court held
that Illinois must adopt an ``alternate base period'' (ABP)
that would result in payment of benefits to workers who did not
qualify under the present test but who might qualify if more
recent wages were considered. The court failed to take into
account the large administrative costs to state unemployment
compensation agencies and employers in attempting to collect
more recent wage information. These added costs are estimated
to be more than $1 billion annually, if Pennington were applied
nationwide, as is likely to be the case. The added costs
incurred under Pennington will be reflected in the federal
budget because federal and state unemployment compensation
taxes and state unemployment benefits are accounted for in the
unified federal budget. Any added costs, therefore, will add
directly to the task of balancing the federal budget, as well
as adding to the tax burden on employers and upsetting the
balance at the state level in making benefit determinations.
Historically, states have been given the responsibility for
determination of who is eligible for unemployment compensation,
along with other basic benefit design issues. We believe that
this decision should remain at the state level, because states
are closest to striking an appropriate balance between benefits
for workers and cost to employers, as well as efficient
administration of the program.
Employers, including our members who have operations in
California, feel strongly that the decision to use an alternate
base period should not be imposed by the courts. Legislation
clarifying that use of an alternate base period remains a
state, rather than federal, decision has been introduced as
H.R. 125. We respectfully urge that the Congress give expedited
consideration to the enactment of this legislation.
FUTA Grants and Taxes by State (FY 1995)
------------------------------------------------------------------------
FUTA Federal % Grants/
State Contributions Grant Contributions
------------------------------------------------------------------------
ALABAMA..................... 86.9 41.5 47.8
ALASKA...................... 11.4 29.5 258.8
ARIZONA..................... 90.2 39.1 43.3
ARKANSAS.................... 49.9 27.2 54.5
CALIFORNIA.................. 645.5 500.6 77.6
COLORADO.................... 91.6 43.1 47.1
CONNECTICUT................. 74.2 63.7 85.8
DELAWARE.................... 18.2 10.7 58.8
DIST. OF COL................ 18.1 15.4 85.1
FLORIDA..................... 319.1 113.8 35.7
GEORGIA..................... 170.5 66.3 38.9
HAWAII...................... 25.6 17.8 69.5
IDAHO....................... 22.9 20.5 89.5
ILLINOIS.................... 278.3 151.5 54.4
INDIANA..................... 136.5 50.0 36.6
IOWA........................ 62.6 29.0 46.3
KANSAS...................... 57.1 25.2 44.1
KENTUCKY.................... 77.7 33.3 42.9
LOUISIANA................... 82.4 37.3 45.3
MAINE....................... 24.5 20.6 84.1
MARYLAND.................... 101.7 67.6 66.5
MASSACHUSETTS............... 139.1 84.3 60.6
MICHIGAN.................... 210.5 127.0 60.3
MINNESOTA................... 114.9 51.8 45.1
MISSISSIPPI................. 53.4 25.8 48.3
MISSOURI.................... 121.9 57.9 47.5
MONTANA..................... 14.2 14.1 99.3
NEBRASKA.................... 34.8 18.7 53.7
NEVADA...................... 42.7 25.3 59.3
NEW HAMPSHIRE............... 26.6 14.1 53.0
NEW JERSEY.................. 169.5 113.0 66.7
NEW MEXICO.................. 30.0 19.2 64.0
NEW YORK.................... 345.7 241.2 69.8
NORTH CAROLINA.............. 174.3 63.8 36.6
NORTH DAKOTA................ 11.8 14.0 118.6
OHIO........................ 259.4 101.6 39.2
OKLAHOMA.................... 59.9 30.9 51.6
OREGON...................... 70.0 47.8 68.3
PENNSYLVANIA................ 251.0 166.9 66.5
PUERTO RICO................. 34.7 39.0 112.4
RHODE ISLAND................ 20.8 20.3 97.6
SOUTH CAROLINA.............. 80.1 36.8 45.9
SOUTH DAKOTA................ 13.7 10.9 79.6
TENNESSEE................... 123.3 43.6 35.4
TEXAS....................... 400.0 167.3 41.8
UTAH........................ 42.3 30.3 71.6
VERMONT..................... 12.3 10.5 85.4
VIRGIN ISLANDS.............. 1.7 3.2 188.2
VIRGINIA.................... 148.7 57.9 38.9
WASHINGTON.................. 115.1 89.4 77.7
WEST VIRGINIA............... 30.5 20.3 66.6
WISCONSIN................... 125.0 63.2 50.6
WYOMING..................... 9.3 13.1 140.9
TOTAL..................... 5731.7 3227.3 56.3
------------------------------------------------------------------------
Dollars in Millions.
Source: U.S. Department of Labor
Chairman Shaw. Thank you, Mr. Oxfeld.
Mr. Wilson.
STATEMENT OF MARK WILSON, REBECCA LUKENS LABOR POLICY FELLOW,
HERITAGE FOUNDATION
Mr. Wilson. Mr. Chairman, and Members of the Subcommittee,
thank you for inviting me to testify on unemployment insurance
reform. Thank you for accepting my written testimony into the
record. Obviously, I'd like to summarize some of the key points
that I would like to make, summarize the key principles I think
are necessary for UI reform, and then highlight some important
differences between the two major competing reform plans that
are out there. And I'd also like to note that the following
testimony is my own view, and does not necessarily reflect the
views of the Heritage Foundation.
As the 105th Congress begins its debate over the
unemployment insurance system, legislators should consider
three important principles to ensure that both workers and
employers receive the greatest benefit from any reform.
Number one, the taxing and spending authority for the UI/ES
system should be at one level of government, and not split
between the Federal Government and the States. Effective
program accountability requires States to be responsible for
both raising and spending the revenue to run the UI/ES system.
Maintaining the current bifurcated taxing and spending
authorities diminishes direct responsibility and
accountability.
Number two, ensure and maintain the integrity of the
national employment security system by continuing the FUTA
offset for States that provide public employment services with
universal access where individuals can file UI claims and
receive reemployment services.
National standards regarding benefit coverage, FUTA
conformity standards, benefits for out-of-state claimants
should continue.
Number three, there should be, however, a minimum of
Federal control and a maximum of flexibility for the States.
Burdensome Federal mandates that cause inefficiencies and
impose increased costs on the States should be eliminated. And
States should be empowered to provide programs that improve
both employment services for job seekers and employers and have
the flexibility to address the needs of workers that may be
unique to their State.
These principles form the foundation of sensible employment
security reform that will improve UI/ES services while reducing
administrative and payroll taxes.
Two separate plans to reform the employment security system
have come forward in the past year. The principles that I have
summarized and the recommendations that are outlined in my
written testimony have been endorsed by ALEC, the American
Legislative Exchange Council, and form the foundation of the
ALEC plan.
Another plan that is supported by UBA and several State
employment security administrators represented by Dave is
presented in their written testimony.
Although there are some similarities between the ALEC plan
and the UBA ES administrators' plan, three fundamental
differences separate them. The most important distinction is
that the UBA ES plan maintains the FUTA, while the ALEC plan
effectively eliminates it.
Under the ALEC plan, the taxing and spending authority for
the UI/ES system would be transferred to one level of
government, thereby improving accountability.
Each State would have direct control over their taxes,
rather than continuing to receive revenue from a fixed Federal
FUTA tax that is set in Washington and rarely changed.
Governors and State legislatures are in the best position
to determine the needs of their unemployed workers and to
establish the appropriate wage base and tax rate to meet those
needs.
Moreover, the employee security agencies would have to
justify their budgets directly to the citizens of those States.
Under the UBA ES plan, the current bifurcated tax and spending
arrangement between the Federal and State governments would
continue indefinitely.
For many States, the UBA ES plan does not solve the problem
of over taxation, over FUTA taxation. For example, Mr.
Chairman, in your home State of Florida, employers would
continue to send over $230 million to Washington in FUTA taxes.
But with even a 30-percent increase in the State UI/ES
agency's budget, Florida would spend only $150 million.
This means that over $80 million per year would be pulled
from Florida workers and employers and continue to build up in
Washington trust funds. Eventually they would roll over into
the State benefit accounts, but here, too, they would continue
an unwanted buildup.
Under the ALEC plan, Florida would have direct control over
the level and rate of both the administrative and benefit
taxes. In fact, Florida's legislature recently passed a benefit
tax moratorium explicitly to limit the size of their benefit
trust funds.
Only the ALEC plan would enable them to do so on the
administrative side of the ledger. Under the ALEC plan, workers
and employers would be saving over $1 billion each year in
payroll taxes. And by maintaining the FUTA tax rate, UBA and
the ES plan also preserves the continued mountain of burdensome
paperwork requirements that are required because of the current
Federal/State grant process and the overregulation of State
programs.
The UBA ES plan does not eliminate the FUTA grant process.
It only changes the grant formula to 100 percent passthrough.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Mark Wilson, Rebecca Lukens Labor Policy Fellow, Heritage
Foundation
Mr. Chairman, Members of the Committee, thank you for
inviting me to testify on unemployment insurance reform. Today,
I would like to discuss how transferring the administration and
financing of the Employment Security system to the states would
reduce payroll taxes, increase jobs and take-home pay, reduce
paperwork burdens, improve services for unemployed workers, and
more effectively decrease the duration of unemployment. Please
accept my written testimony and enter it into the record. It
should also be noted that the following testimony is my own
view and does not necessarily reflect that of The Heritage
Foundation.
Brief Overview of the Employment Security System
The Employment Security (ES) system consists of the
Employment Service and unemployment insurance programs. The
Employment Service was created in 1933 by the Wagner-Peyser Act
to make available, free of charge, job search and placement
assistance to individuals, and recruiting and referral services
to employers. Services are available in more than 1,800
Employment Service offices nationwide. More than 18 million
people were served by the Employment Service system in 1996
with about 8 million referred to jobs. Over 3 million
individuals found jobs after receiving re-employment services
at a cost of about $250 each. In 1982, Congress amended the
Wagner-Peyser Act to devolve most Employment Service
administrative responsibility to the States. Financial
responsibility (revenue and appropriations) for the Employment
Service, however, remains with the Federal government.
The unemployment insurance (UI) system was federally
mandated on the states by the Social Security Act of 1935.\1\
Together the Federal Unemployment Tax Act (FUTA) and the Social
Security Act established the framework for administering and
financing the UI system. FUTA generally determines covered
employment, and imposes certain requirements on state programs,
but states generally determine eligibility, weekly benefit
amounts, and the duration of benefits.
---------------------------------------------------------------------------
\1\ The Social Security Act provided business a competitive
disadvantage if their state did not enact UI. The tax for employers in
states that meet all federal requirements is 0.8 percent. The tax for
employers in states that don't meet federal requirements is 6.2
percent.
---------------------------------------------------------------------------
The UI/ES system currently is financed by two separate
taxes, with two different tax forms, by two levels of
government. A Federal Unemployment Tax (FUTA) of 0.8 percent on
the first $7,000 of each employees wages and state unemployment
insurance taxes that average 0.9 percent of total wages. The
current 0.8 percent FUTA tax rate has two components: a
permanent tax rate of 0.6 percent, and a temporary surtax of
0.2 percent.\2\ The surtax was first passed in 1976 to restore
depleted state UI accounts and was suppose to expire in 1987.
Since 1987, the surtax has been extended four times primarily
to fund extended benefit programs and is now suppose to expire
in 1998. The revenue raised by FUTA is designated for UI
administration and maintaining a system of ES offices. Portions
of FUTA revenues also fund the federal half of the Extended
Benefits Program.\3\
---------------------------------------------------------------------------
\2\ The current FUTA tax rate is 6.2 percent, but employers in
states with programs approved by the federal government receive a
credit of 5.4 percentage points, making the effective FUTA tax rate 0.8
percent.
\3\ Half of the revenue to pay for extended benefits comes from
FUTA. The other half comes from the state benefit taxes. The extended
benefits program provides for an additional 13 weeks after a recipient
has exhausted regular UI benefits, but is only available if a state's
unemployment rate rises significantly.
---------------------------------------------------------------------------
The state unemployment insurance tax varies from state to
state, is paid by employers on behalf of their employees, and
is experience-rated (employers with few layoffs typically have
the lowest tax rates). State legislatures determine the tax
rate and the taxable wage base. Twelve states limit taxable
wages to the federal minimum of $7,000, other states have
ceilings raging from $8,000 in eight states, to $25,500 in
Hawaii.
State UI tax revenues fund their weekly UI benefit payments
and the state half of the Extended Benefit Program. FUTA
revenues are deposited in three federal accounts and state UI
tax revenues are deposited in 53 state accounts maintained by
the federal government (one for each state, D.C., Puerto Rico,
and the Virgin Islands). At the end of fiscal year 1997, state
accounts in the UI Trust Fund are forecast to have balances
totaling $42.9 billion and the three federal accounts had
balances totaling $18.8 billion.\4\
---------------------------------------------------------------------------
\4\ U.S. Department of Labor, ``UI Outlook,'' February 1997.
---------------------------------------------------------------------------
Like the Social Security Trust Fund, any positive balance
in the UI Trust Fund effectively is used to fund other federal
programs for as long as there is the federal budget is running
a deficit. General revenues are used to fund federal
unemployment benefit programs and allowances such as Trade
Adjustment Assistance and NAFTA Transitional Adjustment
Assistance.
Why The UI/ES System Should Be Transferred To The States
When the UI/ES system was created in the 1930's, Congress
intended it to be a federal-state partnership. The federal
government was to set broad parameters for the system, provide
adequate and equitable funding for state administration, and
oversee state law and operations to ensure compliance and
conformity. The states were to be responsible for carrying out
the program while complying with all federal laws and
regulations, as well as their own state requirements. Over the
years, several serious problems have developed with this
divided arrangement.
Overtaxation. In FY 1996, only $3.38 billion, or 58%, of
$5.85 billion in FUTA tax collection was actually returned in
federal grants to administer state unemployment offices. The
rest was spent on DOL bureaucracy, IRS tax collection, and
labor market information programs; or deposited in two seldom-
used federal accounts to pay for extended unemployment benefits
and make loans to state unemployment benefit trust funds. For
example, in FY 1995, employers in Tennessee paid $120.8 million
in FUTA taxes but the state received only $43.6 million in FUTA
grants to administer their UI/ES program, a loss of $77.2
million. Employers in Florida paid $309.9 million in FUTA taxes
but the state received only $113.8 million back from the
federal government, a loss of $196.1 million. In 1995, 19
states receive less than half the FUTA they sent to Washington.
All told the federal government collected $5.85 billion in FUTA
taxes in FY 1996 and after skimming money off the top for
bureaucracy, demonstration projects, and federal trust funds,
it then returned on average 56 percent back to the states.
Unnecessary paperwork. Employers now have to fill out both
a federal and a state unemployment tax return, the federal
return for the administrative tax and the state return for the
benefits tax. This costs employers an extra $291 million in
costs associated with double filing, when all taxes could be
paid on a single state return. It also costs employers $70
million per year for the IRS to process all of the FUTA forms.
Unused funds. Years of overtaxation have caused an immense
amount of money to pile up in Washington trust funds: $18.8
billion.\5\ Even though FUTA revenues collected for UI and ES
administration have been more than sufficient, Congress
continues to extend the 0.2 percent FUTA surtax on jobs and
limit UI and ES administration appropriations. This effectively
masks the true size of the federal deficit. Moreover, federal
budget constraints have had a detrimental effect on the
services provided to unemployed workers by the state UI system
and ES offices. This in turn has led to longer periods of
unemployment for workers \6\ and unnecessarily high payroll
taxes--contrary to the primary purpose of the UI/ES system.\7\
---------------------------------------------------------------------------
\5\ The balance in the Employment Security Administration Account
will be $2.7 billion in September 1997. This is $1.3 billion more than
the statutory limit. There is also a $6.7 billion balance in the
Federal Unemployment Account that has been built up using surplus FUTA
payroll taxes. In fiscal year 1997, Congress will withhold over $1.3
billion in FUTA revenues.
\6\ Lawrence F. Katz and Bruce D. Meyer, ``The Impact of the
Potential Duration of Unemployment Benefits on the Duration of
Unemployment,'' National Bureau of Economic Research, Working Paper No.
2741, October 1988. This study concluded that extending the duration of
UI benefits from 6 months to 1 year will increase the mean duration of
unemployment by 4 to 5 weeks. Examples of federal programs that
increase the duration of UI benefits are the extended benefit programs
and trade adjustment assistance.
\7\ Daniel S. Hamermesh, ``New Estimates of the Incidence of
Payroll Tax,'' Southern Economic Journal, Winter 1979. Research on the
incidence of taxation has generally concluded that payroll taxes are
predominantly, if not completely, borne by labor in the long-run
through lower real wages.
---------------------------------------------------------------------------
Inefficient service delivery. When the federal government
raises tax money from the states and it is transmuted into
``federal funds,'' hosts of rules, restrictions, and
requirements suddenly appear that hinder efficient service
delivery. The federal government has also used the state
conformity process to frequently upset the balance of
administrative funding and workloads by dictating that states
absorb the costs of administering additional programs.\8\
Moreover, the state conformity process has resulted in a ``one-
size fits all'' approach that does not address the needs of
individual states, nor provide states with the flexibility to
address the needs of individual workers.
---------------------------------------------------------------------------
\8\ Edwin M. Kehl, ``Administrative Simplification of Unemployment
Compensation Programs,'' in W. Lee Hansen and James F Byers eds.,
``Unemployment Insurance: The Second Half-Century,'' The University of
Wisconsin Press, 1990.
---------------------------------------------------------------------------
The Key Principles For Reform
As the 105th Congress begins its debate over the UI/ES
system, legislators should consider three important principles
to ensure that both workers and employers receive the greatest
benefit from any reform.
1. The taxing and spending authority for the UI/ES system
should be at one level of government and not split between the
federal government and the states. Effective program
accountability requires the states to be responsible for both
raising and spending the revenue to run the UI/ES system.
Maintaining bifurcated taxing and spending authorities
diminishes direct accountability.
2. Assure the maintenance and integrity of a national ES
system by continuing the FUTA offset credit for states that
provide public employment services with universal access where
individuals could file UI claims and receive re-employment
services. National standards regarding benefit coverage, FUTA
conformity standards, benefits for out-of-state claimants
should continue.
3. There should, however, be a minimum of federal control
and maximum flexibility for the states. Burdensome federal
mandates that cause inefficiencies and impose increased costs
on the states should be eliminated. States should be empowered
to design programs that improve employment services for job
seekers and employers, and have the flexibility to address the
needs of workers that may be unique to their state.
These principles form the foundation of sensible Employment
Security reform that will improve UI/ES services while reducing
administrative payroll taxes. To implement these principles
Congress should:
Allow the temporary 0.2 percent FUTA surtax to
expire at the end of 1998.\9\
---------------------------------------------------------------------------
\9\ This is already in the CBO baseline budget.
---------------------------------------------------------------------------
This will remove an unnecessarily high payroll surtax that
limits job growth and workers' take-home pay and return $1.4
billion each year to workers and employers. This revenue loss
is already accounted for in the CBO baseline budget and will
not effect the deficit.
Increase the FUTA employer offset credit from 90
to 100 percent, and transfer the taxing authority for
administrative purposes to the states.
This will effectively eliminate the FUTA tax for states
that continue to maintain conformity with the amended FUTA
requirements. The taxing and spending authority for the UI/ES
system would be transferred to one level of government. Each
state would then be responsible, and accountable, to their
workers and employers for the UI payroll tax dollars and for
the administration and effectiveness of their UI/ES system. The
combined state tax would remain dedicated to funding only those
activities covered by the UI/ES system.
This will also save employers $291 million per year in
paperwork costs associated with filing the FUTA tax returns and
an additional $70 million per year for the IRS to process all
of the FUTA forms.
Establish 53 new ``state'' administrative accounts
in the U.S. Treasury. States would be required to deposit
revenue raised for ES administration into their federally
managed administrative account. Each state would be permitted
to pay for their administrative expenses from their new
accounts. States would continue to pay for their UI benefit
expenses from their benefit accounts. States would, however, be
permitted to make withdrawals only to pay for benefits and
administration of its UI law.
Use the existing balance in the federal Employment
Security Administration Account (ESAA) for transition purposes.
Set aside $150 million in the old federal ESAA to ``hold
harmless'' for 5 years those states that receive more in FUTA
grants than their employers pay in FUTA taxes in FY 1995.
Transfer the remaining ESAA balance to the new 53 state
administrative accounts in proportion to their share of covered
employment. Distribute the hold harmless set-aside into the
states' administrative accounts in proportion to their most
recent FUTA revenue/FUTA grant shortfall. Eliminate ESAA after
a 5 year hold harmless period.
This will hold-harmless those states that do not have a
sufficient tax base to fund their UI/ES system for a 5 year
transition period.
Repeal the federal-state extended benefit program
and discontinue the Extended Unemployment Compensation Account
(EUCA). Transfer the EUCA balance to the 53 state benefit
accounts in proportion to their share of covered employment.
Amend FUTA to enable States, at their option, to provide their
own extended benefit program with their own triggers.
States currently have the responsibility to determine the
number of weeks regular UI benefits are paid. State
legislatures should be able to establish an extended benefits
program that best meets the needs of their workers and
determine the duration of those extended benefits as well. As
it is, the current extended benefit program ``trigger''
requirements are so high, few states qualified for activation
of the program during the last recession. There will be no
impact on the federal budget because the state benefit
accounts, like EUCA, are included in the federal budget.
Discontinue the Federal Unemployment Account (FUA)
and distribute the balance to the 53 state benefit accounts in
proportion to their share of covered employment. Provisions
should be made for interest bearing loans from federal general
revenues to state trust funds with the same repayment
provisions that currently exist. States should, at their
option, be able to borrow from other sources as well.
Funds in the FUA come from a portion of the FUTA payroll
tax on jobs.\10\ When the FUA is not being used for state
loans, the surplus that builds up in the account is essentially
used to fund other government programs and amounts to a tax on
jobs to reduce the deficit. At the end of September 1998 there
will be a $7.0 billion surplus in the FUA. In recent years,
states have borrowed from other sources to obtain lower
interest rates and avoid losing the FUTA offset credit.
Provisions should be made, however, for interest bearing loans
from federal general revenues if they are needed quickly. There
will be no impact on the federal budget because the state
benefit accounts, like FUA, are included in the federal budget.
---------------------------------------------------------------------------
\10\ FUTA funds are indirectly deposited the FUA when the EUCA and
Employment Security Administration Account (ESAA) have reached their
statutory limits.
---------------------------------------------------------------------------
Ensure state trust fund security and accuracy by
continuing to require the deposit of all state unemployment
insurance taxes in the federal Unemployment Trust Fund
accounts. Funds should be deposited on a timely basis and be
invested by the U.S. Treasury in federal securities. Interest
earned would accrue to the appropriate state trust fund
account.
Repeal Title III of the Social Security Act
(Grants to States for UI Administration) and transfer certain
requirements to FUTA.
Full payment of benefits when due (prompt and accurate) and
the opportunity for a fair hearing when claims are denied would
be moved to FUTA.
Title III elements that would be eliminated include
provisions that: Make the Secretary of Labor the judge of what
constitutes the proper and efficient administration of a
state's UI law; requiring states to replace and administrative
moneys lost or improperly expended; requiring states to provide
information to federal agencies administering public works or
assistance through public employment; and requiring cooperation
with federal agencies administering any UI law.
Requirements to disclose authorized information to the Food
Stamp program, child support agencies, and other agencies, as
well as deducting child support payments from UI checks would
remain in other statutes after their repeal in Title III.
Amend FUTA to require states to provide public
employment services with universal access where individuals
could file claims for unemployment benefits and receive re-
employment services.
To assure the maintenance and integrity of a national ES
system FUTA should be amended to require states to provide the
UI and employment services currently required under the Wagner-
Peyser Act. National standards regarding benefit coverage, FUTA
conformity standards, benefits for out-of-state claimants
should continue. Each state, however, should have the
flexibility to deliver employment services in a manner which
meets the needs of its job seekers and employers.
Repeal the Wagner-Peyser Act.
By amending FUTA to include the provision of employment
services (section 7 of Wagner-Peyser) the act would no longer
be necessary.
Repeal the Disabled Veterans' Outreach Program and
Local Veterans' Employment Representative program and amend
FUTA to require states to provide preferences to veterans
seeking unemployment insurance benefits and re-employment
services consistent with Title 38 of the United States Code.
The administrative efficiency of the ES offices could be
significantly improved by repealing barriers to the integration
of veterans' services with other employment services. As the
Vice President's National Performance Review noted in calling
for the removal of barriers,\11\ DoL's Veterans' Employment and
Training Service provides for state-employed, federally funded,
employment specialists to serve veterans in local state
employment service offices. However, these staff are legally
prohibited from helping non-veterans.'' So, if a local office
is crowded with non-veterans,'' points out the NPR, ``these
specialists cannot help out--even if they have no veterans to
serve.'' Employment Service staff would be used more
efficiently and the public better served by eliminating this
requirement.
---------------------------------------------------------------------------
\11\ From Red Tape to Results, Creating a Government That Works
Better and Costs Less, Department of Labor, Accompanying Report of the
National Performance Review, Office of the Vice President, September
1993, p. 80.
---------------------------------------------------------------------------
Require state laws to conform to certain
provisions that would remain, or be added to, FUTA. These
include:
To qualify for the FUTA tax credit, states must cover:
Employers who paid at least $1,500 in wages during any
calendar quarter or who employed at least one worker in at
least one day of each of 20 weeks in the current or prior
calendar year; Employers who paid cash wages of at least
$20,000 for agricultural labor in any calendar quarter or who
employed 10 or more farmworkers in at least one day in each of
the 20 different weeks in the current or prior year; domestic
service employers who paid cash wages of $1,000 or more during
any calendar quarter in the current or prior year.
FUTA would also continue to require coverage of nonprofit
organizations who employed at least four workers for one day in
each of the 20 different weeks in the current or prior year,
and state and local governments without regard to the number of
employees.
Amend Title IX to eliminate the general UI and ES
administrative grants to the states and reflect the elimination
of the EUCA and FUA accounts.
Amend Title IX of the Social Security Act to
eliminate restrictions on Reed Act funds previously distributed
and allow states to retain administrative funds used for real
estate as well as equity.
Current rules are so restrictive they act against the
efficient operation of the state UI/ES systems. The states are
in the best position to determine the use of capital equipment
and local facilities that will best serve the needs of their
workers and employers.
Permit states to carry out certain national
activities, with costs reimbursed by federal general revenues.
These include:
Federal unemployment claims (UCFE, UCX, TAA, DUA); BLS
cooperative programs (ES-202, CES, LAUS, OES); Compilation of
economic data (initial claims, continued claims, covered
employment); ensuring state statutes conform to FUTA
requirements; and Alien Labor Certification.
States would share in the cost of contracts for
some activities maintained by a consortium of states include:
Interstate and combined wage claim coordination, and America's
Job Bank.
Any remaining Department of Labor and Department
of Treasury oversight would be funded with general revenues.
Key Points of Comparison Between the Two Employment Security System
Reform Proposals
Two separate plans to reform the Employment Security system
have come forward in the past year. The principles and
recommendations that I have outlined today have been endorsed
by the American Legislative Exchange Council (ALEC) and form
the foundation of the ALEC plan. Another plan is supported by
UBA Inc., and several state Employment Security Administrators
(UBA/ES plan) and has been presented in the testimony of the
other panelists. Although there are some similarities between
the ALEC plan and the UBA/ES plan, three fundamental
differences separate them.
1. The most important distinction is the UBA/ES plan
maintains FUTA while the ALEC plan effectively eliminates it.
Under the ALEC plan the taxing and spending
authority for the UI/ES system would be transferred to one
level of government thereby improving accountability. Each
state would have direct control over their taxes rather than
continuing to receive revenue from a fixed federal tax (FUTA)
that is set in Washington and rarely changed. Governors and
state legislators are in the best position to determine the
needs of their unemployed workers and establish the appropriate
wage base and tax rate to meet those needs. Moreover,
Employment Security agencies would have to justify their
budgets (and thus the administrative tax level) directly to the
citizens of their states. Under the UBA/ES plan the current
bifurcated tax and spending arrangement between the federal and
state governments would continue indefinitely.
Under the ALEC plan, workers and employers may be
able to save over $1 billion each year in payroll taxes since
many states would be able to equal or exceed their current
federal grant revenue with lower tax rates. Under the UBA/ES
plan, many state Employment Security agencies could receive
substantial revenue windfalls of over 50 percent before any
taxes are cut.
By maintaining FUTA, the UBA/ES plan also
perseveres the mountain of burdensome paperwork required by the
current federal/state grant process and the over-regulation of
state programs by Washington bureaucrats. The ALEC plan, on the
other hand, would free up these resources for state Employment
Security agencies to use to improve re-employment services.
2. Unlike the UBA/ES plan, the ALEC plan would eliminate
the unnecessary Federal Unemployment Account (FUA) and
distribute more than $7.1 billion proportionally to the state
benefit accounts. This would significantly improve the solvency
of the state benefit trust funds and may trigger automatic
benefit tax cuts under existing state law. It may also
encourage some state legislatures to reduce benefit tax rates
or even declare a benefit tax moratoria (as North Carolina has
already done). At the least, these funds will permit the
absorption of benefit increases without raising taxes.
3. Only the ALEC plan provides states with the flexibility
to establish their own extended benefit programs that will best
meet the needs of their workers. The UBA/ES plan continues the
extended benefit program as an unnecessary mandate on the
states.
Conclusion
The recommendations presented here for transferring the
Employment Security system to the states constitutes a modest,
achievable proposal that will not unduly affect the federal
budget. In fact, they were characterized by one state
Employment Security Commissioner as ``fiscally sound,
administratively simple, and politically realistic.\12\ If
enacted such a transfer will enable states to reduce payroll
taxes, increase jobs and take-home pay, reduce paperwork
burdens, improve services for unemployed workers, and more
effectively decrease the duration of unemployment.
---------------------------------------------------------------------------
\12\ David B. Poythress, Statement before the House Committee on
Ways and Means, Subcommittee on Human Resources, July 11, 1996.
---------------------------------------------------------------------------
Chairman Shaw. Thank you, Mr. Wilson.
Mr. Simonson.
STATEMENT OF KENNETH SIMONSON, VICE PRESIDENT AND CHIEF
ECONOMIST, AMERICAN TRUCKING ASSOCIATIONS, ALEXANDRIA, VIRGINIA
Mr. Simonson. Good morning, Chairman Shaw and Members of
the Subcommittee. Thank you for the opportunity to testify. You
may not see them on my head, but I am actually wearing three
hats today.
Besides speaking for the 35,000 trucking businesses that
belong to the American Trucking Associations and its State and
national affiliates, I'm appearing on behalf of the UI Tax
Working Group, an informal coalition of employers, service
providers, and State governments whose focus is the FUTA
proposals in the administration's budget and their relationship
to UI reform.
In addition, I'm appearing as chair of the tax Committee of
the Small Business Legislative Council, a permanent independent
coalition of nearly 100 trade and professional associations
that share a common commitment to the future of small business.
The administration's budget contains two FUTA proposals
that can only be described as gimmicks. One is yet another
extension, this time through 2007, of the so-called temporary
0.2-percent surtax, first enacted in 1976, to eliminate an
unemployment trust fund deficit that was retired a decade ago.
This budget proposal comes despite an unemployment rate
that has thankfully stayed below 6 percent for over 2\1/2\
years, and which the budget, naturally, forecasts to stay there
as long as the budget window is open.
In fact, a straight extension of the surtax this time would
create an embarrassment of riches in the form of surpluses in
the various unemployment trust fund accounts that would have to
be forwarded to the States, and therefore not help make the
deficit look smaller.
To avoid this result, the administration proposes to raise
the levies around these funds so the money won't spill over
outside the budget.
The second proposal is even more shameless, to the point
that it gives the word gimmick a bad name. This proposal would
require employers to pay both Federal and State unemployment
taxes monthly rather than quarterly.
It's no coincidence that the plan would start up just in
time to accelerate payments otherwise due in fiscal year 2003
into fiscal year 2002. While the Treasury would get help that
year from a one-time speedup of 2 months' worth of unemployment
tax receipts, employers, the IRS, and State governments would
be saddled with higher filing and processing costs every year.
I would direct your attention to the charts distributed
with my testimony. The first charge shows the current system,
in which employers make a total of eight quarterly submissions
per year--four each to the IRS, and four to a State agency.
The second chart vividly shows that the administration
would triple this burden to 24 monthly filings each year.
Similarly, the processing and reconciliation burden would
triple for Federal and State agencies. That's what makes this
proposal even more objectionable than the other tax speedup
gimmicks considered in the past.
The only rationale offered for this idea is that it might
enable the IRS to identify nonpayers more rapidly. But as
ICESA, the Interstate Conference of Employment Security
Agencies, points out, State agencies do nearly all of the
unemployment tax enforcement.
The more resources they must devote to processing payments,
many of which would be for very small amounts, the less they
would have available for compliance. In any case, ICESA finds
that compliance is high and would not be improved by speeding
up payments without documents to reconcile them.
The administration has not suggested that it would support
higher spending by either Federal or State authorities to
process these additional tax filings. Clearly, the extra work
would be burdensome. Even their proposal includes an exemption
for some small employers with limited FUTA liability. But many
smaller businesses that add or replace employees, or hire
seasonal workers, would not qualify for the exemption, since
new FUTA liability accrues with each new hire, including
replacement employees.
This deposit acceleration rule makes no sense for
businesses, large or small, and an exception for small business
won't fix this fundamentally flawed concept.
I was pleased, Mr. Chairman, that you addressed those in
your floor statement earlier this year.
This proposal doesn't seem to pass anyone's straight face
test. When representatives of the UI Tax Working Group visited
the administration offices before the budget came out, both OMB
and Labor Department staff disavowed authorship of the speedup
proposal in unusually candid terms.
Even the Treasury staff presented no defense other than to
ask us to propose another revenue idea if we wanted this one
dropped. They did not suggest IRS would be given extra funds,
or was capable of handling the additional work without them.
Rather than move forward with complicated budget gimmicks,
as proposed in the administration's budget, Congress should
seek to streamline and consolidate the tax consolidation
process. There are many UI reform proposals, as you've heard
this morning.
Let me call attention to just the tax piece. Instead of the
toothy tangle shown on my second chart, we believe now is the
time to adopt a combined quarterly submission that would enable
employers to file taxes quarterly with just one agency, as
shown on the last chart.
Being flanked by experts on unemployment insurance reform
plans, I will not try to address those, believing that
devolution is in the details.
Instead, let me close by urging you to stay away from these
two budget gimmicks that will cause genuine, long lasting pain,
in exchange for unjustified or one-time fiscal gain.
Thank you.
[The prepared statement and attachments follow:]
Statement of Kenneth Simonson, Vice President and Chief Economist,
American Trucking Associations, Alexandria, Virginia
Thank you, Mr. Chairman and Members of the Subcommittee,
for the opportunity to testify today on selected unemployment
insurance (``UI'') issues. I am Vice President & Chief
Economist of the American Trucking Associations, the national
trade association for over 35,000 trucking businesses of all
sizes, types and regions. I am appearing on behalf of the UI
Tax Working Group, an informal coalition of employers, service
providers and state governments whose focus is the
Administration's Budget Federal Unemployment Tax Act (``FUTA'')
proposals and their relationship to UI reform. In addition, I
am appearing as Chair of the Tax Committee of the Small
Business Legislative Council (``SBLC''), a permanent,
independent coalition of nearly 100 trade and professional
associations that share a common commitment to the future of
small businesses.
Our working group has involved a broad array of
organizations: the American Payroll Association, the American
Society of Payroll Management, the American Trucking
Associations, the Interstate Conference of Employment Security
Agencies, Inc., the National Association of Manufacturers, the
National Federation of Independent Business, the Service Bureau
Consortium, the Society for Human Resource Management, and UBA,
Inc. These organizations oppose the Administration's FUTA
proposals and believe that any restructuring of the FUTA/State
Unemployment Insurance (``SUI'') tax rules should only be
considered in the context of broad-based UI programmatic
reforms such as those now being considered by the Subcommittee.
Furthermore, we believe any reform of the UI system should
include a streamlining of the FUTA/SUI collection system,
thereby creating greater efficiencies and reduced costs for the
federal and state governments and for employers.
We are deeply concerned that the FUTA proposals contained
in the Administration's FY 1998 budget would create substantial
new burdens for both taxpayers and state government
administrators. If enacted, the budget scoring of these
proposals would make meaningful UI reform more difficult to
achieve. Mr. Chairman, we applaud your publicly stated
opposition to the Administration's FUTA proposals and your
commitment to consider FUTA restructuring only in the broader
context of UI reform.
Recommendations to reform the UI system and the collection
of unemployment taxes address a wide range of issues related to
the goals, financing and administration of the system. With
respect to tax collection issues, there is broad agreement that
the current duplicate collection system results in unnecessary
expense for federal and state government administrators. For
employers, this system is both expensive and complex. They must
deal with two levels of tax administration for payments, record
keeping and audit. Furthermore, they must confront varying
FUTA/SUI tax rate structures and wage bases, as well as
definitions of covered employment that differ between the
federal system and the states--and among the states. For multi-
state employers, like many in the trucking industry, the system
has become extremely complex.
At hearings before this Subcommittee last summer, witnesses
estimated that the present system of collecting separate state
and federal unemployment taxes each quarter costs employers up
to $500 million more per year in processing and related
administrative costs than would be required under a unified
collection system. Clearly reform is needed.
The Administration's FY 1998 UI Proposals
The Administration's FY 1998 budget contains two FUTA tax
proposals: the first proposal would extend the current .2
percent FUTA surtax scheduled to expire at the end of 1998
through the year 2007; the second would accelerate, from
quarterly to monthly, the collection of most federal and state
UI taxes beginning in the year 2002.
Surtax Extension. The FUTA surtax was enacted in 1976 to
eliminate a deficit in the Unemployment Trust Fund. Although
that debt was retired in 1987, the surtax has not been allowed
to expire. The proposal to again extend the tax was designed to
respond more to out-year budget considerations than to
demonstrated UI funding needs. It must be evaluated with full
appreciation of the significant current balances in the federal
UI trust funds and the continuing state frustration with
federal practices regarding reimbursement of administrative
expenses. We doubt that you will find any justification for a
further extension of this ``temporary'' tax. Private sector
employers are unanimous in opposing it.
UI Tax Deposit Speed-Up. Accelerating the collection of
existing federal and state UI taxes is a device that generates
a one-time artificial revenue increase for budget-scoring
purposes and real, every year increases in both compliance
costs for employers and collection costs for FUTA and SUI tax
administrators. The Administration's proposal is fundamentally
inconsistent with every reform proposal that seeks to
streamline the operation of the UI system and with its own
initiatives to reduce paperwork and regulatory burdens.
The proposal would increase federal revenues in FY 2002, as
taxes scheduled to be collected in FY 2003 are accelerated into
the previous year.\1\ No new revenues would be collected by the
federal or state governments by virtue of this proposal--the
federal government would simply record, in FY02, revenues that
would otherwise be received a year later.
---------------------------------------------------------------------------
\1\ Ironically, the amount of revenue recorded through this one-
time accounting speed-up results from yet another budgeting device.
State UI tax revenues are included as assets of the federal government
for budget-scoring purposes, notwithstanding the fact that the federal
government does not mandate the rate of this tax, collect it, or even
have the right to use the proceeds. All state monies in these Trust
Fund Accounts are automatically transferred back to the states to pay
UI benefit obligations as they occur. In the interim, they cannot be
used by the federal government for any other purpose.
---------------------------------------------------------------------------
This proposal is even more objectionable than other tax
speed-up gimmicks considered in budget reconciliation proposals
in the past. For example, proposals that might move an excise
tax deposit date forward by one month into an earlier fiscal
year make little policy sense, but also do not create major
additional administrative burdens. This particular proposal
would result directly in significant and continuing costs to
taxpayers and to the federal and state governments. By tripling
the number of required UI tax collection filings from 8 to 24
per affected employer each year, the proposal would exacerbate
current inefficiencies and substantially raise costs to
employers and both federal and state UI tax administrators.
Tripling the required number of deposits can only dramatically
escalate the cost to employers of the duplication inherent in
the current separate FUTA/SUI quarterly collection practices--
now estimated to cost employers several hundred million dollars
a year.
Furthermore, the one-time, budget score-keeping gain will
be far more than offset by the real, every year administrative
costs of additional FUTA tax collection to the IRS and SUI tax
collection to the states. Monthly submission requirements can
only increase the $100 million to process and verify the
quarterly FUTA deposits the IRS now receives from the UI Trust
funds.
In addition, since the federal government is required to
reimburse states for their UI administrative costs,
reimbursement of states for the added costs of monthly SUI
collection is another hidden federal outlay cost in this ill-
conceived proposal.\2\ To the extent the federal government
does not reimburse the states for these higher SUI collection
costs, the states will experience yet another form of unfunded
mandate.
---------------------------------------------------------------------------
\2\ The Administration's budget does not appear to factor in such
increased federal and state collection costs as an outlay offset to the
increased FUTA revenues projected.
---------------------------------------------------------------------------
The Administration implicitly recognizes that the added
federal and state deposit requirements would be burdensome, at
least for small business, since the proposal includes an
exemption for certain employers with limited FUTA liability.
Many smaller businesses that add or replace employees or hire
seasonal workers would not qualify for the exemption since new
FUTA liability accrues with each new hire, including
replacement employees. Further, this new exemption would add
still another distinction to the many already in the tax code
as to what constitutes a ``small'' business. This deposit
acceleration rule makes no sense for businesses large or small,
and an exception for small business does nothing to improve
this fundamentally flawed concept.
The Need for Reform
Rather than move forward with complicated budget gimmicks
as proposed in the Administration's budget, Congress should
seek to streamline and consolidate the tax collection process
as has been proposed in the various reform proposals that have
been presented to you.
State governments collected approximately 80 percent of the
$28.6 billion in the total federal/state UI taxes collected in
FY96. Transfer of the FUTA tax collection to the states would
place responsibility for the collection of the entire tax on
the administering authority having the most compelling interest
in maintaining an efficient and comprehensive collection
system. Consolidation would also eliminate the need for
duplicate tax submissions by every employer, the redundant
verification of tax deposits, and multiple audits now
necessitated by two separate collection systems.
The notion of consolidating tax collection with state
administrators is neither new nor radical. The 1980 UI
Commission chaired by the late Wilbur Cohen proposed the
concept. The 1995 Advisory Council chaired by Janet Norwood
endorsed it.
Conclusion
UI reform should focus on simplifying the system, reducing
the burden of our employers and reducing the costs of
administration to federal and state governments. Transferring
FUTA tax collection to the states would dramatically simplify
the system and save hundreds of millions of private and public
sector dollars annually.
Mr. Chairman, as you evaluate the tax collection aspects of
these reforms, we would ask that you keep in mind the three
charts that the UI Tax Working Group has supplied to the
Subcommittee. They contain a simple but important message:
Where we are;
Where we need not go; and
Where simplification can take us.
Thank you.
[GRAPHIC] [TIFF OMITTED] T0099.010
[GRAPHIC] [TIFF OMITTED] T0099.011
[GRAPHIC] [TIFF OMITTED] T0099.012
Chairman Shaw. Thank you, sir.
Dr. Norwood.
STATEMENT OF JANET L. NORWOOD, SENIOR FELLOW, URBAN INSTITUTE
Ms. Norwood. Thank you, Mr. Chairman, and Members of the
Subcommittee. As you know, I spent 3 years after having left
the Bureau of Labor Statistics studying the unemployment
insurance system with a council that represented labor,
management, the States, and the public.
We found a number of things that I think are terribly
important. The first point is that the unemployment insurance
system, which, as you know, is 60 years old, was set up at a
time when the labor market was very different from what it is
today.
We have a lot more people in services. The unemployment
insurance system was set up really for a manufacturing work
force with recessions that were short lived, and the people who
lost jobs were rehired. And we have a large number of part-time
and contingent workers.
The council found that there was a long-term, downward
trend in recipiency, since 1947; the unemployment insurance
program really has been serving a decreasing proportion of the
unemployed.
In fact, the range of unemployed receiving UI that we found
was about 17.6 percent in one State to 65 percent in another.
So there is a big difference among the States.
But what I would like to do today is to focus basically on
two issues. The first is the Federal and the State role in
unemployment insurance. The Nation's unemployment insurance
system is one of shared responsibilities and powers.
And I think it's important that those responsibilities be
shared effectively. We must maintain the interests of the
States, but we must also maintain the national interest.
We spent a good deal of time looking at the basic concepts
that ought to be the basis of a Federal/State cooperative
program, and although we had very differing views on the
council, we unanimously agreed that where the interests of the
States and the Federal Government coincided, which are many in
the unemployment insurance system, the Federal Government does
not need to be involved.
But where the interests are different, it is important for
there to be a Federal presence.
We found seven areas in which we felt that the Federal
Government needed to protect the national interest. The first
is to ensure there is a UI system in all States.
The second is to promote forward-funding of the
unemployment insurance system, and that's terribly important,
because there are two purposes of this system. One is to pay
workers who lose their jobs through no fault of their own, to
tide them over until they find employment.
But the other is to prime the economy. It's a pump-priming
effect in a period of economic downturn. And you can't do that
if you don't have adequate State trust funds at the time of a
recession.
The third is to coordinate the collection of information
and to monitor developments. The fourth is to maintain
supplemental benefit programs that trigger on automatically in
recessions, and avoid, therefore, the costly Federal emergency
benefits.
The fifth is to coordinate a more efficient pooling of risk
through loans to the States with serious recessions, and change
the way in which interest rates are paid. And finally, ensuring
the eligibility of workers with strong labor force attachment
with some minimum level of benefits.
In other areas, the programs should be left to the States.
And we had a list of areas where we thought the Federal
Government should leave issues to the States.
The second point I want to make is that we did find there
was a race to the bottom among the States. And the reason for
that is basically that there is a lot of competition among the
States for lower taxes. The easiest way for a State to handle
trust fund inadequacy is, we found, to raise eligibility
requirements.
We found some real discrimination against low-wage workers.
I'm particularly concerned about that, because as we move
forward toward more and more workers coming into the labor
force as a result of welfare reform, we're going to have people
with much less labor force attachment, much less experience and
training, who will have more spells of unemployment.
If we continue to tighten eligibility and have workers--and
there are some figures in my statement--if we have workers who
work half the year, say, part time, or work a full year part
time at the minimum wage, cutoff for unemployment compensation,
even though they have worked and have strong attachment to the
labor force, I think we're going to have some serious
difficulties in coping with this group of the labor force.
Mr. Chairman, we made 52 recommendations. I'm proud to say
that most of them--not quite all--but most of them were
unanimous, and I would ask that this pamphlet summarizing them
be noted in the record.
Thank you very much.
[The prepared statement follows:]
Statement of Janet L. Norwood, Senior Fellow, Urban Institute \1\
Mr. Chairman and Members of the Subcommittee:
---------------------------------------------------------------------------
\1\ Any opinions expressed herein are solely the author's and
should not be attributed to the Urban Institute, its officers, or
funders.
---------------------------------------------------------------------------
I appreciate the opportunity to discuss the nation's
unemployment insurance program with you this morning. As you
know, I chaired the Advisory Council on Unemployment
Compensation (ACUC), having been appointed to the Council by
both Presidents Bush and Clinton. The Council, established in
Section 908 of the Social Security Act as amended, had 11
members appointed by the Congress and the President who, by
law, were representatives of state governments, business,
labor, and the public. The ACUC reviewed the entire
Unemployment Insurance program (UI), held meetings and public
hearings in different parts of the country, visited state
offices, and met with groups of businessmen and with workers
seeking benefits. Members of the Council also visited a number
of state UI offices and staff at the U.S. Department of Labor.
The Council convened two economic research conferences and
sponsored a legal symposium to facilitate the exchange of ideas
and to ensure a full understanding of the operation of the UI
program. The three reports of the Council contain, I believe, a
useful summary of the operation of the program--both the parts
that are working well and areas which could be improved.
Although many different perspectives were represented on the
Council, most of the recommendations were unanimous.
The nation's system of unemployment insurance is now more
than 60 years old. As the oldest federal-state cooperative
program, it has served the nation well and, in fact, should be
seen as a prime example of cooperation between the states and
the federal government. The UI program provides economic
security to millions of American workers who, through no fault
of their own, are temporarily laid off or permanently lose
their jobs. We should ensure that the program continues to meet
the needs of workers in a labor market that is considerably
different from that of the past.
Our country's labor force today is much more diverse, made
up of men and women, skilled and unskilled, minorities and
immigrants. More than 136 million people are in the labor
force, and the labor force participation rate has climbed to
over 67 percent. Almost 8 out of every 10 workers are employed
in a service-producing industry. Factory workers, who were the
prime recipients of UI benefits when the program began, today
make up only 20 percent of nonagricultural employment. Part-
time work has become more prevalent, much of it because people
prefer it, but more than 4 million workers are forced to work
part-time because full-time jobs are not available. In
addition, nearly 8 million workers (6.1 percent of all employed
workers) were multiple jobholders, that is, they held more than
one job.
The fact that the unemployment rate--at 5.2 percent--is
relatively low and that job creation continues makes this a
very good time to review the UI program. This is a period when
the demands on the UI system are relatively low and when,
therefore, we should be planning for the future. It is
important to note that according to data for the first week in
March, only 37.4 percent of the unemployed in our labor force
survey are receiving UI benefits. There are many reasons for
this discrepancy, of course, since the UI system does not cover
new entrants to the labor force or those long-term unemployed
who have already used up their benefits. Nevertheless, the
long-term downward trend in recipiency since 1947 shows that
the UI program has been serving a decreasing proportion of the
unemployed.
The ACUC made a number of recommendations for improvement
of the system, and they are all useful. But I would like to
focus my testimony this morning on two issues that I consider
especially important. The first is the sharing of
responsibility between the federal government and the state
governments and the solvency of the UI trust funds. The second
is the treatment of part-time and low-wage workers.
Defining the Federal and State Roles in the Unemployment
Insurance System
The nation's unemployment insurance system is one of shared
responsibilities and powers. It is important that those
responsibilities be shared effectively so that the interests of
the states and of the nation as a whole are best served. The
federal government has a responsibility to protect the national
interest in cases where the interests of the states do not
coincide with those of the federal government. In cases where
the interests of the two levels of government coincide--which
is very often the case--the program should be left to the
states. The ACUC made a number of specific recommendations
about activities in the program which should be left to the
states. Our report laid out a useful conceptual foundation for
dealing with the responsibilities of the two levels of
government in programs which must have the cooperation of both
to succeed. I believe that the research that we did on this
issue can be applied to many other programs and that the UI
system should be seen as a useful model as we move more
responsibility to state governments.
The Council found that the federal government had a
responsibility to protect essential national interests in seven
areas and to leave most responsibility for other areas to the
states. The recommendations were that the federal government
should: (1) ensure that each state maintains a UI system; (2)
Promote forward funding of the UI system; (3) coordinate the
collection of labor market information and the monitoring of
developments; (4) maintain supplemental benefit programs that
trigger on automatically in recessions, thereby avoiding costly
federal emergency benefits; (5) coordinate a more efficient
pooling of risk through loans to states with serious
recessions; (6) assure the eligibility of workers with labor
force attachment for a minimum level of benefits; and (7)
promote the efficiency and quality of program outcomes.
In other areas, the Council found that program details
could best be left to the states. We recommended that many
federal laws, regulations, and federal oversight be changed to
leave the states unencumbered in areas best handled by them.
For example, states should determine whether to disqualify
certain groups of workers (i.e., school employees between terms
or professional athletes), whether benefits should be reduced
if workers received retirement benefits, and a variety of
oversight functions about performance outcomes.
Our research showed that the pressures under which many of
the states were operating encouraged a ``race to the bottom,''
which affected two extremely important areas--trust fund
solvency and low-wage workers. Although some states maintained
a degree of forward funding of the trust funds, others did not.
Since one important purpose of the UI program is the provision
of purchasing power during an economic downturn, the federal
government has a responsibility to ensure that this is done.
State trust funds must be adequately maintained in good times
so that when recession hits, payments can be made to the
workers who need them. The funds needed for these payments
should be secured in periods of economic expansion and not in
the midst of an economic downturn. I am concerned that
insufficient attention is currently being given to building up
the trust funds in some states now while we are in an economic
expansion for use during some future recession.
Low-Wage Workers
Research conducted by the Council staff found that the
competitive pressures among the states to attract business
could well lead to a continued decline in the percentage of
unemployed workers who received benefits. We were concerned to
find that this problem disproportionately affected low-wage
workers. When a state experiences insufficient trust funds to
cope with the demand from workers entitled to benefits, often
the first step taken is to tighten eligibility for those
benefits. The brunt of this tightening hits especially those
working part-time and those earning low wages. For example, our
research found that a minimum wage person who worked half time
or for 20 hours each week the year round would not qualify for
UI benefits in nine states. But a comparable part-time, full-
year worker earning $8.00 an hour would qualify in all states.
The point is that a worker with strong labor force attachment
can be disqualified for UI because his earnings were too low.
In the same way, we found that a worker employed two days per
week for a full year at the minimum wage would not qualify for
benefits in 29 states. But that worker would be eligible in all
but two states if his earnings were $8.00 per hour. Thus, low-
wage and part-time workers are disqualified either because of
their low earnings or because they work only part-time.
The ACUC report for 1995 declared: ``Because of the
structure of earnings eligibility requirements, low-wage, part-
time workers must work more hours to qualify than higher-wage
workers.'' This means that the system in some states
discriminates against the working poor, exactly the group we
most need to help in our society. I believe that this is an
issue that will become more important as an increasing number
of people move from welfare to jobs as the result of the recent
welfare legislation. The former welfare recipients tend to have
little labor force experience and frequently do not have much
training; they can, therefore, be expected to suffer more
spells of unemployment than the rest of the labor force.
Mr. Chairman, I have focused my brief remarks on only a few
of what I believe to be among the most important issues covered
by the careful study and review of the Advisory Council. I
should be happy to try to answer any questions you may have.
References:
Advisory Council on Unemployment Compensation, Report and
Recommendations, Transmitted to the President and Congress, February
1994.
Unemployment Insurance in the United States: Benefits, Financing,
Coverage, A Report to the President and Congress, February 1995.
Defining Federal and State Roles in Unemployment Insurance, A
Report to the President and Congress, January 1996.
Collected Findings and Recommendations: 1994-1996.
Chairman Shaw. Thank you, Dr. Norwood.
Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. This panel is a lot
harder than the first panel, and I, frankly, don't have any
questions, because I don't know enough yet about what everybody
is proposing. So for right now, Mr. Chairman, I beg for more
time to study this issue.
But I do appreciate all the contributions of the folks who
are here. They're very interesting comments. And I think that I
need more time to assimilate all of this.
Thank you.
Chairman Shaw. That is a historic comment, that a Member of
Congress doesn't know everything about everything.
Mr. Levin.
Mr. Levin. Thank you, Mr. Chairman. What do you do next? I
very much, if I might say, sir, respect that approach, and I
hope we can look at this issue without kind of automatically
choosing up sides.
I think where we can simplify we should do it, and I think
we need to look at the administrative problems. I'm no longer
on the Budget Committee, but I don't like gimmicks.
I hope we can use, Mr. Chairman, this hearing as an
opportunity to take a rather broad and perhaps a fresh look at
the unemployment system. Because I think as Dr. Norwood has
said, times have changed since it was started.
And also we have, I think, some memories of the last
recession. And I hope that no one here, Republican or Democrat,
thinks there will never be another one, whatever the
assumptions of CBO or anyone else might be.
So let me just ask, for example, I'll ask you, Mr. Wilson,
What happens under your proposal if there is no FUTA tax when
there is a recession? Where's the supplemental benefit coming
from?
Mr. Wilson. I believe the States should have control over
establishing their own extended benefits program. They are in
the best position to decide the length of the duration, the
eligibility for the duration, and the trigger mechanism for the
extended benefits.
As you know, in the last recession, in the early nineties,
the trigger mechanism at the Federal level kicked in for very
few States and forced Congress to establish an emergency
employment compensation program.
Mr. Levin. Let me just say, myself, I draw the opposite
conclusion. And I think Mr. English's testimony, if I might say
so, points in the opposite direction from you, from what you
say.
Look, we had trouble with the EB Program, so you say don't
make it useful. Abolish it.
Mr. Wilson. No. I'm not saying abolish it. I'm saying leave
it up to the States.
Mr. Levin. Well, that's abolishing a Federal program. And
we went through the agony of trying to respond to high
unemployment levels in States, and what we're finding is that
recessions are not national. They tend to be regional.
So you say leave it up to the States, but the States that
are hit are the ones that have the least capacity to respond.
Now, you can take 1990 or 1991 if you want. That was difficult
enough.
But take 1982, 1983, 1984, and 1985 when we went through
the agony of what we were going to do about regional
recessions. And it is true, the EB program trigger did not
work. We had set up a system we thought might be operable.
But that only showed, I think, the need to have some kind
of a national system, partly because the States that are hit
are the least able to respond; and second, as we found out in
the eighties, and again to some extent in the nineties, when
there's severe unemployment in one State, it affects other
States. People go to other States.
Mr. Wilson. But the States are currently responsible for
regular benefits. They have been able to manage those benefits,
that program, fairly well over the last 60 years.
Mr. Levin. Within a Federal structure. But that's assuming
no recession. So when you say Governors and State legislators
are in the best position to determine the needs of their
unemployed workers and establish appropriate wage base and tax
rate, even--and I think we need to take a look at that
statement honestly. But when there's a recession, even if they
look at their needs, and if there isn't a Federal system they
can draw upon, so they determine their needs, they don't have
the capacity.
Mr. Wilson. I believe the States, the Governors, and the
legislatures are in the best position to determine the wage
level and the tax rate for their administrative tax.
Mr. Levin. Let me ask Dr. Norwood if she would comment.
Ms. Norwood. I would just point out that one of the
specialists on UI, Wayne Vroman, at the Urban Institute, tells
me the State trust funds today are growing at only about one-
half the rate of the previous recovery, and the aggregate of
State trust funds is now only about three-quarters of the
amount of 1989, the last big expansion.
The point that needs to be made is that you cannot raise
taxes in a period of recession. That's the worst thing you can
possibly do. You're going to hit business when it is down and
cause it to go down further. You've got to find the resources
in good times to fund those trust funds.
So if the States are determining this completely, and there
has been a lot of evidence of reductions in many States now,
which do not have very much forward funding--not all States
certainly, but in many of them--if there isn't any kind of
Federal oversight for that, I think the Congressman is quite
right that you will not have those workers served.
Mr. Wilson. There was a lot of money that was sitting in
the Federal extended benefit account that went unused in the
last recession because of the trigger levels. Devolving that
trust fund to the States would increase the solvency of the
State benefit trust funds and enable them to establish extended
benefit programs with the trigger levels in their individual
States. That may be able to help workers.
Ms. Norwood. But it would just result in the States
reducing the tax further. So you would end up in a situation
where you didn't have those resources. That's what has happened
if you look at the history. We have studied this since 1947.
Mr. Levin. My time is up. I just urge everybody to read the
report of the advisory council. Look at the membership which
spanned the labor movement to Governor Thompson, and I just
think we need to take a hard look at this.
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Collins, I see the witness from Georgia
would like to be recognized. Perhaps you would recognize him
under your time.
Mr. Collins. That was my intent, Mr. Chairman.
Chairman Shaw. I knew that.
Mr. Collins. I appreciate that very much, because I, too,
am very interested in his answer, and I'm sure he's thought
this thing through well, because we've talked about it for a
number of years. Mr. Oxfeld also wanted to make some comments.
So, Mr. Poythress.
Mr. Poythress. Mr. Chairman, our recommendation is that
Federal fiscal accountability standards be established. And
that the State trust funds for both benefits and administration
be subject to that fiscal responsibility standard, so that you
don't have a race to the bottom and empty it out in good times
and have no money in bad times.
I would like to go back to another point that was made
about the phenomenon of regional State-level recessions,
because I think that's what we had in the early nineties. The
response, as my friend, Mark, pointed out was not the extended
benefit system kicking in. It is so complex and so, in my view,
nonresponsive. It didn't kick in.
What happened was a blanket Federal response, which was
very generous. And I think, frankly, we, the taxpayers, spent a
lot more money in places that we didn't need to spend it then
under that approach, whereas if the States had been fiscally
responsible and had the money to respond, those States that
needed to respond could respond, as a State, and deal with the
recession in their locality.
And then as a final matter, our recommendation includes the
maintenance of what we call the loan account, or what we call
the FUA account, so that if a State hit the wall and there was
no way to go, they could come to the Federal Government and
borrow at interest.
Mr. Collins. Mr. Oxfeld.
Mr. Oxfeld. I have a couple of observations pertinent to
the discussion. One is I think it's fair to observe, as I have
discovered over the many years I've been involved with this
program, that no matter what type of extended benefits law
there is, the Congress is likely to respond politically with
supplemental compensation in order to address the political
need, if not the financial need, of people who are unemployed.
The second is the incentives in the unemployment law today
for States to maintain fiscally sound and responsible balances
in their trust funds are far greater than they were ever in
previous history or recessions, because of the requirements
that States have to pay market-level interest rates when they
borrow.
As a result, States are much more acutely aware of the need
to be fiscally responsible in their trust fund balances. That's
new. We have not had that in a recession previously.
Finally, I would like to comment on the idea that there is
a race to the bottom, which we think is a total myth. In fact,
if anything, there is a race to the middle. Some degree of
competition among the States, we believe, is healthy.
But if you look at the record, even the advisory council
said there is little empirical research to demonstrate any race
to the bottom. Some States have reduced benefits, but other
States have expanded benefits.
Today, eligibility is broader than it was just a few years
ago. If you're a full-time worker, on minimum wage, in every
State you can now qualify for benefits. Some States have raised
benefits. Others have reduced them.
But the idea that employers are going to locate in a State
that has low benefits, or one that is very parsimonious in its
unemployment program, simply isn't borne out by the facts.
Otherwise, I think every manufacturing facility in the country
after 60 years would be located in Alabama and Mississippi.
Although there are plenty there, there are plenty in other
places as well.
Thank you.
Mr. Collins. I think you make a good point. I think
businesses look more at workman's compensation than they do at
unemployment insurance.
Mr. Poythress, you mentioned returning responsibility to
the States, lightening the paperwork burden on American
business to save millions in wasted tax dollars, laying the
foundation for future tax cuts.
But if I just understood your comments, those tax cuts
could not come unless there were certain requirements met by
those States to ensure those funds were adequate to meet the
requirements of the unemployed.
Mr. Poythress. Yes, sir. That's correct.
Mr. Collins. Very good.
Thank you.
Chairman Shaw. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Mr. Wilson, why
shouldn't we simply make the extended benefit triggers more
sensitive, and therefore make the program easier for States to
access, just as a followup to Congressman Levin's exchange with
Dr. Norwood?
Mr. Wilson. That is an option. I think I would prefer
actually that the FUTA tax be--the employer offset credit be
raised to 100 percent, and allow the States to establish their
own administrative tax rate.
And I think that's a better option, in my personal point of
view. You are correct, though. That is a possibility, of
changing the Federal trigger level.
Mr. Coyne. Dr. Norwood, did you want to respond to an
earlier exchange?
Ms. Norwood. Well, I'd like to say first that the council
did consider EB at some length, as the law required, and we
made some recommendations about the kind of trigger that should
be used. There should be an automatic trigger so that you don't
have all of the discussion that makes the EB come on late, and
sometimes stay on too long.
I think there are ways to handle that by refining and
revising the extended benefit program.
Obviously, I disagree with my friend here from UBA about
competition among the States. I would just point out that we
did a great deal of research using a good bit of data that had
not been used before.
And we did find very real differences, and then we did a
complete search of all kinds of records and statements by State
officials, and they all were advertising that if a company came
to their State, not all of them, but most of them, the entrance
of a business to their State would result in lower unemployment
taxes.
Mr. Wilson. I would just like to comment that, as Dr.
Norwood correctly points out, there are ways to establish a
Federal extended benefits trigger level. But for it to be able
to adequately handle all of the unique situations for all 50
States, through one trigger formula, I can't imagine that.
I can't imagine that the same trigger formula that would be
good and suitable for Georgia would be the same trigger formula
that could be found for Nevada or Florida or Michigan. And to
be able to come up with a formula, a national, one size fits
all formula, would be extremely problematic in my point of
view.
Mr. Oxfeld. Just a further point on Commissioner Norwood's
comment. You would expect that if there was a real race to the
bottom, all States would be rushing to have low new employer
tax rates.
But in the past 2 years, four States raised their new
employer tax rates and four States lowered them. The fact is
that employers respond to many, many different issues. Their
experience and layoffs have much more to do with their tax
rates. And they know that.
They're not looking at the unemployment tax rate. There may
be States who tout it, but employers are not responding to
that. They're much more likely to be concerned about locating
in a State that has a deficit in its unemployment trust fund
than they are about a race to the bottom.
Ms. Norwood. I'm just very pleased to know that you know
what's in the minds of employers. What we did----
Mr. Oxfeld. We represent them.
Ms. Norwood [continuing]. We tried to do was to look at the
data that was available. I would also point out that there has
been a significant number of States, particularly southern
States, as well as Massachusetts, Kansas, several others, who
have reduced their unemployment tax in recent times.
Mr. Oxfeld. With very healthy surpluses in their trust
funds.
Ms. Norwood. Not all of them. That's the issue.
Chairman Shaw. Thank you, Mr. Coyne.
Mr. English may inquire.
Mr. English. Thank you, Mr. Chairman. Mr. Chairman, my
first job out of school was working as the research director of
the Senate Labor and Industry Committee, working on UC, as I
noted in my testimony.
My last job in State government was working as staffer for
the State Senate Finance Committee. And I have to tell you, Mr.
Oxfeld, tax rates matter in locational decisions.
Mr. Wilson from the Heritage Foundation would certainly
concede that it is their view that State tax rates have a
direct impact on a State business climate.
And certainly in Pennsylvania, UC taxes have been a major
part of the business climate, particularly as in the early
eighties we came out of a recession, and we had a large
deficit--a $1 billion hole in our UC system that hung like a
sword of Damocles over the economy.
Now, unless I'm missing something, UC benefits are directly
tied to UC taxes, tax rates, and tax levels. And so it strikes
me that if States are able to lower their UC taxes through
lowering UC benefits, in good times, that will have a very
substantial effect on their economic strategy.
I am concerned because in the late seventies, Pennsylvania
was running a deficit in a very different climate. In a
situation where they didn't have to pay market interest rates,
and for strategic reasons, Pennsylvania tried to hold down its
taxes in order to remain more attractive to businesses.
I think there is a direct linkage here. I'd welcome your
response on this, but my sense is that if States are able to
reduce their benefits dramatically and reduce their taxes
accordingly, there will be some incentive for them to do that,
again, as Dr. Norwood indicated, by tinkering with eligibility.
Why shouldn't there be a race to the bottom when most of
the States that I'm aware of, particularly Pennsylvania, are
looking for advantages to lower their State tax rates on
business in order to attract more jobs?
Mr. Oxfeld. Well, I'm familiar with the situation in
Pennsylvania. For years, but prior to the requirement that
States pay interest when they borrow when their trust accounts
run low, Pennsylvania had exceptionally generous benefits
compared to most States, and broader eligibility than most
States did.
And they knew that if they borrowed, they had interest-free
loans, and if they didn't pay it back, it was the Federal tax
that would increase through----
Mr. English. Mr. Oxfeld, we all know that. I'm speaking to
a more general situation. Why wouldn't there be a race to the
bottom if you can lower your tax rates by reducing benefits?
Mr. Oxfeld. I can appreciate your point, and I hope I don't
sound argumentative with you. I would say that the evidence is
that very few Members, whether on the congressional level or in
State legislatures, are eager to vote for reductions in
benefits for people who are out of work.
The fact is I would say the evidence shows that there is a
race to the middle. That the States that had more generous
duration and higher benefit levels, that had greater than
average--easier access to the system----
Mr. English. Mr. Oxfeld----
Mr. Oxfeld [continuing]. Cut back more toward the center,
but not toward the bottom.
Mr. English. What evidence? You had cited there were four
States that had raised their business taxes, but States are
under terrific financial pressure. Others have tried to lower
them.
I think given what we know about State finance, isn't it
very difficult to draw conclusions from that?
Dr. Norwood, would you like to comment on this?
Ms. Norwood. Well, it's quite clear the issue is the
funding of the trust funds. States are under pressure, and we
found quite a bit of evidence--we'd be glad to send you people
papers which used real data.
[The report was sent to all Members of Congress.]
The State has only three options. It can raise the base
wage, which, by the way, has not been raised for years, and
most States are above it except for a few. We do have a
recommendation in our advisory council report on that. That's
one way.
The other way is to raise taxes, and the third way, which
is really what has been happening, is to restrict eligibility.
And I think that's what's happened to the lower wage workers
who, I might point out, are the people we most need to protect.
It is also possible, of course, to reduce benefit payments.
Mr. English. Mr. Chairman, may I ask one more question? My
time has expired.
Chairman Shaw. Certainly.
Mr. English. Mr. Wilson, on the notion of having the States
run extended benefits programs, if you have a regional
recession of some duration, won't States be under terrific
pressure to dismantle extended benefits for the simple reason
that extended benefits are a very substantial expense in an
extended recession?
And if a State in that situation, where you have declining
revenues coming in because of the recession, is called upon to
pay out dramatically more in benefits just because of economic
conditions, doesn't that put terrific fiscal pressure on States
in a way that welfare doesn't as directly?
Because at least there is a lapse time in a recession when
welfare costs increase. There is a direct increase in how
quickly unemployment benefit costs go up. So doesn't this hit
States when they are at their most vulnerable, if you dismantle
the Federal extended benefits program?
Mr. Wilson. I think the bottom line here, Congressman, is
the solvency issue. That's what we're all trying to address
here. And I think we all agree at this table that there needs
to be some solvency standards at the Federal level on States so
that States maintain solvent--not only solvent regular benefit
trust funds, but also if they are----
Mr. English. I quite agree. And that is in my proposal,
too.
Mr. Wilson [continuing]. Give them the power to develop and
establish their own extended benefit trust funds, that the
solvency requirements also carryover into the extended benefits
side of it.
I think what we're trying to talk about here is the
administrative tax side of the issue. I don't think we have any
quarrels here about the benefit side of the program at all. The
issue we're trying to address here in these reform proposals
relates to the administrative tax, and how the FUTA tax is
handled.
Mr. English. I understand.
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Ensign.
Mr. Ensign. Thank you, Mr. Chairman. I would like to first
talk a little bit about the whole, almost from a practical
standpoint, but also from a philosophical standpoint, the idea
of what Mr. English was talking about.
He proposed a scenario to where States try to attract
businesses through lower taxes, and I think that is one of the
reasons my State has been so effective in attracting a lot of
new businesses, simply because of our low tax base.
I think that that's a good thing. I don't think this is
something to be criticized. I think that's a good thing. And he
painted the scenario to where if that's done in the manner--if
politicians do that in a manner that they allow those trust
funds, whatever you would call them, to be depleted, now they
get into trouble.
This gets back for me to a question of accountability. If
it's the Federal Government that does it, then we can now just
borrow. Therefore, we pass this debt on to our children, which
is basically what we do. When we get extended benefits, when we
get into recession times, the Federal Government just borrows
it and goes into debt.
Why shouldn't--and this is where the philosophical point of
view comes in--why shouldn't States and State-elected officials
be held accountable if they get into that recession and they
did not have a rainy day fund--like the Federal Government
doesn't have--be held accountable by their local voters?
Yes, Mr. Oxfeld.
Mr. Oxfeld. I have to observe, as a matter of Federal law,
under the FUTA, States now are required to pay market interest
rates if they have to borrow from their trust funds as
Congressman English remembers too well.
That is a new provision of the law. It was only enacted in
the early eighties as a reaction to the huge deficits many
States had, particularly in the Northeast and in the Midwest,
and which provide powerful incentives to be responsible in
funding their trust accounts that didn't exist before.
We couldn't agree with you more.
Mr. Ensign. Would you care to respond, Ms. Norwood?
Ms. Norwood. Yes. I disagree with you. It seems to me that
every unemployed worker in this country, through no fault of
his own, who loses a job needs some temporary help. He's got to
get back into work, and there are a whole series of things that
need to----
Mr. Ensign. Well, I'm not disagreeing with you on that.
What I'm talking about is whether it's the States'
responsibility or whether it's the Federal Government's
responsibility. Because the Government that is closest to the
people is the most accountable.
Ms. Norwood. Certainly. But there ought to be some very
strict and automatic requirements.
Mr. Ensign. Why not from the State level and not the
Federal level, though?
Ms. Norwood. Because every State will have different
levels, and we've had a lot of experience that that doesn't----
Mr. Ensign. What's wrong with that?
Ms. Norwood. What's wrong with it is that you have 17
percent of the workers who are unemployed receiving
unemployment compensation in some States, and that's not very
much. What happens to the others?
Mr. Ensign. What's wrong with a State becoming more
efficient, maybe providing, because they're more efficient,
providing more benefits? Another State is not efficient,
therefore it can't afford to pay as much benefits. Or another
State that chooses not to pay as much benefits. What is wrong
with that?
Just like one company pays more money than another company
pays.
Ms. Norwood. What's wrong with it is that in the past, many
of those States, instead of using unemployment benefits have
had those workers, particularly the lower paid workers, handled
through food stamps, and other Federal programs, and that
safety net is being reduced.
Mr. Ensign. Well, I would just close with this, as my time
is about to expire--I think this gets back to the whole
question of whether or not we believe the Federal Government
has the answers, whether or not we believe that the Federal
Government knows better than people that are more accountable.
I believe the more local the power is, the more it's
accountable. I think that that is clearly what our Founders saw
as a great vision, because you can hold people more
accountable.
Somebody from New York cannot hold me accountable. Somebody
from Las Vegas can hold me accountable. And I think that if I'm
not meeting the needs, if I'm a local, State elected official,
they can hold me accountable. And I think that that is
certainly the direction we need to be going.
Maybe not all the answers are there, and maybe it is a slow
devolution, but we certainly need to be going in that
direction.
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Watkins.
Mr. Watkins. I have no questions, Mr. Chairman.
Mr. Levin. Mr. Chairman, could I just----
Chairman Shaw. Certainly, Mr. Levin.
Mr. Levin. I think the last discussion with Mr. Ensign has
been very useful. And it's hard for me to bite my tongue and
say nothing.
But I want to just say to Mr. Oxfeld so you're not under a
misimpression about the Congress and our political response to
unemployment in the nineties.
True, we fought about extension of benefits. True, it would
have been better if there had been a trigger mechanism so
extended benefits would not have had to be adopted through
specific legislation, three or four times.
But I think you sell short Republicans and Democrats by
just saying or implying it was a very political response,
because it wasn't. And we spent a lot of time--Mr. English's
predecessor, as I remember it, was one of those who was very
much involved in this on the Republican side.
We had a disagreement over redoing the EB formula, between
the administration and the majority here. And so we acted not
mainly because there were votes out there, but because there
were hundreds and hundreds of thousands of people who were laid
off through no fault of their own.
And we in Michigan and Pennsylvania responded when people
were laid off in Texas, and in Oklahoma, and in other places
through no fault of their own, and no fault of us in Michigan.
So it was not basically a political response.
Mr. Oxfeld. May I respond. I don't mean to suggest that UBA
or employers don't believe that it's appropriate to have an
extended benefits program at the Federal level. And I think
there are honest disagreements over designing the trigger
levels, which is a very difficult task to do, given all the
differences among the States.
The compromise restructuring plan preserves the extended
benefits program. In fact, it relaxes a little bit some of the
present restrictions in Federal law on collecting extended
benefits, unlike the Heritage plan or the ALEC plan.
We felt it was important in getting more money to have good
administration, that we not even deal with that issue. And I
respect your opinion. I don't mean to say that Members are only
interested in political solutions, but it's been our
observation over the years that no matter what type of system
has been in place already, there is a degree of political
interest among many Members of Congress in doing something
additional beyond what is already there.
Mr. Levin. Let me just say, the trigger system wasn't
working. By the way, I don't think we got very much help from a
lot of organizations in redoing it. The trigger system wasn't
working. No State was triggering on.
And there were millions of unemployed people in this
country.
Chairman Shaw. Before this panel is dismissed, let me just
toss another ball in the air and see if somebody wants to jump
after it.
In the Green Book, some of the studies that we have, would
indicate that people are much more likely to intensify their
job search toward the end of their benefit period than they are
toward the beginning of the benefit period.
What have any of your studies indicated with regard to
that?
Mr. Poythress. Mr. Chairman, let me respond to you in a
slightly different way. I have heard that story. I have never
seen it documented, but lest it be true, we in Georgia adopted
a profiling system at the suggestion of the U.S. Department of
Labor some years ago.
We identify, immediately, at the time of filing for a
claim, people who we believe are, based on empirical
observations, likely to run out their entire period of time of
benefits.
And we immediately place them in a reemployment program,
providing training and intensive high-touch job placement
services. Works great. We get those people hired very quickly.
Chairman Shaw. Dr. Norwood, you're nodding affirmatively.
Ms. Norwood. Yes, I would agree with that. There is some
evidence in the literature that those who have longer spells of
unemployment tend to remain unemployed a little bit longer.
And that's one of the reasons that in Canada and in Western
Europe, which have very long spells in which workers receive
benefits, we see extended unemployment, much more long duration
unemployment.
But I would agree with my colleague that what is really
needed is a recognition of the people who really have the need
and are going to be there for a longer time, and the pulling
together of the resources of the employment security agencies
and others to see to it that they get the kind of training and
help in applying for jobs that they really need.
The council met with employers and we met with State agency
people in all kinds of labor markets, and we also met with
unemployed workers and had held a number of public hearings.
And we heard a great deal about this.
But mainly about the need to bring all of these kinds of
services together.
Chairman Shaw. Yes, sir.
Mr. Poythress. If I could just add one final point about
it, because I think we may have come full circle here. We have
been doing that, and we do other kinds of employee service
activities on a starvation budget for the last 3 years.
And it's been that starvation budget, really, which
triggered this entire talk about devolving this system, because
the current administrative funding mechanism simply does not
work.
As the Doctor pointed out, it is inequitable, it is
inadequate. And all the States are really struggling to keep
our heads above water, to do the administrative things, the
employment service things that we are charged to do.
And it was the inadequacy of those funds that has really
triggered this whole discussion.
Mr. Wilson. Mr. Chairman, I'd just like to point out that
the former chief economist of the Department of Labor, Larry
Katz, published some research for the National Bureau of
Economic Research that concluded that extending the duration of
unemployment benefits from 6 months to 1 year increases the
mean duration of unemployment by 4 to 5 weeks.
So there is, as Ms. Norwood correctly pointed out, a wealth
of literature and studies on this that indicate that's the
case.
Chairman Shaw. Looks like we have agreement among the
panel, and so we will end with that. And I thank all of you for
being here. You've given excellent testimony, and I've enjoyed
some of the disagreement.
The next panel will be made up of Lynn Doherty, who is the
director of the Illinois Department of Employment Security in
Chicago, Illinois; Gay Gilbert, deputy administrator of the
Ohio Bureau of Employment Services, on behalf of the Interstate
Conference of Employment Security Agencies; Jonathan Hiatt who
is the general counsel of the AFL-CIO here in Washington, DC;
and Albert R. Miller, who is the president and chief operating
officer of Phoenix Closures, Inc., in Naperville, Illinois.
The two witnesses from Illinois, I know that Mr. Crane
wanted to be here to personally introduce you. He has been
summoned by the Speaker which is a higher calling, I believe,
and if he comes in during the hearing, I know he would like to
make some personal comments about both of you.
Ms. Doherty.
STATEMENT OF LYNN QUIGLEY DOHERTY, DIRECTOR, ILLINOIS
DEPARTMENT OF EMPLOYMENT SECURITY, CHICAGO, ILLINOIS; ON BEHALF
OF HON. JIM EDGAR, GOVERNOR, STATE OF ILLINOIS
Ms. Doherty. Thank you, Mr. Chairman, and Members of the
Subcommittee.
Once again the State of Illinois is here asking for your
help in passing legislation to overturn the Federal Appellate
Court decision in Pennington v. Didrickson. That decision
represents a 180-degree turnaround from how the Federal
Government and the States have construed the Social Security
Act since that statute's inception more than 60 years ago.
It involves unelected Federal judges in tax and spending
policy better suited for Governors and State legislatures. Left
standing, it would have a costly impact upon employers and
State government in Illinois, and its impact is being
compounded across the country.
Pennington is a class action lawsuit brought under the
Social Security Act challenging the provision of the Illinois
law that establishes the State's base period. The base period
is the period of time examined to determine whether an
individual is in fact eligible for unemployment benefits, and,
if so, the amount of the individual's weekly unemployment
check.
The plaintiffs in Pennington are demanding an alternate
base period for individuals who don't qualify under the State's
standard base period. More than 40 States have virtually the
same base period system as Illinois.
In Pennington v. Didrickson, the Federal Appellate Court
reversed the ruling of the Federal District judge, and held
that individuals could, in fact, sue under the Social Security
Act to broaden eligibility for unemployment insurance by
requiring States to adopt multiple base periods.
As a consequence of this decision, Illinois and other
States may soon be forced to implement multiple base periods.
With all due respect, the Appellate Court was wrong. Its
ruling contradicts the legislative history of the Social
Security Act, Supreme Court precedent, and the longstanding
position of the U.S. Department of Labor.
Beyond all that, however, it has very expensive
consequences. The multibase period scheme sought by the
plaintiffs would involve millions of dollars in one-time
administrative costs, and ongoing costs of $2.5 million a year,
with absolutely no identified source of funds to cover those
costs.
So far, the courts have limited their analysis to comparing
the advantages of multiple base periods against the increases
in State government's operating costs.
However, the ramifications extend well beyond that
argument. Pennington could also raise employer taxes from
somewhere between $10 to $40 million per year in Illinois.
Alternately, the State could face pressure to offset the
increased payouts resulting from Pennington by cutting benefits
elsewhere.
In either case, determining eligibility based on wages
earned during the proposed alternate base period would require
additional reporting from employers to verify those earnings.
Beyond all that, the scheme the Pennington plaintiffs are
after would only be the beginning. A Pennington-type lawsuit
has now been filed against the State of California as well.
In the California case, however, the plaintiffs are
demanding a difficult, even more costly alternate base period
scheme than in the Pennington case. So consequently, even if
Illinois were to adopt what the Pennington plaintiffs are
after, the State would still be exposed to further lawsuits by
different plaintiffs who wanted still another alternate base
period to accommodate their particular needs.
Last year the Congressional Budget Office estimated that if
implemented nationally, the multiple base period scheme the
Pennington plaintiffs are seeking could raise outlays from the
Federal Treasury by more than $350 million a year.
That figure would rise dramatically as litigants' demands
for different base periods multiply.
In a friend of the court brief submitted in Pennington v.
Didrickson, the U.S. Department of Labor said, Given the
widespread use of the type of base period employed by Illinois,
an order striking down the Illinois law undoubtedly would cause
nationwide disruption in the various States' unemployment
compensation systems.
The type or number of base periods a State uses is not a
litmus test of its fairness to the unemployed. For example,
eight States use the alternate base period sought by the
Pennington plaintiffs. In each of those States, however, the
amount necessary to qualify for benefits is substantially
higher--up to twice as much.
A State's base period structure is simply a partial
reflection of how State policymakers have decided to allocate
limited resources to serve best the interests of everybody the
unemployment insurance was established to serve.
I am not asking to prohibit the use of multiple base
periods, or to take away any rights now enjoyed by any
claimant. I am asking that as the decisions to the State's base
period scheme are made, all of its ramifications are fully
considered and that the people who make the decisions continue
to be accountable to the people who will be impacted by the
decision.
Thank you very much.
[The prepared statement and attachment follow:]
Statement of Lynn Quigley Doherty, Director, Illinois Department of
Employment Security, Chicago, Illinois; On Behalf of Hon. Jim Edgar,
Governor, State of Illinois
Thank you, Mr. Chairman and members of the Subcommittee,
for the opportunity to testify before you today. Once again,
the State of Illinois is here to ask for your help in passing
legislation to overturn the federal appellate court decision in
Pennington v. Didrickson. That decision represents a 180-degree
departure from the manner in which both the federal government
and states have construed the Social Security Act, since that
statute's enactment more than 60 years ago. It involves
unelected federal judges in tax and spending policy that should
be reserved to elected officials. Left standing, it could soon
have a costly impact upon employers and state government in
Illinois and aggravate the federal deficit by hundred's of
million's of dollars. Its impact is already being compounded
across the nation.
Background--State Base Period
Pennington is a class action lawsuit, challenging the
provision of Illinois law that establishes the state's ``base
period.'' As you know, the base period is the period of time
examined to determine whether an individual has earned enough
wages to be eligible for unemployment insurance and, if so, the
amount of the individual's weekly unemployment check. The base
period in Illinois is the first four of the last five completed
calendar quarters preceding the individual's filing an initial
claim. To qualify for unemployment insurance in Illinois, an
individual must have been paid at least $1,600 in wages during
his or her base period, with at least $440 having been earned
outside the quarter in which the individual's wages were
highest.
Forty-nine other jurisdictions use the same base period as
Illinois. Of those, eight have adopted alternate base periods
for individuals who do not qualify using the standard base
period. There are two reasons for the nationwide prevalence of
the base period Illinois uses.
First, a base period of the first four of the last five
quarters generally ensures that unemployment insurance will be
available for workers with a genuine attachment to the labor
force, but not necessarily for those with only a marginal
connection.
The legislative history of the Social Security Act
indicates that unemployment insurance was intended to be
limited to individuals with established ties to the workforce.
According to a 1935 report by the Committee on Economic
Security, which drew the blueprint for today's unemployment
insurance system, unemployment insurance was intended for the
``ordinarily steadily employed.'' The Ways and Means
Committee's report on the Social Security Act noted the program
was not intended to provide relief for everyone who was out of
work.
Congress' intent still makes sense today. Unemployment
insurance is funded almost exclusively by employers. In
Illinois, it is funded 100 percent by employers. Employers
alone should not bear the burden for individuals with little or
no attachment to the world of work.
Second, a base period like Illinois' streamlines
administration and minimizes the risk of fraud. Within a month
following the close of each quarter, Illinois employers provide
the state with reports on the wages paid to their workers
during that quarter. The state uses those reports to verify
that claimants are monetarily eligible for unemployment
insurance. With Illinois' base period, all reports needed to
verify an individual's eligibility should already be in the
state's computer system when the initial claim is filed.
Pennington Lawsuit
The plaintiffs in Pennington are demanding that the federal
court broaden eligibility for unemployment insurance by
requiring Illinois to adopt multiple base periods. They argue
the Social Security Act grants federal judges the authority to
do so. Specifically, they maintain that anyone who has not
earned $1,600 over the 12 months included in the base period,
or has not earned $440 outside the high quarter, should be able
to try to establish eligibility through an alternate base
period using the last four quarters.
When the case was first heard in district court, the judge
agreed with Illinois that, as part of the state's monetary
eligibility requirement, Illinois' base period could not be
challenged in litigation under the Social Security Act.
However, in Pennington v. Didrickson, the appellate court
reversed and remanded the case, to determine whether Illinois
had to adopt multiple base periods.
To make that determination, the appellate court instructed
the district judge to balance the benefits which some claimants
could derive from the alternate base period against the state's
interest in holding down administrative costs and minimizing
fraud. On remand, the district judge determined the claimants'
interests outweighed the state's and, therefore, that Illinois
had to adopt the alternate base period. Just recently, the
appellate court affirmed the district judge's determination.
Illinois will petition the Supreme Court to hear the case. That
petition will include the same argument I make to you today.
With all due respect, the appellate court was wrong when it
held federal judges could decide the type and number of base
periods a state was to have. It was wrong for a number of
reasons. The legislative history of the Social Security Act
indicates Congress intended states to have broad freedom to set
up the types of unemployment insurance systems they considered
appropriate.
The United States Supreme Court has held that the Social
Security Act was intended to recognize the importance of each
state establishing its own eligibility criteria for
unemployment insurance.
In addition, since the establishment of the unemployment
insurance system, the Labor Department--the federal agency
charged with enforcement of the Social Security Act as it
pertains to unemployment insurance--as considered a base period
of the first four of the last five quarters to be consistent
with the Act. As you will recall, the last time this
Subcommittee considered the consequences of Pennington, the
Labor Department did not depart from its longstanding position
that the type and number of base periods employed by states are
matters for state policy makers.
In the 1970's, Congress itself expressly recognized and
took no issue with the states' widespread use of base periods
consisting of the first four of the last five quarters.
Beyond all that, however, the appellate court was wrong
because its decision vests unelected federal judges with the
authority to substitute their judgment for governors and state
legislatures with regard to tax and spending policy. The
balancing test it prescribed is essentially a policy judgment
of the type that governors and state legislatures are elected
to make and are better-suited to make. The appellate court's
ruling has separated the authority to make policy decisions
from accountability for those decisions, with potentially
expensive consequences.
Potential Illinois Impact of Pennington
In deciding the case on remand, the district judge noted
that the administrative costs of the alternate base period
sought by the plaintiffs could be substantial--million's of
dollars in one-time costs and $2.5 million in additional yearly
operating expenses according to the Department of Employment
Security. He also acknowledged that additional federal dollars
to cover those costs were not likely to be forthcoming. He did
not, however, concern himself with where the money to cover
those costs would come from or with any of the other
significant implications of what the plaintiffs want.
Besides finding the money to implement the plaintiffs'
scheme, Illinois would also have to find the time and
personnel, inasmuch as the State is already in the middle of
two major automation projects for the benefit of claimants:
overhauling its extensive mainframe computer system to enable
it to continue running in the year 2000 and beyond and
implementing a telephone certification system. The telephone
certification project is a streamlining initiative that will
eliminate the need for claimants to mail paper forms to the
State to certify as to their continued eligibility for
benefits. As an aside, implementation of the plaintiffs'
multiple base period scheme would negate most, if not all, of
the cost savings anticipated from telephone certification. The
year 2000 project is necessary to ensure the State remains able
to pay benefits at all.
In addition to the administrative burden it would impose on
state government, Pennington could also substantially raise
outlays from Illinois' Unemployment Trust Fund account and
impose hefty increases in employer taxes.
The Department of Employment Security estimates the
alternate base period the plaintiffs are seeking would increase
Illinois' Trust Fund outlays by 1.5 percent. A Labor Department
study indicates alternate base periods raise state Trust Fund
outlays by four to six percent. A 1.5-percent increase in
outlays from Illinois' Trust Fund account would on average
amount to around $20 million per year; a six-percent increase
would approach $100 million, annually.
As state law is currently written, additional outlays would
automatically trigger tax increases for Illinois business. A
1.5-percent increase in outlays would result in an employer tax
hike averaging nearly $10 million per year. A six-percent
increase in outlays would raise employer taxes by over $40
million each year.
Since state Trust Fund accounts are part of the unified
federal budget, the difference between the increased outlays
and the higher taxes would translate into an increase in the
federal deficit--more than $100-million increase over the next
eight years if outlays rose by 1.5 percent; a $400-million
increase if outlays rose by six percent..
Alternatively, the State could face pressure to offset the
increased payouts resulting from Pennington by cutting benefits
elsewhere.
In any case, determining eligibility based on wages earned
after the first four of the last five quarters would require
additional reporting from employers to verify the earnings,
thereby imposing substantial new ``paperwork burdens.''
Potential National Impact of Pennington
Pennington's impact in Illinois, including its effect on
the federal deficit, could presage things to come for nearly
every other state. The appellate court's decision is binding in
Indiana and Wisconsin, as well as Illinois, and can be used as
precedent to attack other states' unemployment insurance laws.
As you know, a Pennington-type suit has now been brought
against the State of California, as well.
The California litigation demonstrates the inherent
difficulty of leaving to judicial fiat the type and number of
base periods a state is to use. In the California case, the
plaintiffs are demanding an alternate base period of the last
52 weeks. Consequently, even if Illinois were to adopt the
multiple base period scheme the Pennington plaintiffs are
after, the State would still be exposed to further lawsuits by
different plaintiffs who wanted still other alternate base
periods to accommodate their particular needs.
Moreover, Pennington's use as precedent will not
necessarily be limited to cases where an alternate base period
is the difference between eligibility and ineligibility. States
can expect the argument that the Social Security Act requires
an alternate base period when an alternate base period would
yield a higher weekly benefit check. Pennington has blurred the
line between what a state can and cannot be sued for under the
Social Security Act.
Last year, as you know, the Congressional Budget Office
estimated that, if implemented nationally, the multiple base
period scheme the Pennington plaintiffs are seeking could raise
outlays from the federal treasury by more than $350 million per
year. That figure would rise dramatically as litigants' demands
for different base periods multiplied.
In the friend-of-the-court brief it submitted to the
appellate court, the Labor Department said, ``Given the
widespread use of the type of base period employed by Illinois,
an order striking down the Illinois law undoubtedly would cause
nationwide disruption in the various states' unemployment
compensation systems.''
The case's implications beyond Illinois' borders prompted
23 states to join Illinois in requesting Supreme Court review
of the appellate court's decision in Pennington v. Didrickson.
Conclusion
The type or number of base periods a state uses is not the
litmus test of the fairness of that state's unemployment
insurance system. For example, in each of the eight states that
have adopted the alternate base period sought by the Pennington
plaintiffs, the amount necessary to qualify for benefits is
substantially higher than in Illinois--up to twice as much. A
state's base period structure is simply a partial reflection of
how that state's policy makers have decided to allocate the
system's limited resources to best serve the interests of
everyone whom the system was established to serve.
My specific request to you is for legislation to clarify
the Social Security Act does not govern state base periods. I
am not asking you to prohibit the use of multiple base periods
or to take away any rights now enjoyed by any claimant. The
legislation I am seeking will simply eliminate the need for
further costly litigation. Consistent with the intent of the
unemployment insurance system's architects, it will also ensure
that requirements as to eligibility remain a decision for state
policy makers, who are directly accountable to the people who
will be impacted by that decision.
I look forward to working with you toward a speedy
resolution of this issue.
Thank you again for your time and consideration.
[GRAPHIC] [TIFF OMITTED] T0099.055
Mr. Collins [presiding]. Thank you.
We'll hear now from Gay Gilbert.
STATEMENT OF GAY GILBERT, DEPUTY ADMINISTRATOR, OHIO BUREAU OF
EMPLOYMENT SERVICES; ON BEHALF OF INTERSTATE CONFERENCE OF
EMPLOYMENT SECURITY AGENCIES
Ms. Gilbert. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Gay Gilbert. I am deputy administrator
of the Ohio Bureau of Employment Services, and I am here today
representing the Interstate Conference of Employment Security
Agencies, or ICESA.
ICESA is the national organization of State officials who
administer the States' public employment service, unemployment
insurance laws, the labor market information programs, and in
many States, job training programs.
And I would like to thank Chairman Shaw for the invitation
to present ICESA's view here today.
As Lynn Doherty has mentioned, the issue in the Pennington
case has to do with the State's right to determine its own base
period as part of the eligibility structure for unemployment
compensation.
Just a short review of what a base period is--it's the
period of time in which we look at a claimant's wages to
determine if they've had some attachment to the labor force.
And that becomes part of our eligibility determination.
And as Lynn mentioned, 48 States, including Ohio, use the
same period as Illinois. To make this eligibility determination
using the base period, almost all States collect wage
information from employers on a quarterly basis.
To maintain that data base of information requires a
certain amount of technology and a lot of time to do the data
entry.
The Pennington lawsuit involves the Social Security Act's
``when due'' clause. The Social Security Act requires that
States utilize administrative methods designed to ensure
benefits are paid when due; i.e., as quickly as possible.
The issue in Pennington is whether or not the base period
is a State eligibility requirement or an administrative method
that's subject to the ``when due'' clause. ICESA strongly
supports the argument that Illinois has made, that a State's
base period is a State eligibility requirement and not an
administrative method subject to the ``when due'' clause.
And there are some fairly persuasive reasons for why we
look at it that way. From the very inception of the UI Program,
the ``when due'' clause has been interpreted by the executive
branch and the courts to mean that benefits should be paid when
due, but under the terms and conditions of the State laws.
And States have been given broad discretion in developing
their State UI laws.
One of the indicators that the executive branch has
endorsed this position is that when the UI Program first began,
the Department of Labor issued some draft bills that were model
legislation for States to look at in developing their laws, and
one of those draft bills included the base period we all use.
In addition, every year, the Department of Labor is
required to certify that each State's law is in conformity with
Federal law, and for 60 plus years they have done that with the
base periods we all use.
Some States, like Ohio, have chosen to use an alternative
base period. It is ICESA's position that States should continue
to have the latitude to use either alternate base periods or
whatever base period is appropriate for their State's needs.
I would say that as technology begins to advance, we may
have the opportunity to move the base period closer to the time
of when the claimant is actually making his/her application.
But technology is expensive, as Lynn pointed out, and at this
point in time the unemployment insurance system is already
underfunded. We are not in a position to spend large amounts of
money making huge technological changes.
We are also currently hampered by the fact that we're all
having to transition our computer systems to the year 2000 to
make our systems compliant.
Lynn mentioned being concerned about additional lawsuits.
We believe that this case opens the door not only to lawsuits
like Pennington, but to other eligibility issues that States
determine as part of their unemployment insurance laws.
Policy issues of this kind should be dealt with in the
legislative process, and not in the courts. H.R. 125 has been
introduced by Congressman Crane, and ICESA supports that
legislation and encourages you to do so.
Before concluding I would like to mention two other items
very quickly that relate to unemployment insurance. The
President's budget for 1998 includes a proposal to double, from
roughly $7 to $14 billion, the amount that can be held in the
unemployment trust fund account from which loans are available.
There are no projections at this point that States are
going to need those loans, and at this point the rules are
such, as was mentioned earlier, that there is a great incentive
for States to avoid borrowing money. And so we see no policy
basis for extending this limit, and we would encourage you to
consider possibly not supporting that.
Also, as you develop legislation relative to unemployment
insurance, we urge you to look at the national new hire
directory which is currently being developed for child support
enforcement purposes. States currently have access to this
information in their own States, but they do not have access to
other States' information. We believe that such access is
desirable for our program, and H.R. 125 may provide you with a
vehicle to do that.
Again, ICESA would be happy to provide you with more
information on that subject.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Gay Gilbert, Deputy Administrator, Ohio Bureau of
mployment Services; on Behalf of Interstate Conference of Employment
Security Agencies
Mr. Chairman and members of the Subcommittee, my name is
Gay Gilbert. I am Deputy Administrator of the Ohio Bureau of
Employment Services, and I am here today representing the
Interstate Conference of Employment Security Agencies (ICESA).
ICESA is the national organization of state officials who
administer the nation's public Employment Service, unemployment
insurance laws, labor market information programs and, in most
states, job training programs.
I would like to thank Chairman Shaw for the invitation to
present ICESA's views about the federal court's ruling in the
Pennington case.
Background
To establish eligibility for unemployment benefits, an
individual must have sufficient wages preceding the filing of a
claim. The period surveyed for these wages is called the ``base
period.''
Most states use a base period consisting of the first four
of the last five completed calendar quarters. For example, if
the claim were filed today, April 24, 1997, the base period
would be January 1, 1996, through December 31, 1996. Even if
the individual had worked during all of the period from January
1, 1997, through April 23, 1997, the wages from this work would
not be used to determine eligibility for a claim.
The first four of the last five completed calendar quarters
is the most common base period. It reflects the public policy
judgement that unemployment benefits should be paid only when
the claimant has an established attachment to the labor force.
In addition, almost all states determine eligibility for
benefits using wage information which is reported by employers
on a quarterly basis for all workers. It takes time for these
reports to be completed and submitted by employers and for
states to enter the information into state computer databases.
Outline and Status of the Pennington Case
As you know, the plaintiffs in Pennington are a class of
claimants who were not monetarily eligible for unemployment
benefits using the standard Illinois base period but would have
been eligible had earnings subsequent to the first four of the
last five quarters been considered. They contend that the
Illinois base period violates the Social Security Act's
requirement that administrative methods ensure that UI benefits
are paid ``when due.''
In 1994, the Seventh Circuit Court of Appeals reversed the
district court and ruled that individuals could sue under the
``when due'' clause to challenge a state's base period. The
appellate court remanded the case to the district court for a
determination as to whether the ``when due'' clause required
Illinois to adopt an alternate base period for the plaintiffs.
To make the determination, the district court was instructed to
balance the plaintiffs' interest in prompt payment of benefits
against the state's interest in minimizing administrative
costs. The U.S. Department of Labor submitted an amicus brief
to the court supporting the Illinois Department of Employment
Security's position.
The Illinois DES appealed the seventh circuit's ruling to
the Supreme Court which declined to hear the case in November
1994. Twenty-three states signed an amicus brief supporting
Illinois' position.
On remand, the district court weighed four factors: 1) the
number of additional eligible claimants there would be under an
alternative base period; 2) the amount of additional benefits
that would be paid; 3) the increased promptness with which
eligible claimants would receive benefits; and, 4) the
administrative costs of implementing an alternative base
period. There was no consideration of the potential impact on
employers in terms of additional costs or administrative
burden. With respect to administrative costs, the court found
IDES' evidence credible--the agency would incur more than $13
million in one-time costs and additional annual operating
expenses of more than $2.5 million. The court also stated it
was likely that federal funding to cover the costs would not be
forthcoming. Nevertheless, the court concluded that the first
three factors inured to the plaintiffs' benefit and outweighed
the fourth. Accordingly, the court ruled that Illinois had to
adopt an alternate base period for the plaintiffs.
Illinois appealed the district court's ruling; however,
just a few weeks ago the U.S. Court of Appeals for the Seventh
Circuit affirmed the district court's judgement.
ICESA's Views
Our nation's unemployment insurance (UI) system is a unique
federal-state partnership, grounded in federal law but executed
through state law by state officials. The legislative framework
created with the Social Security Act in 1935 gives states broad
discretion to design their own unemployment insurance programs
including determining the terms and conditions under which
benefits are payable.
Prior to the court's interpretation in Pennington, Section
303 (a) (1) has been interpreted by the Executive Branch and by
the courts since 1935 to mean that benefits should be paid as
promptly as is feasible administratively under the terms and
conditions of state laws.
Throughout the history of the unemployment insurance
program, determining the period that constitutes the base
period for unemployment insurance claims purposes has been one
of many eligibility criteria that federal law has left to the
states. For example, each state--through its legislative
process--decides the amount of earnings necessary to qualify
for benefits, whether various reasons for voluntarily leaving a
job constitute ``good cause'' and when the reasons for
discharge from a job are such that an individual is
disqualified from benefits.
The legislation establishing the unemployment insurance
system in this country makes it clear that Congress intends for
the states to have wide latitude in designing their
unemployment compensation programs. That being the case, it is
remarkable that the structures of state programs are so
similar. This phenomenon can most likely be traced back to
``draft bills'' for state unemployment compensation laws that
were provided to the states by the Department of Labor to
illustrate legislation that would meet federal requirements.
The base period that Illinois and most other states use was
included in a draft bill that many states used as a model for
their respective state laws. Therefore in establishing a base
period consisting of the first four of the last five completed
calendar quarters, states were assured that their law conformed
to federal requirements. In addition, each year the Secretary
of Labor must certify to the Secretary of the Treasury that
each state's unemployment compensation law is in conformity
with federal law in order for employers doing business in the
state to claim the 90% offset credit against federal
unemployment tax obligations. The Secretary has certified the
Illinois law and the laws of other states with the same base
period structure for almost 60 years.
We believe that the court's decision in Pennington is an
implausible interpretation of the Social Security Act's
requirement that administrative methods be designed to ensure
the prompt payment of benefits when due and is inconsistent
with the intent of Congress that states have wide latitude to
design state unemployment insurance programs.
A number of states have put alternative base periods in
place to address the circumstances of the plaintiffs in
Pennington--individuals who would not qualify using the first
four of the last five quarters but who would qualify if more
recent wages were used. ICESA believes that states should
continue to have latitude to establish such alternatives or
other standard base periods--that the first four of the last
five quarters is only one of a variety of base periods that
states might use.
As technology that permits states to collect and process
wage information more quickly becomes available, more states
may wish to establish alternatives or more recent quarters as
their base periods. However, purchasing the latest technology
and implementing alternatives to standard practices are
expensive. Administrative funding for unemployment insurance
has been reduced substantially in recent years, and increases
in the future to support practices such as alternative base
periods do not appear likely. Right now states are directing
scarce resources to making unemployment insurance computer
systems Year 2000 compliant. Both UI benefit and tax systems
contain numerous date-sensitive calculations which, if not
modified to accommodate the century change, will have
devastating consequences.
As you know, administrative funding for unemployment
insurance is included under domestic discretionary spending
caps although the program is an entitlement. There is currently
no provision for increases in administrative funding for
unemployment insurance under the discretionary caps--even
though the number of beneficiaries who would be entitled to be
served could increase substantially in an economic downturn.
Implications
Earlier this year, California was sued in a Pennington-type
suit. Other states may face similar lawsuits very soon. Losing
a Pennington-type case would mean that if claimants do not
qualify for UI benefits under the standard base period, an
alternative period, such as the most recent 52 weeks or the
most recent 4 quarters, would be used. Pennington could also be
used as a precedent for lawsuits arguing that the ``when due''
clause requires an alternative base period whenever inclusion
of more recent wages would yield a higher benefit amount.
Pennington blurs the line between what SESAs can and cannot be
sued for, potentially giving rise to further lawsuits against
state employment security agencies regarding issues beyond base
periods.
We are concerned that Pennington could establish a
precedent for determination of other qualifying and eligibility
requirements for state unemployment benefits by the judicial
rather than the legislative process. Expansion of the courts'
authority into setting qualifying and eligibility requirements
for unemployment benefits preempts the democratic process and,
as a result, is likely to erode public support for the program.
In the legislative process, discussions about qualifying
and eligibility are not an entirely intellectual exercise. The
practical implications, as well as the intellectual basis, of
new provisions must be recognized because the legislative body
bears responsibility for the outcome. For example, in a state
where individuals in the same circumstances as the plaintiffs
in Pennington are not eligible for benefits, legislators must
explain to constituents why they are not eligible; in a state
where an alternative base period is put in place, legislators
must explain to their employer constituents that their
unemployment taxes will be higher. In the legislative process,
all interests must be weighed. The courts simply issue an
opinion and take no responsibility for implementation.
Recommendation
In early January, Congressman Phil Crane (R-IL) introduced
H.R. 125 which clarifies that individuals cannot file ``when
due'' lawsuits to force changes in state base periods. It does
not prohibit a state from adopting an alternate base period and
does not take away from any claimant any right now enjoyed with
respect to unemployment insurance.
We believe that it is in the best interest of the
unemployment insurance system and the workers and employers it
serves to maintain the historical interpretation of the Social
Security Act's ``when due'' clause; that interpretation would
be changed significantly if the Pennington decision stands.
ICESA urges you to enact H.R. 125 making clear Congressional
intent to leave establishment of base periods to the states.
Chairman Shaw. Thank you very much, Ms. Gilbert.
Mr. Hiatt.
STATEMENT OF JONATHAN HIATT, GENERAL COUNSEL, AMERICAN
FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATION
Mr. Hiatt. Thank you, Mr. Chairman. Mr. Chairman and
Members of the Subcommittee, I thank you for the opportunity to
comment today. I have submitted written testimony for the
record, but in the interests of time I'll just highlight some
of the points from those remarks.
The Pennington case was not brought in a vacuum. Throughout
the last 25 years, State and Federal legislators have
instituted a distressing array of barriers to access to
unemployment benefits: higher earning requirements, tougher
disqualification penalties, waiting weeks, artificially high
triggers for extended benefits, taxes on benefits, and
administrative complications which delay or eliminate access to
benefits, the problem that led to the Pennington case.
State and Federal legal restrictions on eligibility have
reduced the percentage of unemployed receiving benefits from 75
percent in 1975 to only 32 percent for the most recent figures.
Even accounting for changes in the demographics of the
unemployed, the Advisory Council on Unemployment Compensation,
and numerous independent researchers have noted the important
contribution of State legal restrictions in explaining this
decline.
The categories of workers affected by enforcing the
statutory ``when due'' standard are precisely those which
represent the fastest growing segments of the labor market:
contingent workers, lower wage workers, women workers.
Amidst this decline in access to the system, the Pennington
case highlighted an administrative procedure that has
eligibility implications. Legally, the distinction between an
administrative issue with eligibility implications and a pure
issue of eligibility is pivotal.
The court, in Pennington, determined, not surprisingly,
and, indeed, most logically, that a procedure which is used to
measure eligibility is clearly an administrative procedure,
even if it obviously has eligibility ramifications.
The court went on to find that in Illinois an
administrative procedure which requires claimants to wait up to
6 months solely so that the State can maintain an outmoded
administrative system violated the ``when due'' clause, the
provision which requires the States to pay unemployment
benefits as soon as possible once an unemployed claimant is
entitled to them.
In Illinois the court found that between 13,800 and 40,000
unemployed workers who were otherwise eligible now lose out or
face extreme delay and our impacted in any given year by the
failure to consider the lag quarter.
In seeking to reverse the court and alter the Social
Security Act, the Crane bill oversteps the boundaries of the
Federal/State division of functions. The Supreme Court has
twice ruled unanimously on cases where administrative concerns
had eligibility implications.
In the Java case, they defended the primacy of the ``when
due'' clause against an administrative procedure which existed
in 48 States. Most recently, the Supreme Court declined to
reconsider the issue in the Pennington case.
The Federal Government has a longstanding responsibility to
enforce the ``when due'' clause. In fact, Federal activity,
through the unemployment insurance service, has improved the
functioning of wage record systems, while simultaneously
expanding the range of procedures which are administratively
feasible and reducing the time lag which is justifiable under
``when due'' considerations.
Eight States currently account for the most recent quarter
of earnings, the lag quarter, in some way, despite Illinois'
protests about the difficulty of achieving this administrative
goal. In Maine, Massachusetts, New Jersey, Ohio, Rhode Island,
Vermont, Washington, and Michigan, States use a base period
which includes earnings of the most recent quarter.
The most common strategy is to use existing wage record
data for the first four of the last five quarters to initially
determine eligibility, and if a claimant fails the monetary
eligibility test, the State issues a wage request to secure the
more recent data.
Implementation of a such a movable base system does not
require a complete revamping of administrative procedures, nor
does it invalidate previous efforts to develop wage record data
bases.
The movable base procedure more accurately measures earning
history, and more promptly pays benefits to eligibility
claimants without imposing undue additional costs.
Technological and history change in administration are
essential to the findings in Pennington. Many States fear that
they will be forced to implement administrative procedures that
are defined by courts and rigidly enforced.
That is not our interpretation of what the court in
Pennington has said. We believe the principle stated in the
Java Supreme Court case provides for a balancing act to measure
administrative feasibility as against timeliness standards. And
that's what the Pennington court--all Reagan appointees,
incidentally--did in simply applying this balancing test.
States can account for most recent earnings either through
existing wage reporting systems or by supplementing those
systems through a wage request procedure following initial
determinations.
The court, in Pennington, specifically did not tell
Illinois what system had to be followed, or that any particular
system was the only appropriate one. What States cannot do, and
what they should not be allowed to do through congressional
reversal of Pennington is to ignore the national interest in
timely benefit payment to individuals who have worked, paid
taxes, and earned enough money to be eligible for benefits.
Thank you.
[The prepared statement follows:]
Statement of Jonathan Hiatt, General Counsel, American Federation of
Labor and Congress of Industrial Organization
Last year, the AFL-CIO testified before this Subcommittee
that the Pennington lawsuit and the proposed legislation to
reverse it were vital issues for unemployed workers in the
United States. We believe the federal courts have spoken
forcefully and correctly in their assessment of Illinois'
administrative procedures. They have demanded a reasonable
remedy and stayed within the bounds of the current federal-
state division of responsibilities under the Social Security
Act. It would be misguided and unfair for Congress to reverse
the court decision, deny claimants the right to timely benefit
payments, alter the Social Security Act, and restrict access
for hard-working claimants who happen to work in labor markets
or industries which offer only irregular work. We believe the
district court and appeals courts in Pennington--though,
incidentally, were all appointed by President Reagan--have
rendered a fair and accurate judgement which should not be
overturned through legislative action.
Although we are here to testify on the Pennington panel, we
must voice some concerns regarding devolution. The AFL-CIO
encourages Congress to fashion a consensus response to UI
administrative financing problems. Labor, employers, and
federal and state administrators can be brought together around
shared principles for administrative financing without
fundamentally altering the current federal/state programs. The
existing range of devolution proposals, however, has nothing to
do with consensus. These proposals only delay the process which
should be moving forward to fix administrative problems. We
will outline the principles which should guide administrative
finance discussion, looking forward to the day when devolution
efforts are put aside in favor of more appropriate, consensus-
building policies.
The following statement addresses Pennington and
devolution, in that order.
Pennington v. Illinois
Unemployment Insurance and the New Labor Market
The Pennington case is a pivotal event for unemployed workers
because it addresses one aspect of the disjunction between current UI
administrative practices and underlying changes in the labor market. At
a time when the economy is increasingly creating low-wage and
contingent jobs, the UI system has been moving further and further
toward serving only higher-wage, more stable employees.
State and federal legal restrictions on eligibility have reduced
the percentage of the unemployed receiving benefits from 75 percent in
1975 to only 32 percent for the most recent figures. Even accounting
for changes in the demographics of the unemployed, the Advisory Council
on Unemployment Compensation and numerous independent researchers have
noted the important contribution of state legal restrictions in
reducing the percentage of the unemployed who receive benefits.\1\
---------------------------------------------------------------------------
\1\ Bassi, et al. (1996), ``The Evolution of Unemployment
Insurance,'' Advisory Council on Unemployment Compensation, Background
Papers, Volume III, January; Anderson and Meyer (1994), ``Unemployment
Insurance Benefits and Takeup Rates,'' Working Paper 4787, National
Bureau of Economic Research; Baldwin (1993), ``Benefit Recipiency Rates
Under the Federal/State Unemployment Insurance Program: Explaining and
Reversing Decline,'' Ph.D. Dissertation, M.I.T.; Corson and Nicholson
(1988), ``An Examination of Declining UI Claims During the 1980s,'' UI
Occasional Paper 88-3, US Department of Labor.
---------------------------------------------------------------------------
Amid this national decline in the counter-cyclical and insurance
functions of the system, Pennington highlighted the inequitable
treatment of claimants subject to the hurdles posed by the Illinois UI
system. These administrative hurdles, which the court has strongly
rejected, impose a particular burden on workers who are either least
able to bear economic uncertainty (due to their low prior earnings) or
not responsible for the irregularity of the work patterns (such as
construction labor). The overall decline in the effectiveness of the UI
system is due in large measure to its insufficient treatment of low-
wage and contingent workers.
Unemployment Insurance and Part-Time Work
As discussed below, the Pennington case addresses an administrative
procedure issue with eligibility implications. The core issue is
whether a state's administrative process, which disadvantages workers
with irregular work patterns, can be allowed to stand. Congress must
appreciate the full extent to which current UI practice across the
country disadvantages low-wage workers in a variety of ways,
particularly through monetary eligibility requirements.
Monetary eligibility requirements do not simply set a threshold
earnings level for eligibility. Most states require a set amount of
earnings for a given 52 week period, but also specify a ``high
quarter'' earning threshold. These high quarter thresholds reduce
eligibility on the basis of the distribution of earnings over time, not
just the total level of earnings. The non-partisan National Commission
for Employment Policy measured the impact of state monetary eligibility
requirements--and particularly high quarter requirements--on UI
recipiency rates for various population groups.\2\ This research
duplicated the screening process which unemployed workers face after
applying for UI. It compared the earnings history of individuals
against the monetary eligibility requirements for the states in which
the surveyed individuals lived.
---------------------------------------------------------------------------
\2\ Yoon, Spalter-Roth, Baldwin (1995), ``Unemployment Insurance:
Barriers to Access for Women and Part-Time Workers,'' National
Commission for Employment Policy.
---------------------------------------------------------------------------
The Commission found that women are twice as likely as men to fail
state requirements for high quarter earnings and that only nine percent
of all unemployed workers who worked part-time received benefits. State
monetary eligibility requirements, particularly high quarter earnings
requirements, pose a significant hurdle for the unemployed seeking UI
benefits. The impact of high quarter requirements is exacerbated where
states delay counting the most recent quarter of earnings, a quarter
which may prove essential to eligibility. Thus, by asserting the
federal obligation to enforce standards of timeliness, the Pennington
case also represents a small, vital step toward reversing years of
backsliding under state UI law.
Pennington and HR 125
In Luella Pennington v Lynn Doherty, Director of the Illinois
Department of Employment Security, 22 F.3rd 1376 (7th Cir. 1994), the
Seventh Circuit court found that federal timeliness requirements (the
so-called ``when due'' clause) of the Social Security Act were violated
because Illinois makes eligible workers wait up to six months before
they file a claim in order to allow time for processing the most recent
quarter of earnings at the time of layoff. The U.S. Supreme Court
denied the Illinois appeal. On remand, the U.S. District Court ordered
Illinois ``to adopt an alternative within a reasonable time'' to
expedite accounting for a worker's most recent earnings. Illinois filed
an appeal. On April 4, 1997, the Republican-appointed United States
Court of Appeals for the Seventh Circuit again rejected Illinois'
arguments.
Representative Crane has offered HR 125 to remove state base period
determination issues from federal scrutiny under the Social Security
Act. This action would strip claimants of their right to legal recourse
where state accounting procedures neglect to count most recent earnings
and, in the process, delay timely payment of benefits. In effect, HR
125 reverses the court decision and implies that a six month delay for
benefits is within the bounds of ``timely'' payments.
Claimants' and States' Rights: HR 125 Reverses Historic Federal Role
Illinois' case against Luella Pennington and Representative Crane's
effort through HR 125 assert that the state right to set eligibility is
paramount. But for over 60 years, the federal government has had the
right to insist that benefits be paid in a timely manner (under the
statutory ``when due'' clause). Indeed, in its most recent decision the
Pennington court states that:
The [U.S. Secretary of Labor's] regulations provide some guidance
in this endeavor. But they could provide a great deal more, and perhaps
they should.
We believe they should. The federal role in overseeing
administrative fairness and efficiency was codified in the Social
Security Act. Federal agencies have a unique responsibility to ensure
against fraud, to promote timely benefit payments, and to advance
system integrity. Congress should resist pressure to alter the federal-
state relationship on behalf of the state of Illinois.
The Supreme Court has twice ruled unanimously that state authority
over eligibility determination did not have precedence over the federal
responsibility to guarantee timely payment of benefits under the ``when
due'' requirement. In perhaps the most important case, California
Department of Human Resources Development v. Java, 402 U.S. 121 (1971),
the Supreme Court struck down an administrative provision that was in
use in 48 states, citing violation of the ``when due'' clause during
pendency of an appeal. This case established the framework for the
court's decision in Pennington, namely that ``when due'' must mean ``at
the earliest stage of unemployment that payments were administratively
feasible.''
It is Administratively Feasible to Protect Claimants' Rights
Eight states currently account for the most recent quarter of
earnings in some way, despite Illinois' protests about the difficulty
of achieving this administrative goal. In Maine, Massachusetts, New
Jersey, Ohio, Rhode Island, Vermont, Washington and Michigan, states
use a base period which includes earnings in the most recent quarter.
The most common state strategy is to use existing wage record data for
the first four of the last five quarters to initially determine
eligibility. If a claimant fails the monetary eligibility test, the
state issues a wage request to secure the most recent data.
Alternatively, given current technological advances, many states can
easily meet higher timeliness standards by simply speeding their
existing wage reporting systems. Thus, implementation of a moveable
base does not require a complete revamping of administrative procedures
nor does it invalidate previous efforts to develop wage record
databases. In fact, efforts to expand wage record reporting systems
have laid the groundwork for higher timeliness standards. The moveable
base procedure more accurately measures earning history and more
promptly pays benefits to eligible claimants without imposing undue
additional cost.
The administrative procedures followed in these states show how the
cost accounting which Illinois has provided vastly overstates the
administrative burden which the state would bear. Loleta Didrickson,
Comptroller of the State of Illinois, provided cost estimates that
include creating a wage request system and reachback funding to cover
previous denials. When these provisions are removed from the cost
estimates for alternate base implementation, the additional
administrative cost to Illinois drops to just $400,000 per year.\3\
---------------------------------------------------------------------------
\3\ Statement on Behalf of Mrs. Luella Pennington and the
Pennington Class Opposing Legislation to Reverse Pennington v.
Didrickson.
---------------------------------------------------------------------------
It must be remembered that the Federal government has played an
active role in making alternate base procedures administratively
feasible. The federal Unemployment Insurance Service has actively
promoted technology upgrades which facilitate the timely collection of
wage record data and rapid sharing of information. The federal partner
in the UI system has a responsibility to demand timely payments and an
obligation to make those timeliness standards reachable through system
integrity funding and best-practice information. We believe the
Department of Labor and state administrators have been working together
for years, laying the groundwork for a higher standard of timeliness in
benefit payments. Congress should not intervene against claimants to
defend outmoded administrative procedures.
Pennington Takes the System Further From Welfare, Not Closer
Last year, opponents of the Pennington decision argued that
moveable base provision made UI too much like welfare. This is badly
misleading. In fact, by forcing Illinois to accurately account for a
worker's earnings, Pennington make unemployment insurance a more
effective form of social insurance for individuals with work histories.
Workers found eligible under a more timely accounting standard have
paid in to the UI system through indirect taxes on themselves and
direct taxes on their employers. They have worked, paid UI taxes, and
lost their jobs. They are guilty only of earning that income during a
quarter which the state chooses not to count unless the worker waits
and reapplies.
By promoting a more timely and accurate accounting of workers'
earnings, moveable base procedures keep workers from slipping into
welfare after they lose their jobs. State Senator Patrick Johnston of
California recently asked the State of California to provide an
estimate of the number of workers who would not slip into welfare if an
alternate base period administrative procedure were enacted. The state
made estimates based on the last four completed quarters and on the
prior 52 weeks. The state found that 16,357 and 28,200 workers,
respectively, would be kept out of welfare because their UI eligibility
would be more accurately accounted for and welfare savings of $23.7
million and $40.9 million, respectively, would be realized.\4\
Ironically, in the absence of moveable base administrative procedures,
states are forcing unemployed workers to reduce their connection to the
labor market while awaiting benefit eligibility or, worse, falling into
the welfare system.
---------------------------------------------------------------------------
\4\ Letter from Chief Deputy Director of the California Health and
Welfare Agency to the Honorable Patrick Johnston, California State
Senate.
---------------------------------------------------------------------------
Summary Arguments: Pennington and HR 125
The Department of Labor is currently sponsoring research into the
administrative and eligibility issues relating to moveable base period
administration. In an earlier study, Wayne Vroman (1995) found that UI
eligibility would increase by six to eight percent and benefit outlays
would increase four to six percent under alternate base period
programs. Clearly, there are far reaching effects to demanding that
states pay benefits in a timely manner.
But these eligibility implications should not cloud Congress'
deliberations around HR 125. The Pennington case is first and foremost
a case about whether states should be allowed to delay payment of UI
benefits, sometimes to the extent that claimants fall out of the
system. The courts have emphatically stated that states do not have
this right. Congress should not now step in to limit the rights of the
unemployed.
Devolution
In the absence of specific legislative language, we can only
speculate about the full effect of the current devolution proposals.
However, we have deep concerns about the impact of devolution on vital
elements of the current system. Moreover, we fear the attention which
is being focused on devolution only serves to delay the development of
less fundamental but more practical solutions to administrative
financing problems which many constituencies can agree upon.
The AFL-CIO is uniquely representative of various elements of the
employment security system in the United States. We represent
unemployed union members who remain connected to the labor movement and
we try to further the prospects of all unemployed workers as a basic
principle of social justice. We also represent employees in human
service and unemployment insurance agencies. And representatives of
organized labor serve in various capacities on federal, state, and
local advisory boards dealing with unemployment insurance related
issues. In short, our concern for effective administrative financing
runs deep.
We believe administrative financing reform should be guided by
basic principles. These shared principles can form the basis for a
discussion of alternatives, but devolution efforts fail on virtually
all counts.
States Should Receive Adequate Administrative Funds
Current practice starves state agencies of the funds they need to
administer programs. Some devolution proposals suggest using general
revenue for some functions, a suggestion which imposes a new burden on
the tax system without improving the flow of funds. Instead,
administrative finance reform should ensure that funds for benefits and
funds for administration are more closely linked and made available as
needed by state agencies.
Funds Should Go to States on an Equitable Basis
Both the problems with the current system and the virtues of
devolution are overstated in this regard. The states which most
strongly advocate devolution are also less likely than other states to
pay benefits to the unemployed. They receive less in administrative
funds because they pay fewer of the unemployed benefits. At the same
time, the distributional effects of devolution have yet to be fully
explored. We suspect that small states and states with limited tax
bases will come up short under devolution. Hold harmless provisions may
only forestall the day of reckoning.
Funds Should Account for Fluctuations in Workload
Just as the trust fund for benefits must allow for unpredictable
changes in demand, so too should the administrative accounts provide
for spikes in administrative requirements. Any proposal which suggests
that these peak loads can be covered by borrowing from general revenue
should be viewed with great skepticism.
Tax Reporting Should be Simplified
No one would argue that complex tax procedures should be
maintained. As part of any consensus package of administrative
financing reforms, employers should expect to see simplified reporting
procedures which maintain revenue and still provide necessary
information and data. Despite claims to the contrary, we believe
devolution may actually increase the complexity of the tax system both
for multistate employers and within a given state as new demands result
in unique funding mechanisms.
Conclusions
With the effort to reverse Pennington and the effort to devolve UI
financing, Congress faces two issues which threaten the social
insurance system in the United States. The effort to reverse Pennington
would strike down over 60 years of commitment to reducing the anxiety
of waiting to receive UI benefits which a worker has earned. The
boundaries of what is ``administratively feasible'' have shifted in
favor of claimants; Congress should not resist this important advance.
On devolution, advocates are developing their case as a response to
the problems which exist under current financing arrangements. There
can be no doubt that such problems exist. There can also be no doubt
that solutions short of devolution should be pursued before the current
federal/state division of functions is discarded in favor of uncertain,
dramatic change.
Thank you for the opportunity to raise these concerns.
Chairman Shaw. Thank you.
Mr. Miller.
STATEMENT OF ALBERT R. MILLER, PRESIDENT AND CHIEF OPERATING
OFFICER, PHOENIX CLOSURES, INC., NAPERVILLE, ILLINOIS
Mr. Miller. Thank you, Mr. Chairman, and Members of the
Subcommittee. My name is Bert Miller, and I am president and
chief operating officer of Phoenix Closures. My company is
located in Naperville, Illinois, and produces container caps
for regional and national brand products, both domestic and
international.
Our customers cover a wide array of markets, including
foods, household chemicals, cosmetics, health care products,
industrial products, and pharmaceuticals.
Phoenix Closures presently employs more than 200 workers,
and has been an Illinois employer for over 100 years.
I am here today to express my strong support for the
legislation Governor Edgar and Director Doherty are seeking in
connection with the Pennington case. There are problems both
with the alternate base period itself, and the manner in which
it would be implemented if Pennington stands.
The Pennington alternate base period would provide for
payments of unemployment benefits financed exclusively by
employers to individuals with no established connection to the
work force. To that extent, it would begin to turn the
unemployment insurance system into a 100-percent employer
financed welfare program--something well beyond what I
understand to have been Congress' intent and something
employers cannot afford.
Director Doherty has already discussed the potential impact
on employers--annual tax increases of as much as $40 million,
and more government imposed paperwork. To put that into
context, permit me to discuss briefly my company's situation.
Phoenix Closures is a longtime Illinois business run by a
longtime Illinois family. Our success is built on a strong
partnership we have with our employees and their union, the
textile workers, AFL-CIO.
The company's employees are also its neighbors, and Phoenix
Closures intends to remain committed to them in its home in
Illinois. However, we face intense competition from businesses
whose roots are not firmly fixed.
Many of our competitors have moved to more rural parts of
the country to take advantage of low wages. In the past 3
years, four of our competitors have established plants in
Mexico.
Phoenix Closures has remained competitive by substantial
investments in high-tech equipment, in training our employees
to run that equipment, and in doing our level best to keep the
line on costs whenever possible.
In that environment, court orders that raise taxes by as
much as $40 million per year, and compound government-imposed
paperwork, are not just dispiriting. For many businesses like
ours, a system that allows things like that will ultimately be
deadly.
The alternate base periods costs, however, would not just
fall on employers. I am also troubled by the potential impact
on government--millions of dollars in startup costs, and $2.5
million in annual costs, according to the Department of
Employment Security, with no identifiable source to cover those
costs.
I have been a consistent advocate of the idea that
government needs to work a lot smarter and cheaper than it does
right now. However, no entity can achieve that result if it
just keeps taking on more and more things to do.
The alternate base period just gives government one more
thing to do, and takes us further in the wrong direction.
Besides the problems with the idea of an alternate base period,
I am deeply troubled by the fact that, as the Pennington case
has transpired, employers have been completely shut out of the
process. As things stand now, most of my concerns will never
enter into the debate. According to both the District and
Appellate Courts, the only relevant considerations in deciding
whether a State is to be ordered to adopt an alternate base
period are how much more would be paid in benefits, and what
the impact would be on government's operating expenses. The
cost to employers in terms of higher taxes and additional
paperwork simply will not count.
Employers will not have the satisfaction of voting against
the judge who ordered the alternate base period.
Mr. Chairman, employers are the ones who pay for the
system. Our concerns should at least be considered relevant to
the discussion.
The legislation Illinois is seeking is simple. It will make
sure the decision as to whether or not the benefits of an
alternate base period justify its costs remains one for
policymakers who will be accountable to the people the decision
will affect.
It will also ensure as costs and benefits are weighed, all
sides' concerns are given their due. I respectfully ask you to
support it.
Thank you for taking the time for having this hearing and
considering my views.
[The prepared statement follows:]
Statement of Albert R. Miller, President and Chief Operating Officer,
Phoenix Closures, Inc., Naperville, Illinois
Thank you, Mr. Chairman and members of the Subcommittee. My
name is Bert Miller. I am the President and chief operating
officer of Phoenix Closures. My company is located in
Naperville, Illinois and produces container caps for regional
and national brand products, both domestic and international.
Our customers cover a wide array of markets, including foods,
household chemicals, cosmetics, health care products,
industrial products and pharmaceuticals. Phoenix Closures
presently employs more than 200 workers and has been an
Illinois employer for over 100 years.
I am here today to express my strong support for the
legislation Governor Edgar and Director Doherty are seeking in
connection with the Pennington case.
There are problems both with the alternate base period
itself and the manner in which it would be implemented if
Pennington stands. The Pennington alternate base period would
provide for the payment of unemployment benefits, financed
exclusively by employers, to individuals with no established
connection to the workforce. To that extent, it would begin to
turn the unemployment insurance system into a 100-percent
employer-financed welfare program--something well beyond what I
understand to have been Congress' intent and something
employers cannot afford.
By increasing outlays from Illinois' Trust Fund account,
the alternate base period would also raise employer taxes. The
greater the rise in outlays was, the higher the tax increase
would be. The lowest estimate I have seen is that the alternate
base period would increase outlays from Illinois' account by
1.5 percent. An increase of that size would raise employer
taxes by around $10 million per year. There is a Labor
Department study that estimates an alternate base period can
raise a state's Trust Fund outlays by four to six percent. A
six-percent increase in outlays from Illinois' account would
raise taxes on Illinois business by $40 million each year.
The alternate base period's cost to employers, however,
would not be limited to higher taxes. I understand employers
would also be faced with additional reporting requirements,
with penalties for noncompliance, to verify claimant earnings
that had not yet been reported and entered into the state's
computers.
To put that into context, permit me to discuss briefly my
own company's situation. Phoenix Closures is a longtime
Illinois business run by a longtime Illinois family. Our
success is built on the strong partnership we have with our
employees and their union--the United Needle and Textile
Employees Union, AFL-CIO. The company's employees are also its
neighbors, and Phoenix Closures intends to remain committed to
them and its home in Illinois. However, we face intense
competition from businesses whose roots are not as firmly
fixed. Many of our competitors have moved to more rural parts
of the country, to take advantage of low wages. In the last
three years, four of our competitors have established plants in
Mexico.
Phoenix Closures has remained competitive by substantial
investments in high-tech equipment, in training for our
employees to run that equipment and in doing our level best to
hold the line on costs whenever possible.
In that environment, court orders that raise taxes by as
much as $40 million per year and compound government-imposed
paperwork are not just dispiriting. For many businesses like
ours, a system that allows things like that will ultimately be
deadly.
The alternate base period's costs, however, would not just
fall on employers. I am also troubled by the potential impact
on government--million's of dollars in start-up costs and $2.5
million in extra annual costs according to the Department of
Employment Security, with no identifiable source to cover those
costs. I have been a consistent advocate of the idea that
government needs to work a whole lot smarter and cheaper than
it does right now. However, no entity can achieve that result
if it just keeps taking on more and more things to do. The
alternate base period just gives government one more thing to
do and takes us further in the wrong direction.
Besides the problems with the idea of an alternate base
period, I am deeply troubled by the fact that, as the
Pennington case has transpired, employers have been completely
shut out of the process. As things stand now, most of my
concerns will never even enter into the debate. According to
both the district and appellate courts, the only relevant
considerations in deciding whether a state is to be ordered to
adopt an alternate base period are how much more would be paid
in benefits and what the impact would be on government's
operating expenses. The cost to employers, in terms of higher
taxes and additional paperwork, will simply not count.
Employers will not even be able to have the satisfaction of
voting against the judge who ordered the alternate base period.
Mr. Chairman, employers are the ones who pay for the system;
our concerns should at least be considered relevant to the
discussion.
The legislation Illinois is seeking is simple. It will just
make sure that the decision as to whether the benefits of an
alternate base period justify its costs remains one for policy
makers who will be accountable to the people the decision will
affect and that, as the costs and benefits are weighed, all
sides' concerns are given their due. I respectfully ask you to
support it.
Thank you for you taking the time to have this hearing
today and for considering my views.
Chairman Shaw. Thank you, Mr. Miller.
Mr. Collins may inquire.
Mr. Collins. I have no questions, Mr. Chairman.
Chairman Shaw. Mr. Levin.
Mr. Levin. I think the panel, Mr. Chairman, has laid out
the issue pretty clearly. I just wanted to ask Ms. Gilbert--
Ohio now uses a system that's consistent with Pennington?
Ms. Gilbert. That's correct.
Mr. Levin. Ms. Doherty, do you know what percentage of the
workers laid off today in Illinois are covered by unemployment
compensation?
Ms. Doherty. I can tell you that of the people who apply on
a yearly basis with us, 93 percent of them are monetarily
eligible. And that's the first thing we look at, is monetary
eligibility. Seven percent would apply most likely in this
Pennington case.
Now, from the 93 percent, though, there are reasons that
they may not get unemployment benefits after that. I don't know
overall how many workers are not covered in Illinois. No. I can
get you that information, though.
Mr. Levin. OK. Thank you.
[The information was not available at the time of
printing.]
Mr. Levin. Yes.
Ms. Gilbert. Congressman Levin, I would like to respond to
your issue that Ohio has the Pennington base period. Basically,
the concern that States have is that States have the right to
determine whatever base period that is, and even Ohio would
face similar litigation to the Pennington litigation
potentially for base periods even sooner than what the
Pennington folks are seeking.
So the concern is that States have the right, that this is
a State issue. States have the right to determine their own
base period.
Mr. Levin. Thank you.
Mr. Hiatt.
Mr. Hiatt. Congressman Levin, I believe that in response to
your question to Ms. Doherty, the District Court, as upheld by
the Appeals Court decision that just came down a couple of
weeks ago in the remand in the Pennington case, had found that
under an alternative base system in Illinois, there would be
some 13,800 to 40,000 workers in a given year who would be
eligible for benefits if the lag quarter wages were considered.
So other issues of eligibility or ineligibility aside, they
found that range would be directly affected by this one change.
Ms. Doherty. Congressman, could I also respond? One of the
points of interest that we did not bring up here is what it
takes for somebody to be eligible. And basically what we look
for in a four-quarter period, the first four quarters of the
last five completed, is $1,600 in wages.
That's how much they have to make in a year to be eligible
for unemployment insurance benefits. That should be noted.
Mr. Levin. And how is that responsive to Mr. Hiatt?
Ms. Doherty. Well, it's probably a combination of both.
Because I think Ohio's monetary eligibility is a bit higher. So
we could change our base period, and if we raised monetary
eligibility, we could actually cut people out.
You have to look at the whole law, not just one piece, and
I think one of the things that happens in Illinois which I
think has been fairly effective for us the last 10 years is our
law is negotiated between the business and the labor community
before it goes in front of our general assembly.
So that both those groups are accountable to the people
that they represent. And it's been a fairly effective process
for us. We haven't always used that in Illinois, but the last
10 years, with the exception of one or two times, we have stuck
with the new agreed bill process, which basically takes both
sides of the equation into effect.
Mr. Hiatt. If I may, I really think it's apples and oranges
to confuse the monetary eligibility requirements, on the one
hand, with the ``when due'' issue, on the other.
As Congressman Ensign pointed out before, ultimately with
respect to the eligibility requirements, it's going to be the
State officials who are going to be accountable. All that the
Pennington case addresses is how quickly are unemployed workers
who are otherwise eligibility for this unemployment money going
to get their money.
And if the State is saying, Well, we'll get it to you when
it's owed to you, but as a result we're going to have to raise
eligibility requirements, with fewer unemployed workers
eligible, well, that's the State's prerogative, and then
they'll have to take the heat when the citizens in the State
complain about it.
But that shouldn't have an impact on unemployed workers who
are eligible by everybody's definition under a given State
standard, getting their unemployment check when it's due.
That's the only issue that Pennington is addressing.
Mr. Levin. Thank you.
Chairman Shaw. Mr. English.
Mr. English. Thank you, Mr. Chairman.
I'm kind of interested in the Pennington issue, because
Pennsylvania's current UC system, I think, does conform to
Pennington, as it's structured. So some of these issues are
relatively new to me.
Mr. Hiatt, with regard to multiple base periods, and I'd
like to move at least my part of this discussion away purely
from the cost side of it. Because too much of the debate on UC
is cost driven, without fully considering all of the other
implications.
In moving toward multiple base periods, what kinds of
claimants benefit from that change in the structure of
benefits? I know the structure of UC benefits has different
effects for different kinds of work patterns.
Can you describe the sorts of workers that you have found
would benefit from multiple base periods, as opposed to the
system that Illinois has had in place?
Mr. Hiatt. Well, a good example that you would find
everywhere would be construction workers. Construction workers
who are contingent or temporary in the sense that typically
their employment on one particular project, with one particular
employer, is not going to be of a long-term, ongoing, factory-
type pattern.
And so they may not have worked five quarters ago, but they
may very well have been working in the quarters two through
five. And five is the quarter immediately preceding their
unemployment.
As our economy has changed from one where almost everybody
worked for one employer for his or her whole working life, to
one where an average worker now has, whatever it is, 11 or 12
employers over the course of their lifetime employment, it is
not at all atypical that, whether construction workers or other
kinds of seasonal or temporary workers who are employed for
most of the time, but may have time off in between jobs, many
will not be working five quarters ago, but may very well have
been working in quarters two through five.
That would be, I think, a typical example.
Mr. English. One of the other issues--would you like to
speak to that as well?
Ms. Doherty. Just that I guarantee you most construction
workers, if they worked the second through the fifth quarter,
would most definitely be eligible. There are not very many
construction workers in Illinois that are not eligible for
unemployment insurance.
Mr. English. OK. Do you want to comment?
Mr. Hiatt. Just that there was a Department of Labor study,
the Vroman study, 1\1/2\ years ago or so, that found that
indeed there is a construction worker impact, that that is one
of the groups that would be impacted.
I can't speak to the specific number of construction
workers in Illinois who would be affected by this difference,
but across the board that was, in fact, cited as a good example
in response to exactly the question you're asking.
Mr. English. Mr. Chairman, would it be appropriate if the
staff of the Subcommittee were to provide the Members with a
copy of that study from the Department of Labor?
Chairman Shaw. That certainly can be done.
Mr. English. Thank you. Mr. Miller, in your testimony you
also focused on the additional reporting requirements that
would be imposed on businesses moving toward a Pennington
implementation.
And I wonder, can you quantify that paperwork burden, and
what sorts of businesses would the additional regulations have
some impact on?
Mr. Miller. Well, I think the timeliness issue is such that
virtually every employer in Illinois is going to have to come
up with a way to accumulate their payroll data radically
faster, and move it to the State of Illinois to get on their
computers.
And we're going from a situation where we have--and I don't
work in my accounting department and so I don't know the exact
amount of time that we have to get our numbers into the State
of Illinois----
Mr. English. Surely.
Mr. Miller. But from what I understand on Pennington, our
timeframe is going to be literally several days to get the
State computers updated on our payroll, which we don't do.
I have a reasonably good IS department in our company, and
we use a payroll service. So it may very well be that my
company would be able to respond reasonably well. But I can
only imagine that companies that have 50 employees, 75
employees, 100 employees that do their own payroll will
absolutely have nuclear meltdown over this kind of thing.
And relative to this whole unemployment issue, there's one
company in Illinois that manufactures gowns, graduation gowns.
They basically run their business about 90 days a year. If they
wind up paying unemployment on all of their employees because
of the changes in the base period, the changes that are being
discussed, I think it's a safe bet you can expect to see that
business move offshore.
And these are the real problems. I am struck by the fact
that no one has talked about the costs to manufacturers and
employers in the State of Illinois or any other State. I think
the numbers that are talked about here are remarkably low
compared to what the employers are going to have to do to
respond to the more timely reporting requirements.
Mr. English. Mr. Chairman, if I could just ask a quick
followup. If I am correct, Ms. Gilbert, you had indicated that
your State currently is fairly close to being in conformity
with Pennington.
Ms. Gilbert. We do have an alternate base period.
Mr. English. Do you see those additional costs now within
your State?
Ms. Gilbert. I don't have them quantified, but it does
require employers not only to do their quarterly wage reporting
as they do in most States, but at a time when a claimant files
for unemployment, if the claimant qualifies under the alternate
base period, we must go back to the employer and ask for
additional reports at that time.
So it is an additional burden.
Mr. English. Thank you. Mr. Chairman, this has been a
wonderful panel, and I appreciate their contribution.
Chairman Shaw. Mr. Coyne.
Mr. Coyne. No questions, Mr. Chairman.
Chairman Shaw. Well, I'd like to thank this panel. Thank
you very much for being with us.
Mr. Collins. Mr. Chairman, I know I passed a minute ago,
but I would like to enter something into the record. And I
would like to ask Ms. Gilbert a question before she leaves, if
you don't mind, sir.
Chairman Shaw. You go right ahead.
Mr. Collins. Ms. Gilbert, Members of this Subcommittee
received a copy of a letter to the President, dated April 22 of
this year, asking his support in fixing the Pennington problem.
Those States were Illinois, California, Wisconsin, Delaware,
Minnesota, Ohio, Georgia, and Iowa.
Can you give us a sense--and Mr. Chairman, I'd like to
enter a copy of that letter into the record, please.
Chairman Shaw. Without objection.
[The information follows:]
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Mr. Collins. Can you give us a sense of how many other
States support legislation to clarify the longstanding intent
of the Social Security Act that States do have the right to set
their own base periods?
Ms. Gilbert. Can you repeat the question one more time?
Mr. Collins. Can you give us a sense of how many other
States, I named eight, that support legislation to clarify the
longstanding intent of the Social Security Act that States have
the right to set their own base periods?
Ms. Gilbert. Well, the Interstate Conference of Employment
Security Agencies is a consortium of the States. And it is
ICESA's position at this point in time to support that
legislation.
Mr. Collins. How many?
Ms. Gilbert. ICESA currently represents 53 jurisdictions.
So all 50 States and the three additional jurisdictions that we
serve, the District of Columbia, the Virgin Islands, and Puerto
Rico.
Mr. Collins. Very good.
Thank you, Mr. Chairman.
Chairman Shaw. Thank you, Mr. Collins.
Our next panel will be made up of Thomas Nagle,
undersecretary of health and welfare, the State of California
in Sacramento; Hon. Bobby Whitefeather, chairman of the Red
Lake Band of Chippewa Indians Tribal Council, Red Lake,
Minnesota, and he's accompanied by Mr. Peterson whom I have
lately seen on television looking at the devastation. And our
concern, sympathy, and prayers go out to you and your
constituents for what they're suffering.
William Bentley Ball, Esq., Harrisburg, Pennsylvania, on
behalf of the Association of Christian Schools International;
and Richard Masur, who is the president of the Screen Actors
Guild, Los Angeles, California.
Mr. Peterson, you may have to go. Would you like to go
ahead and introduce Mr. Whitefeather? I know you're busy today.
STATEMENT OF HON. COLLIN PETERSON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MINNESOTA
Mr. Peterson. I'd very much appreciate that, Mr. Chairman.
I, as you can imagine, am a little busy--the supplemental that
is dealing with the flood situation right now, and we're
scrambling. So we appreciate those kind words, and my
constituents appreciate that.
I'll be very brief. We've been working on this issue for
some time--I have and a number of us. And, there's a long
history in this country that Indian nations and tribes and
bands be treated the same as State governments, and there's
been litigation on this. It's been upheld time and time again.
All we're asking for with this bill is that the Indian
tribes be treated the same way as States be treated on
unemployment. And there's been a dispute here that we've been
trying to resolve for some time.
They've been trying to collect, I think, from you a certain
amount of money, and Bobby will tell you about that.
But all we're trying to do is just have the tribes be
treated the same as the States when it comes to unemployment.
That they not have to pay unemployment, that they can take care
of it themselves. And apparently there was some discussion
earlier about the fact that somebody had said that they would
support the tribes activities being exempt, but not the
business activities of the tribes.
And I would like to point out that States run a lot of
businesses. They run lotteries, other kinds of things that are,
in my view, business enterprises, and those are exempt from
this unemployment. And there's no difference with what the
tribes do when they run a casino or some other operation that
basically is the same thing that a State is doing.
So what we're asking for, and we hope that you would
consider, is that you treat the tribes appropriately, the same
way as we treat State government. And resolve this, and with
that I would turn it over to Chairman Whitefeather who has been
working long and hard on this, and we really appreciate you
taking the time to hear about this today. We very much
appreciate it.
Chairman Shaw. Good luck with the emergency supplemental.
Mr. Peterson. Thank you. We're going to need it. We have a
lot of problems. I'll wait for the Chairman to say his word,
and then I'll have to leave.
Chairman Shaw. All right. Mr. Whitefeather, and then I'll
go back into order.
STATEMENT OF BOBBY WHITEFEATHER, CHAIRMAN, TRIBAL COUNCIL, RED
LAKE BAND OF CHIPPEWA INDIANS, RED LAKE, MINNESOTA
Mr. Whitefeather. Thank you, Congressman Peterson.
Good afternoon, Mr. Chairman, and Members of the
Subcommittee.
My name is Bobby Whitefeather. I am the tribal chairman of
the Red Lake Band of Chippewa Indians, and we are located in
northern Minnesota, not quite in the flood plain as some of our
neighbors to the west. So we're fortunate in that regard.
Our reservation comprises of 8,000 members, and we are
charged with full governmental functions of providing services
to those people.
The Red Lake Band of Chippewa Indians is here today in
support of H.R. 294, the Indian Tribal Government Unemployment
Tax Act Relief Amendment of 1997. I would first of all like to
acknowledge again Congressman Peterson for his previous efforts
in introducing a similar measure in the 103d Congress. Also
Senator McCain, last year, and, of course, Congressman Shadegg
with his measure this year.
We support H.R. 294 on the basic premise of establishing
fairness and equity to FUTA with respect to treatment, and lack
of clear, consistent classification of tribal governments under
FUTA.
I think it also should be noted, interestingly, that
States, some States treat tribal governments as exempt
employers, Minnesota being one of them.
Over the last several years, the Internal Revenue Service
has been very inconsistent in the practices and the
classification and assessment of the FUTA tax laws.
Reports that the Red Lake Tribe has received from some
tribes vary in instances where some tribes were assessed the
FUTA taxes, and later, to their surprise they received a
refund. There have been also instances such as in Red Lake
where we were informed that we were exempt employers, and
during the interim of several years, the agents for the
Internal Revenue Service changed, and therefore their
interpretation of the treatment of tribal governments has
changed. And we are under this current dilemma at this point.
Several years ago we were informed that we were exempt,
later to find out that a new agent said that was a wrong
interpretation, and the typical story is, you should have
gotten it in writing.
But be that as it may, I think also it should be noted that
the Congressional Research Service has performed various
surveys with respect to treatment of Indian tribes with respect
to FUTA. And the research and the survey has confirmed that
there is inconsistent treatment throughout the country.
The enactment of FUTA over 60 years ago, as in several
other pieces of legislation that come up from time to time,
does not specifically identify Indian tribes as a unit of
government.
Therefore, it results in varied treatments and
interpretations, especially in FUTA where even country
governments and municipalities are treated as exempt
organizations, and, for that matter, charitable organizations
as well.
To be fair, tribal employees that are engaged in activities
that are similar to State governments, local governments have
to be considered. Because we operate a nursing home. We operate
a hospital. We provide police protection, fire protection, and
all the typical public service functions that any government
provides.
In conclusion, I think the application of FUTA to tribal
governments as private employers, the government to government
principle that we all recognize from nation to nation, is
contrary to current understanding of that relationship.
The assessment of FUTA on the Red Lake Band of Chippewa
Indians will have a very devastating effect on our tribal
economy. We've been informed now that we will be assessed in
excess of $2.5 million. In comparison to that assessment, that
is about 40 percent of our annual operating budget.
And so I would urge the Subcommittee's support and the Red
Lake Band of Chippewa Indians, like I said, we're 8,000 strong.
And I am fortunate to have a group of young people with me here
today to attend the hearing from the Red Lake High School.
And we stand with you to urge your strong support for the
enactment of H.R. 294.
Thank you.
[The prepared statement follows:]
Statement of Hon. Bobby Whitefeather, Chairman, Tribal Council, Red
Lake Band of Chippewa Indians, Red Lake, Minnesota
Mr. Chairman, and distinguished members of this
Subcommittee, thank you for this opportunity to comment on
behalf of the Red Lake Band of Chippewa Indians, a federally-
recognized tribal government, in support of the amendments
proposed in H.R. 294, the ``Indian Tribal Government
Unemployment Compensation Act Tax Relief Amendments of 1997.''
Since the early 1990s our Tribe has actively sought
administrative and legislative relief from a very unfair
interpretation and application of the Federal Unemployment Tax
Act (FUTA) to tribal governments recently made by the Internal
Revenue Service (IRS).
We are indebted to Members like the Honorable Rep. John
Shadegg (H.R. 294 in the 105th), the Honorable Rep. Collin
Peterson (H.R. 838 in the 104th, H.R. 1382 in the 103rd), and
the Honorable Sen. John McCain (S. 1305 in the 104th; S. 391 in
the 103rd) who have pressed forward on this issue, year after
year. We are now also indebted to you, Mr. Chairman, for
including this matter for hearing today.
My Tribe testifies today in strong support of H.R. 294.
This bill has the active support of many Indian tribes as well
as the National Congress of American Indians. [See attached
NCAI Resolution SPK-95-060 on predecessor bill H.R. 838].
We support H.R. 294 because it would foster:
(a) fairness and equity--H.R. 294 would treat tribes like
all other governments and non-taxable entities are treated for
purposes of unemployment insurance;
(b) orderly and efficient FUTA administration--H.R. 294
would save federal, tribal, and state governments significant
sums of governmental revenue by resolving uncertainties that
cause sporadic enforcement, coverage, and expensive disputes;
and
(c) government-to-government relations--H.R. 294 would
require a consistent application to the FUTA tax laws of the
government-to-government relationship that has been recognized
by the Federal Courts and by the Congress to exist between the
United States and federally-recognized Indian tribal
governments.
A. Background on the Red Lake Tribal Government and Reservation.
Our Tribe's Red Lake Indian Reservation is a relatively
large, rural Reservation with over 800,000 acres of tribal
trust land and water within the boundaries of the State of
Minnesota. Most of our lands are located within the boundaries
of our diminished Reservation, which has never been broken into
individual allotments and lost to non-Indians. Our Reservation
is not governed by Public Law 83-280. This means the Red Lake
tribal government and the United States government have full
civil and criminal enforcement responsibilities for the Red
Lake Reservation. As a consequence, our tribal government
provides a full range of governmental services to Reservation
residents. We administer police, judicial, penal and fire
protection services, natural resource protection and
management, social services, health and other emergency
services, economic development and planning, and many other
governmental activities. Although we are somewhat isolated by
our rural location, the Tribe has a variety of economic
enterprises which serve the community and provide important
governmental revenue to the Tribe. The State of Minnesota has
neither civil nor criminal enforcement responsibility or
authority over our Reservation.
A December, 1995 study carried out by the Department of
Economics, Bemidji (MN) State University found that
approximately 6,130 of our tribal members live on the
Reservation in 1,560 households. A majority of Reservation
households (59%) have incomes below the federal poverty line
for a family of four. Forty percent of all Reservation
households receive income from employment with our tribal
government, making tribal government jobs the single most
important source of income on our Reservation. Our Tribe
employs approximately 2,400 workers in its governmental
programs and enterprises, for a total annual payroll of $17.4
million. In addition, many of our tribal members survive on a
traditional subsistence economy of fishing and small-scale
timber cutting.
B. FUTA and Tribal Governments.
Introduction. H.R. 294 would correct a serious oversight in the way
Indian tribal governments like Red Lake have been treated by the IRS in
recent years for unemployment tax purposes under the unique, state-
federal unemployment program authorized by FUTA. Red Lake and other
Indian tribes are governments. We deserve consistent treatment as
governments. The changing IRS practice is based on a fundamental
disregard for, or lack of knowledge of, what tribes like Red Lake do as
governments.
How FUTA Works. FUTA involves a joint federal-state taxation system
that levies two taxes on most non-governmental and taxable employers:
An 0.8 percent federal unemployment tax (after credit for state taxes
that are paid) and a state unemployment tax ranging up to more than 9.0
percent of a portion of an employer's payroll.
Since its enactment in the 1930s, FUTA has treated foreign,
federal, state, and local government employers differently from private
commercial business employers. FUTA exempts all foreign, federal,
state, and local government employers from having to pay the 0.8
percent federal tax that is used to administer the FUTA system nation-
wide. It allows state and local government employers, as well as tax-
exempt charitable organizations, to contribute into the state
unemployment funds on a reimbursable basis, meaning they reimburse the
State funds only for those claims actually paid out to former
employees. All other private sector employers pay both the federal and
state FUTA tax rates in advance without reimbursement. The FUTA statute
does not expressly mention tribal government employers within the
definition of governmental employers.
How the IRS Treatment of Tribes, for FUTA Purposes, Has Changed. In
a turnabout from historical practice, but with increasing frequency
over the past decade, the IRS has begun to treat tribal governments as
if we are private-sector commercial business employers for purposes of
determining how we must participate in unemployment insurance programs
under FUTA.
The IRS has begun to try to retroactively collect federal and state
FUTA taxes from tribal governments, even though, as is the case with
Red Lake, to our knowledge all of the employees our tribal government
laid off before 1995 were denied unemployment insurance payments from
the State fund because the State has treated our Tribe as an exempt
governmental employer.
Red Lake's experience is not unusual. At the request of Senator
McCain and the Senate Committee on Indian Affairs, the Congressional
Research Service (CRS) issued a report on October 1, 1993 of a
telephonic survey it conducted of all state unemployment programs. The
report concluded that state treatment of tribal governments under FUTA
was uneven and varied widely. Some states considered tribal governments
exempt. Some treated them as governmental entities and allowed them to
reimburse the state fund on a claims-made basis. Some states accepted
tribal contributions at commercial rates. The treatment of tribes has
lacked any rational consistency.
The Red Lake Tribe conducted its own survey of other tribal
governments experience with FUTA. We learned that IRS policy has varied
widely from region to region during the 1990s and even up to this day.
Some tribes who have paid FUTA taxes have received their tax payments
back from the IRS with the message that tribal governments were exempt.
Many tribes who have not paid FUTA taxes have contributed to state
funds and have not been challenged. Others have not paid either the
federal tax or the state contribution and gone unchallenged. Still
others, like Red Lake, have been told they are exempt and then have
been vigorously pursued by the IRS for huge, retroactive assessments at
the full federal FUTA tax rate (there is no credit because no
contributions were made to the state fund) for many years into the
distant past.
Tribes Like Red Lake Have Suffered Inequitable Treatment At the
Hands of the IRS. My Tribe has suffered great legal and programmatic
costs as a result of the changing IRS interpretations of FUTA. The IRS
has come against us for several million dollars worth of what it calls
back taxes, interest and penalties that reach back as far as 1989. Red
Lake was completely surprised by this change of position by the IRS in
the early 1990s. We had on file two exempt letters from the IRS for
several of our Red Lake programs. We had never paid into the State
fund. Indeed, the federally-approved Minnesota Unemployment Insurance
Plan specifically described Red Lake and other tribal governments as
``exempt.'' The relatively few tribal employees we laid off in prior
years were always denied benefits because they worked for what was
deemed an ``exempt employer.'' Our Tribe did not cost the FUTA system
anything. Suddenly we were ordered to pay huge amounts of money for no
benefit.
Faced as we were with the threat of millions of dollars in IRS
taxes, penalties and interest continuing to mushroom at an exponential
rate, about two years ago our Tribal Council decided under protest to
begin to pay into the State unemployment fund in order to contain our
costs and at least get something (employee coverage) for our money. We
continue to refuse to pay the federal portion of the tax the IRS
considers remaining due after a credit is calculated for our
contributions to the State fund.
A total in excess of $2.5 million remains at issue for tax years
1989 through 1994, adding up all the tax amounts, penalties and
interest that IRS is trying to get from the Red Lake tribal government.
Should the IRS succeed, none of these funds will ever return to benefit
any former employees of our tribal government. None of these funds will
ever return to the State of Minnesota or its unemployment insurance
fund.
Analysis of the FUTA Law and Practice. It is well-settled that
Indian tribal governments like Red Lake are not taxable entities under
the federal tax code because of our status as governments. Until the
late 1980s, this same interpretation was applied uniformly by the IRS
to its collections under the somewhat ambiguous language of FUTA.
While FUTA expressly exempts all Section 501(c)(3) tax-exempt
organizations and all state and local units of government from paying
the federal portion of the FUTA tax, the New Deal-era statutory
language of FUTA does not expressly mention tribal governments. Based
on a re-reading of the statute, the IRS has changed course over the
past decade and begun to pursue a number of tribal governments for FUTA
taxes as if we are taxable for-profit commercial enterprises rather
than governments. This change of interpretation and practice has proven
to be quite burdensome to tribal governments like Red Lake who were
caught unawares by the change in IRS policy.
The IRS has chosen in recent years to pursue some tribal
governments for unpaid FUTA taxes who had proceeded on the good faith
assumption that we were immune, as governmental employers, from the
federal portion of the tax. Some tribal governments also chose not to
participate in the state unemployment programs. Red Lake's experience
with the State of Minnesota is not unique. We have learned that other
tribes in other states have likewise laid off employees who were
subsequently denied benefits by the state unemployment program solely
because they had worked for what the states deemed was an ``exempt''
employer--a tribal government. While this caused hardship on the former
employees of tribal governments, it meant that the state unemployment
funds paid out no benefits and experienced no loss.
The change in this IRS interpretation of the FUTA statute has not
been uniform. The resulting unevenness has caused additional problems
for Red Lake and other tribal governments as we have been subject to
differing interpretations over whether and how we are covered under
FUTA. Compounding this problem have been the varying views of different
state governments and the U.S. Department of Labor. As a result,
different tribes have been treated differently in different periods of
time. This has led to considerable confusion among tribal governments
about whether they are covered and how much they are supposed to pay.
Tribal Experience With the Changing IRS Practice. In the past
decade, some tribes have paid the federal FUTA tax and then enjoyed the
unusual experience of having the IRS return their payments to them with
the notation that the IRS considered them to be exempt employers. Other
tribal governments have not paid any FUTA contributions in a good faith
and reasonable belief that they were exempt. For example, two employer
subdivisions of our Red Lake tribal government, the Red Lake Tribal Job
Training Partnership Act Program and the Red Lake Tribal Comprehensive
Health Services Program, received written communications from the IRS
treating them as if they were tax exempt.
IRS Collection of Unpaid FUTA Contributions is Punitive. The IRS
effort to collect unpaid FUTA assessments is the equivalent of a
punitive tax under FUTA's unique enforcement mechanisms. The statute
permits the IRS to collect the full tax from a non-paying commercial
business regardless of its experience rating. These provisions act as
``teeth'' designed to encourage private sector businesses to pay the
tax in advance.
However, now that the IRS interpretation of the law has changed,
the IRS effort to collect back taxes from Indian tribal governments
like Red Lake means that none of the funds assessed and collected by
the IRS will ever be paid out as unemployment benefits to former
employees of a tribal government like Red Lake that has not
participated under FUTA. Nor will these dollars return to the state
funds in which Red Lake and other tribal governments did not
participate. Instead, the federal IRS will collect the highest possible
state and federal unemployment taxes and place all of these funds
directly into the U.S. Treasury without credit or benefit to any
workers, tribal employees or otherwise, in Minnesota. The IRS approach
would result in a windfall for the United States Treasury, and break
the back of our Tribe's government and Reservation economy.
How can it be fair to impose this kind of taxation without benefit
on the meager funds of an Indian tribal government like Red Lake simply
because we have followed an interpretation of FUTA that some regional
offices of the IRS and the states previously followed but now have
abandoned?
H.R. 294 Would Fairly Resolve the Problem. H.R. 294 would amend
existing FUTA tax statutes to clarify expressly that tribal governments
should be treated just as state and local units of government are
treated for FUTA unemployment tax purposes.
Under H.R. 294, the IRS would have no authority to assess federal
FUTA taxes against tribal governments, just as it cannot do so against
like state and local governments and tax-exempt organizations. In
addition, H.R. 294 would expressly authorize tribal governments, like
state and local governments and tax-exempt organizations, to contribute
to a state unemployment insurance fund on a reimbursable basis for
unemployment benefits actually paid out to former employees.
If a tribal employer does not lay off employees, under H.R. 294
there would be no reimbursements owed because no benefits have been
paid out. If a tribe does lay off someone for whom benefits are paid,
the tribe pays the benefits, dollar for dollar. In contrast, private
sector employers typically must pay an advance unemployment tax. The
FUTA law spreads the insurance costs across the private sector, with
commercial employers paying flat rates only partially adjusted by their
experience rating. The public policy underlying this approach seems to
be that the burden of unemployment insurance should be borne somewhat
evenly by all private sector interests.
The rationale for public sector employers having a reimburser
status is that governmental employers, such as Indian tribes and
states, have a far more stable employment environment than that of the
private sector. Equally important is the rationale that governmental
revenue, whether it be federal, state or tribal, should not be
``spent'' in advance of when an obligation to pay actually arises.
Finally, H.R. 294 would also remove a theoretical unemployment tax
liability of tribal governments like Red Lake who did not pay
unemployment compensation taxes in the past in the good faith and
reasonable belief that we were exempt, provided that no benefits were
paid to their former employees. If former employees were paid benefits
by a state fund, the tribal government would be obliged to reimburse
the state for those benefits actually paid out.
This last point is very important to Red Lake and to other tribes
who have been caught in the net cast by the changes in IRS policy and
practice. It is our understanding that Section 2(e) of H.R. 294
(transition rule) would assure that federal and state portions of the
FUTA tax for years prior to the effective date of H.R. 294 could not be
asserted or collected except to the extent that benefits have been paid
out by a state fund for service attributable to the tribe for such
period. If this is not your reading of this language, we would want to
work closely with your staff to amend the language to ensure that IRS
is prohibited from collecting the unfair windfall it is seeking to gain
from our Tribe and others similarly situated for past years.
Questions That Have Been Raised on H.R. 294. Three years ago, the
U.S. Department of Labor raised a concern that, because tribal
governments, like all governments, are immune from suit by virtue of
their sovereignty, a state fund may not be able to force a
participating tribal government to reimburse the state fund for money
it has paid out to a former tribal employee. There do exist several
ways by which a state in such a situation could collect the necessary
reimbursements from a tribe (for example, it could reduce other funds
going to a tribe for other state-funded services administered by the
tribe). However, a provision was added to the bill that would allow a
state to insist that any tribe wanting to have ``reimburser'' status
post a payment bond to assure that reimbursements will be made. Section
2(c) of H.R. 294 contains this provision and of course has our support.
A second question has been raised about whether H.R. 294 should be
amended to address only those tribal government employees who carry out
what are seen as ``traditional'' governmental activities like law
enforcement, judicial services, social services, or natural resource
protection, removing from H.R. 294 those tribal government employees of
tribal enterprises wholly-owned and controlled by an Indian tribal
government. Tribal governments and their employees do engage in
business-type activities in order to generate governmental revenue and
provide jobs and services in what are, more often than not, rural and
isolated economies. But it should be noted that State governments do
the same thing. Any effort to exclude certain tribal government
employees in this way would be patently unfair. State and local
government employees throughout America are engaged in a wide variety
of business-type activities that are wholly-owned and controlled by
state and local governments. A recent CRS survey preliminarily
concluded that state governments annually raise $46.5 billion from
business-type activities. That is $46.5 billion, not million, in
revenues from the direct operation of business-type activities by State
government employees. All of these state government employees, from the
liquor store stock clerks in Pennsylvania to the massage therapists in
the State park resorts of West Virginia to the lottery gambling clerks
in dozens of states, are treated as governmental employees for purposes
of FUTA. To be fair, our tribal government employees who are engaged in
business-type activities run by the tribal governments should be
treated no differently than these State and local government employees.
Like states, Indian tribal governments dedicate the revenues from these
business-type activities to governmental purposes. This is consistent
with the longstanding Federal policy that encourages tribal government
self-determination and self-sufficiency. It would be the height of
unfairness for the United States to discriminate against Indian tribes
who do the same thing that state governments are doing.
C. Conclusion.
The Red Lake Band of Chippewa Indians, along with other
federally-recognized Indian tribal governments, seeks prompt
enactment of H.R. 294. H.R. 294 would restore fairness to the
administration of the FUTA program and tax structure, because
it proposes to once again have the United States uniformly
treat each Indian tribal government the same as it treats state
and local governments and tax exempt organizations for purposes
of FUTA. Our participation as tribal governments in the FUTA
program under H.R. 294 would be on the same terms that all
other governments and non-taxable organizations participate.
There is no special favor or special treatment involved. H.R.
294 would simply clarify that tribal governments like Red Lake
should be treated for what we are--governmental employers.
My Tribe stands ready to assist the Subcommittee in
refining and securing passage of H.R. 294. Thank you for this
opportunity to be heard.
Attachment
Resolution SPK-95-060
Title: Supporting Legislation Designed to Exclude Tribes From Being
Assessed Under ``FUTA''
WHEREAS, we, the members of the national Congress of
American Indians of the United States, invoking the divine
blessing of the Creator upon our efforts and purposes, in order
to preserve for ourselves and our descendants rights secured
under Indian treaties and agreements with the United States,
and all other rights and benefits to which we are entitled
under the laws and Constitution of the United States to
enlighten the public toward a better understanding of the
Indian people, to preserve Indian cultural values, and
otherwise promote the welfare of the Indian people, do hereby
establish and submit the following resolution; and
WHEREAS, the National Congress of the American Indians
(NCAI) is the oldest and largest national organization
established in 1944 and comprised of representatives of and
advocates for national, regional, and local Tribal concerns;
and
WHEREAS, the health, safety, welfare, education, economic
and employment opportunity, and preservation of cultural and
natural resources are primary goals and objectives of NCAI; and
WHEREAS, the Internal Revenue Service has taken the
position that federal unemployment tax act assessments will be
applied to tribes; and
WHEREAS, other governmental units and non-profits are
specifically exempted from such assessments; and
WHEREAS, member tribes view their resulting treatment as a
``private employer'' as an infringement upon tribal
sovereignty; and
WHEREAS, legislation entitled ``Indian Tribal Government
Unemployment Compensation Act Amendments of 1995'' has been
introduced in Congress as H.R. 838; and
WHEREAS, the legislation, if passed, would include ``an
Indian tribe'' along with other governmental and political
subdivisions now specifically exempt from the assessment.
NOW THEREFORE BE IT RESOLVED, that the NCAI go on record as
supporting legislation designed to exclude tribes from being
assessed under ``FUTA'' and thereby retain for tribes their
status of being exempt from such federal taxation.
Certification
The foregoing resolution was adopted at the 1995 Mid-Year
Conference of the National Congress of American Indians, held
at the Sheraton Spokane in Spokane, Washington, on June 6-8,
1995 with a quorum present.
gaiashkibos, President
ATTEST:
S. Diane Kelley, Recording Secretary
Adopted by the General Assembly during the 1995 Mid-Year Conference of
the National Congress of American Indians, held at the Sheraton Spokane
in Spokane, Washington, on June 6-8, 1995.
Chairman Shaw. Thank you.
Mr. Nagle.
STATEMENT OF THOMAS P. NAGLE, UNDERSECRETARY, HEALTH AND
WELFARE AGENCY, STATE OF CALIFORNIA, SACRAMENTO, CALIFORNIA
Mr. Nagle. Thank you, Mr. Chairman, and Members of the
Subcommittee. Thank you for the opportunity to appear before
you today. I shall be brief. I have two issues. The primary
issue is the one referred to by Congressman Thomas earlier this
morning, involving the payment of unemployment benefits to
inmates upon release from prison.
In 1990 California voters passed a ballot initiative which
required the State to establish the joint ventures program in
the State prison system. Under this program, private businesses
may contract with the California Department of Corrections to
hire inmates to produce on the grounds of State prisons various
goods and services for sale.
In terms of the inmate income, part of the income goes for
Federal, State, and local income taxes, for support of the
prisoner's family, a restitution for the crime victims,
reimbursement to the State for the cost of room and board, and
approximately 20 percent is held in an escrow account and made
available to the individual upon release.
An unintended consequence of this employer participation in
the joint ventures is that employers are required to pay
unemployment taxes for the inmates they hire for employment.
Consequently, inmates are eligible for unemployment benefits
when they are paroled or released from prison.
We believe this distorts the intention of both programs.
Unemployment insurance was not intended to be a support program
for inmates.
The California legislature, to correct the situation,
passed a bill, S.B. 103, which placed a second initiative on
the ballot that would specifically deny unemployment benefits
to inmates upon their release from prison.
The ballot initiative, which was Proposition 194, was
overwhelmingly passed by the California voters in March 1996.
The U.S. Department of Labor has threatened to deny
California companies $1.7 billion in unemployment insurance tax
credits as a result of Proposition 194.
We basically support the legislation introduced by
Congressman Thomas, H.R. 562. This bill would exempt services
performed by inmates who participate in the joint ventures
programs, and similar programs in other States from
unemployment taxes and the resulting benefits.
Inmates who provide services currently and historically in
the prison system, such as doing work in the prison laundry or
kitchen or cabinet shops, make furniture that's used by State
offices. This program has been in existence for at least 20 or
30 years, and they have been exempt from unemployment taxes
under the current law.
Congressman Thomas' bill merely extends that exemption to
inmates to work in these relatively new private sector
agreements.
The other issue is that we are in support of the ICESA
position on the Pennington situation. We feel the issue is one
of State discretion. We've been legally challenged in the
courts. The AFL-CIO v. Lee in California. And so we're
intimately involved in this.
We believe it should be resolved through legislative
process in the Congress, and not by the courts. Our preliminary
estimate is that it will cost California businesses, employers,
approximately $93 million annually.
The increasing cost to administer the program in California
alone, if it's court mandated, we establish to be approximately
$12 million.
So we do support the legislation introduced by Congressman
Crane, H.R. 125. This bill would affirm that the base period
determination should be decided by the States and not as an
administrative consideration.
Thank you, sir.
[The prepared statement follows:]
Statement of Thomas P. Nagle, Undersecretary, Health and Welfare
Agency, State of California, Sacramento, California
Mr. Chairman and Members of the Subcommittee, thank you for
the opportunity to appear before you today to bring to your
attention two very important unemployment insurance issues
which are of great concern to the State of California.
The first issue concerns a situation that has arisen in
California involving the payment of unemployment benefits to
inmates upon release from prison. We believe immediate action
is required by Congress to prevent the misuse of taxpayer
dollars for that purpose.
In 1990, California voters passed a ballot initiative which
required the State to establish the Joint Venture Program in
the State prison system. Under this program, private businesses
may contract with the California Department of Corrections to
hire inmates to produce, on the grounds of state prisons,
various goods and services for sale. Similar programs have been
established in several other states.
The Joint Venture Program provides an opportunity for
inmates to learn important work skills and also generates
revenues for crime victims and savings for federal, state and
local governments. Up to eighty percent of an inmate's income
is withheld to pay for federal, state and local income taxes;
support of the prisoner's family; restitution to crime victims;
and reimbursement to the state for the cost of room and board.
The Joint Venture Program has been very successful.
However, this partnership with the private sector has created
an unintended consequence. Employers participating in the Joint
Venture Program are required to pay unemployment taxes for the
inmates they hire for employment. Consequently, inmates are now
eligible for unemployment benefits when they are paroled or
released from prison. Governor Wilson believes that employers
and taxpayers never intended the unemployment insurance program
to be an ex-inmate support program.
In an attempt to resolve this issue, the California
Legislature passed, and the Governor singed a bill, S.B. 103,
which placed on the ballot an initiative to deny unemployment
benefits to inmates upon their release from prison. The ballot
initiative, Proposition 194, was overwhelmingly passed by
California voters in March 1996. This should have been the end
of the story, but, unfortunately, it was not.
Recently, the U.S. Department of Labor (DOL) has threatened
to deny California companies $1.7 billion in unemployment
insurance tax credits as a result of Proposition 194. One
option offered by the DOL to avoid this action is to make the
inmates employees of the State, and then exempt them from
benefits. Not only is this option an insult to the hardworking
California correctional staff, it is unacceptable to California
employers and taxpayers and inconsistent with the intended
purpose of the unemployment insurance program.
To prevent DOL sanctions and to ensure that inmates do not
qualify for unemployment benefits upon release from prison,
Governor Wilson supports legislation introduced by Congressman
Bill Thomas, H.R. 562. This bill would exempt services
performed by inmates who participate in the Joint Venture
Program, and similar programs in other states, from
unemployment taxes and the resulting benefits.
Such an exemption is not unprecedented. Inmates who provide
services directly to the prison by work in the prison laundry
or kitchen or cabinet shop are already exempt from unemployment
taxes under current law. Congressman Thomas' bill merely
extends that exemption to inmates who work in these relatively
new private sector arrangements.
California voters have already made a clear statement that
they do not want their tax dollars used to pay unemployment
benefits to inmates released from prison. Governor Wilson urges
the Subcommittee to act quickly to resolve this issue by
passing Congressman Thomas' bill when it considers unemployment
insurance reforms.
The other important issue I would like to bring to your
attention today is the impact on California and other states of
the Pennington v. Doherty case out of Illinois. That case
interpreted existing federal law to substantially change the
manner in which most states have calculated the base period for
the award of unemployment benefits since the beginning of the
program in 1935.
From the inception of the Unemployment Insurance Program
the base period for the purposes of determining monetary
eligibility for unemployment benefits has been determined by
each state, most of which have opted for a base period similar
to that chosen by California. The unemployment compensation
program is a federal-state partnership, with certain basic
requirements imposed by federal law as a condition of
participation. The specific eligibility standards and amount of
benefits payable have generally been considered to be within
the discretion of the individual states.
California considers the choice of base period to be an
eligibility criteria solely within each state's discretion.
This is the central issue in a lawsuit currently pending in
California, AFL-CIO v. Lee. The plaintiffs in that lawsuit are
asking the federal courts to follow the Pennington decision and
to order California to adopt a specific base period, one that
would impose a very significant administrative and monetary
burden upon both the state and employers.
The Department of Labor (DOL) participated in the
Pennington case in Illinois by filing a brief in support of the
State of Illinois. DOL's position agreed that the base period
is a matter of a state's rights. The most recent decision in
that case was unfavorable to the State of Illinois and Illinois
has stated that it will be filing a petition in the U.S.
Supreme Court. To date, DOL has not taken a position in
California's pending lawsuit.
Congress can and must resolve this issue because the
consequences of a court-imposed base period are severe. The
cost to California employers alone will be $93 million
annually. The cost to Illinois employers will be from $30 to
$40 million annually. This, ultimately, will translate into
increased employer taxes.
The increased costs of administration to implement a court-
mandated alternative base period in Illinois includes an annual
administrative cost of $2.6 million. In California, the annual
administrative cost alone would be $12 million.
If California and Illinois are required by these lawsuits
to implement a new base period, the other states won't be far
behind. When the costs experienced by California and Illinois
are extrapolated to all of the other states, it's apparent that
an alternative base period requirement is going to impose a
very significant fiscal burden upon employment security
agencies and employers nationwide.
The additional administrative costs of an alternative base
period will have to be absorbed within existing budgets, which
can only mean services in other areas will have to be cut. The
unemployment compensation system has worked well for 60 years
with the existing base period. There is no valid reason to
remove this eligibility determination from the state domain.
Governor Wilson believes that Congress must act to take
this issue out of the court system and reaffirm that this is a
matter for each state to decide through open debated and the
legislative process. In this regard, the Governor supports H.R.
125, the legislation introduced by Congressman Phil Crane that
would affirm that the base period determination is a matter
that should be decided by each state. Governor Wilson strongly
urges Congress to pass H.R.125 quickly and relieve states of
the potential administrative and fiscal burden that would be
imposed upon them if they are mandated to adopt a specific base
period.
Mr. Chairman, this concludes my prepared statement. At this
time, I would be pleased to answer any questions that you or
other Subcommittee Members may have.
Chairman Shaw. Thank you, Mr. Nagle. The next witness will
be introduced by our colleague, Mr. Crane, who is back from the
Speaker's office. Congratulations on your escape.
Mr. Crane. The beginning, not the end.
Mr. Chairman, I want to thank you for including in this
hearing another bill I introduced, H.R. 124, which would exempt
religious schools operated by lay board of believers from the
Federal Unemployment Tax Act, FUTA.
Currently, the exemption extends only to schools directly
operated by churches. It's estimated that 20 percent of
Protestant evangelical schools in our country fall in this
nonexempt category, as well as many Catholic and Jewish
schools.
Yet such schools would not even exist if they didn't have a
strong religious mission. Therefore, it's only fair these
schools be allowed to decide whether or not they'll participate
in the unemployment system.
Today the Subcommittee will hear from William Ball,
representing the Association of Christian Schools
International. Although I've worked in support of this effort
for a number of years, Mr. Ball has devoted his career to being
an advocate for religious freedom.
He has argued some of the landmark religious freedom cases
before the U.S. Supreme Court, and many State supreme courts
around the country. He has defended those who because of
religious beliefs cannot defend themselves from the intrusion
of government in their religion and in their daily lives.
Because he has tirelessly fought in the name of religious
freedom for students, parents, schools, or entire religious
communities, Mr. Ball is uniquely qualified to speak to the
issue raised by H.R. 124, and I commend his testimony to my
colleagues on the Subcommittee, and again thank you, Mr.
Chairman.
Chairman Shaw. Mr. Ball.
STATEMENT OF WILLIAM BENTLEY BALL, ESQ., HARRISBURG,
PENNSYLVANIA; ON BEHALF OF ASSOCIATION OF CHRISTIAN SCHOOLS
INTERNATIONAL
Mr. Ball. Mr. Chairman, Members of the Subcommittee, I want
to thank you very much for having me appear here today. As
Congressman Crane said, I represent the Association of
Christian Schools International, which is a nonprofit
organization representing some 3,000 nonprofit, nonracially
discriminatory evangelical Christian schools in our country,
serving some 570,000 students.
Parents, who are the main supporters of these schools, and
the school administrators are deeply interested in H.R. 124.
And why? Well, the answer is simple. Congressman Crane has just
expressed it.
Section 3309(b)(1) of the Internal Revenue Code says that
schools controlled by churches and are operated primarily for
religious purposes are exempt.
I think the Congress did not intend at that time to exclude
religious schools run by lay board. They focused on church
schools, and they said, Well, it's obvious that we're covering
the religious schools of the country when we speak of church-
controlled schools.
Now, in the Association of Christian Schools International,
there are quite a number of church-controlled schools. But
there are also a significant number of schools not operated by
churches but which are governed by dedicated evangelical
Christian boards of laypeople.
If you would permit me to just take you in your imagination
to a town somewhere in the country where you see Grace Academy,
which is controlled by Grace Church. A couple of miles down the
street, another school called Lake View Christian School is
operated by a lay board of evangelical Christians.
As you go into each of these schools, you'll find a
religiously oriented curriculum. You'll find teachers of
evangelical faith imparting the evangelical faith to their
children. You'll see prayer, a strong spiritual atmosphere.
You'll find the same moral training. You'll see religious
symbols in each. And when you leave, you won't be able to tell
which was which. They are indistinguishable.
As Congressman Crane mentioned, too, there are Orthodox
Jewish schools which--and I don't speak for them--but which I
understand to be in the same category as maintaining lay board
religious schools.
It's obvious then that there is a need here for this
measure, H.R. 124, and the exemption it would then extend to
the remaining number of religious schools.
I want to conclude by drawing to your attention something I
think would be significant to you, if not critical, which is
the question of tax impact.
There are three impacts of this measure. First of all, it
is virtually revenue neutral. This same measure, in the form of
amendment 3443, came before the 100th Congress, and the Joint
Committee on Taxation said that the net budget gain would be
less than $5 million in that fiscal year, and negligible in the
years thereafter.
The second impact which I would refer to, tax impact, is
that it will help the parents who are supporting these lay
board religious schools. And the third impact relates to what
you stated in your advisory statement, that you're interested
in increasing employment and interested in business growth.
The ACSI schools produce highly literate graduates, who are
trained in civic responsibility. And that, I think, in this
day, is a boon to the country, and these schools, therefore,
should be encouraged in their efforts and not penalized.
Thank you.
[The prepared statement follows:]
Statement of William Bentley Ball, Esq., Harrisburg, Pennsylvania; on
Behalf of Association of Christian Schools International
I speak for the Association of Christian Schools
International (ACSI), which thanks you for this opportunity to
address the important measure which is H.R. 124. The
Association is the largest organization of evangelical
Christian schools in the nation, with more than 3000 schools
and colleges. It now serves about 570,000 students.
The sponsors of H.R. 124 are to be congratulated because
your bill will, if enacted, correct a serious defect in our tax
laws. Let me spell out that defect. The Federal Unemployment
Tax Act (FUTA) provides exemption for services performed by
employees
in the employ of (A) a church or convention or association
of churches, or (B) an organization which is operated primarily
for religious purposes and which is operated, supervised,
controlled or principally supported by a church or convention
or association of churches.
A religious school controlled by a church is not covered by
the Act, and the school is not required to pay the FUTA tax.
But many religious schools are not such schools. Fifteen
percent of ACSI schools are not. Indeed one out of five
religious schools in the USA are not. They are indeed operated
(by lay boards) ``primarily for religious purposes'' but are
not controlled, or principally supported, by a church or
association of churches. Under the present law, those schools
are liable for the tax. Yet they are absolutely
indistinguishable from church-operated schools. You could
readily find this out by visiting both types of school. They
are equally religious in curriculum, program and spiritual
life. So it is seriously discriminatory to say that one shall
be taxed but the other not taxed.
It is clear, from examining the history of FUTA, that the
Congress intended no such discrimination but simply was unaware
of the relatively small number of non-church, religious
schools. The Congress readily concluded that it had exempted
all religious schools when it exempted the church schools. That
oversight was understandable. But no longer is it reasonable to
maintain that unfortunate mistake. Let me conclude by pointing
out three important facts:
First, no non-church school would be exempt unless it would
have proven to IRS that it is ``operated primarily for
religious purposes.'' Our non-church religious schools do not
seek any open-ended exemptions.
Second, the change effected by H.R. 124 will be revenue-
neutral. The previous effort to remove the present inequity
(Amendment 3443 (100th Congress)) was held by the Joint
Committee on Taxation to be so, stating that the ``net budget
effect of this bill would be a gain of less than $5 million in
the fiscal year and a negligible effect each year thereafter.''
(Congressional Record, 100th Congress, S14861-2).
Third, ACSI's plea is on behalf of the parents who
sacrifice to afford the education which ACSI's schools provide.
This plea is also on behalf of our society, because ACSI knows
that its schools are providing excellent education and moral
training for young Americans in a caring environment. Schools
which do that should be encouraged in their efforts, not
penalized under our tax laws.
Thank you for hearing this testimony. It is to be hoped
that you will now see fit to move decisively to remove a
serious inequity by voting favorably on H.R. 124.
Chairman Shaw. Thank you, Mr. Ball. Our last witness is
Richard Masur of the Screen Actors Guild.
STATEMENT OF RICHARD MASUR, PRESIDENT, SCREEN ACTORS GUILD, LOS
ANGELES, CALIFORNIA
Mr. Masur. Good afternoon. My name is Richard Masur, and I
am the president of the Screen Actors Guild.
Mr. Chairman, I would like to thank you and the Members and
the staff of this Subcommittee for giving me the opportunity to
testify in support of Congressman English's bill, H.R. 841.
Today I am speaking on behalf of my colleagues in the
entertainment industry, in particular, the senior performers
represented by the Screen Actors Guild, the American Federation
of Television and Radio Artists, and our colleagues in the
Directors Guild of America.
By way of brief introduction, please allow me to explain
the predicament that is faced by seniors in our industry as a
result of section 3304 of FUTA. While some actors are
financially well off, most are not. Entertainment professionals
work many short-term jobs and face prolonged periods of
unemployment.
But like many other hardworking Americans, some senior
members of the entertainment community manage to earn a modest
pension after working 20 or more years. Still, they have years
of productive work ahead of them, and often seek roles, which
we encourage them to take, portraying senior citizens in a
positive, active, and vigorous light.
Actors, writers, and other workers in the entertainment
industry are participants in various multiemployer pension
plans which were established through collective bargaining.
Under the terms of those plans, a worker who has met the
minimum requirements to qualify for benefits can take normal
retirement at age 65, or an early retirement option with
reduced benefits as early as age 55. It is very common for an
actor, once he or she has begun to receive a modest monthly
pension, to continue to seek work in motion pictures or
television to supplement that fixed income.
When such work is obtained, the actor's employer will, in
compliance with the collective bargaining agreement, contribute
to the pension plan. Now, under the plan's rules, such
contributions will result in an increase in the actor's monthly
pension check.
Subsequently, while the actor has otherwise met the
qualifications for unemployment benefits, section 3304 of FUTA
requires that an individual's unemployment insurance benefit be
offset by the pension benefit when, one, that person works for
any employer member of a multiemployer unit which contributed
to the pension; and, two, where that work results in an
increase in benefits.
Section 3304, as currently written and interpreted,
requires the unemployment benefit be offset not simply by the
amount of the benefit increase, but by the total amount of the
pension.
In this way, senior actors and other industry professionals
are being penalized for remaining active workers simply because
they have accepted a short-term job to supplement their fixed
incomes.
For example, assume that as a result of a short-term acting
job a worker's monthly pension benefit increases by $7, from
$400 to $407 per month. Also assume that the unemployment
insurance benefit is determined to be $450 per month.
Under current law, the monthly unemployment benefit of $450
would be reduced by $407, leaving a net benefit of only $43 per
month. Now, it would be reasonable, or certainly more
reasonable, if the unemployment benefit offset were limited to
the amount of the pension increase.
H.R. 841 does just that. Using my example, the change
encompassed in the bill would reduce the monthly unemployment
by $7, leaving a net benefit of $443 a month.
This change to FUTA is noncontroversial, and it enjoys
bipartisan support. We have also been told that it is supported
by the AMPTP, that is, the Alliance of Motion Picture and
Television Producers, and the Motion Picture Association of
America, which represent many of our employers.
As you may recall, this bill was first introduced in the
last Congress as H.R. 3677 by Congressman English, and at that
time my colleague and former Guild President Charlton Heston
testified before the Subcommittee on its behalf.
The Congressional Budget Office estimates the enactment of
H.R. 841 would result in an increase in benefit outlays of $2
million, as well as an eventual increase in revenues to pay for
those outlays. Therefore, this legislation would meet the pay-
as-you-go criteria.
All of our investigation indicates this problem is unique
to the entertainment industry, so with the Chairman's
permission, I would also like to submit a package of
correspondence between our attorneys, the California Employment
Development Department and the U.S. Department of Labor, which
shows that attempts were made to correct this problem at the
State level through administrative means.
This correspondence supports the need for congressional
action at the Federal level.
The pension offset rule was designed to prevent abuses such
as when a person who is retired attempts to collect
unemployment benefits by returning to their original employer
for enough time to qualify for those new benefits.
The current law does, however, allow a person collecting a
pension to work for a different employer without losing
subsequent unemployment benefits if laid off.
The law did not contemplate an adverse effect on people
such as actors who receive a pension increase from the same
pension plan, not the same company. In the entertainment
industry, workers who become eligible for a pension under the
industry's multi-employer plans have subsequently returned to
work under the same multi-employer plan.
In the eyes of the law, these actors are returning to the
same company, when in fact they are merely doing short-term
work in a diverse industry with many employers.
At a time when we are encouraging older people to work and
asking experienced actors and actresses to project positive
role models on television and film, the current pension offset
provision acts as a discouragement to those seeking employment.
Passage of H.R. 841 would restore the integrity of the
unemployment law to its original intent. It would protect the
well-being of senior workers, while also encouraging them to
continue contributing to the entertainment industry and
American culture.
On behalf of all of the senior workers in the entertainment
industry, I would especially like to thank Representative
English for authoring this bill, and Representatives Matsui and
Royce for being the chief cosponsors.
We appreciate the Subcommittee's consideration of this
legislation, and stand prepared to assist you as your
deliberations move forward.
Thank you very much, Mr. Chairman.
[The prepared statement and attachments follow:]
Statement of Richard Masur, President, Screen Actors Guild, Los
Angeles, California
Good day. My name is Richard Masur, and I am President of
the Screen Actors Guild.
Mr. Chairman, I would like to thank you and the members and
staff of this Subcommittee for giving me the opportunity to
testify in support of H.R. 841. Today, I am speaking on behalf
of my colleagues in the entertainment industry, in particular
the senior performers represented by the Screen Actors Guild,
the American Federation of Television and Radio Artists and the
Directors Guild of America.
Your actions affecting unemployment insurance policy have a
direct impact on many people's lives. I am here today to speak
to you about some of them--senior members of the entertainment
community who have been affected adversely, and we believe
unintentionally, by Section 3304 of the Federal Unemployment
Tax Act. As currently written and interpreted by the Department
of Labor and state employment offices, that Section deprives
senior workers of unemployment insurance benefits for which
they have otherwise qualified.
By way of brief introduction, please allow me to explain
this predicament--which is caused by a combination of the
unique nature of entertainment work, the rules of the pension
plan under which we operate, and the current interpretation of
federal law.
While some actors are financially well off, most are not.
Entertainment professionals work many short-term jobs and face
prolonged periods of unemployment. But like many other hard-
working Americans, some senior members of the entertainment
community have earned a modest pension after working 20 or more
years. Still, they have years of productive work ahead of them
and often seek roles we encourage them to take--portraying
senior citizens in a positive, active and vigorous light.
Actors, writers and other workers in the entertainment
industry are participants in various multi-employer pension
plans which were established through collective bargaining.
Under the terms of those plans, a worker who has met the
minimum requirements to qualify for benefits can take normal
retirement at age 65, or an early retirement options with
reduced benefits as early as age 55. It is very common for an
actor, once he or she has begun to receive a modest monthly
pension, to continue to seek work in motion pictures or
television to supplement that fixed income. When such work is
obtained, the actor's employer will, in compliance with the
collective bargaining agreement, contribute to the Pension
Plan. Under the plan's rules, such contributions will result in
an increase in the actor's monthly pension check. Subsequently,
while the actor has otherwise met the qualifications for
unemployment benefits, Section 3304 of the FUTA requires that
an individual's unemployment insurance benefit be offset by the
pension benefit when:
(1) that person works for any employer-member of a multi-
employer unit which contributed to the pension, and
(2) where that work results in an increase in benefits.
Section 3304, as currently written and interpreted,
requires that the unemployment benefit be offset--not simply by
the amount of the benefit increase--but by the total amount of
the Pension. In this way, senior actors and other industry
professional are being penalized for accepting a short-term job
to supplement their fixed incomes.
For example, assume that as a result of a short-term acting
job, a worker's monthly pension benefit increases by $7, from
$400 to $407 per month. Also assume that the determined
unemployment insurance benefit is equal to $450 per month.
Under current law, the monthly unemployment benefit of $450
would be reduced by $407, leaving a net benefit of only $43 per
month.
It would be reasonable if the unemployment benefit offset
were limited to the amount of the pension increase. H.R. 841
does just that. Using my example, the change encompassed in the
bill would reduce the monthly unemployment benefit by $7,
leaving a net benefit of $443 per month. This more-reasonable
offset in benefits would be accomplished by amending Section
3304 of the FUTA to simply limit the unemployment benefit
offset to the amount of the pension increase for workers in the
entertainment industry.
This change to the FUTA is non-controversial and enjoys bi-
partisan support. As you may recall, this bill was first
introduced last Congress as H.R. 3677 by Congressman English,
and my colleague Charlton Heston testified before this
subcommittee on its behalf. The Congressional Budget Office
estimates the enactment of H.R. 841 would result in an increase
in benefit outlays of $2 million, as well as an eventual
increase in revenues to pay for those outlays. Therefore, this
legislation would meet ``pay-as-you-go'' criteria.
All of our investigation indicates this problem is unique
to the entertainment industry. With the Chair's permission, I
would also like to submit a package of correspondence among our
attorneys, the California Employment Development Department and
the U.S. Department of Labor, which shows that attempts were
made to correct this problem at the state level through
administrative means. These correspondence essentially support
the need for Congressional action at the federal level.
The pension offset rule was designed to prevent abuses,
such as when a person who is legitimately retired attempts to
collect unemployment benefits by returning to their original
employer for enough time to qualify for unemployment benefits.
The law does, however, allow a person collecting a pension to
work for a different employer without losing subsequent
unemployment benefits if laid off. The law did not contemplate
an adverse affect on people such as actors who receive a
pension increase from the same pension plan--not the same
company. In the entertainment industry, workers who become
eligible for a pension under the industry's multi-employer plan
have subsequently returned to work under the same multi-
employer plan.
In the eyes of the law, these actors are returning to the
same company, when in fact they are merely seeking short-term
work in a diverse industry with many employers.
At a time when we are encouraging older people to work--and
asking experienced actors and actresses to project positive
role models on TV and film--the current pension offset
provision discourages them from seeking employment. Passage of
H.R. 841 would restore the integrity of unemployment law to its
original intent. It would protect the well-being of senior
workers while also encouraging them to continue contributing to
the entertainment industry and American culture.
We appreciate your consideration of this legislation and
stand prepared to assist you as your deliberations move
forward. Thank you.
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Chairman Shaw. Thank you. Mr. English, your name was
mentioned. Why don't you inquire?
Mr. English. Thank you. Mr. Masur, I very much appreciate
your testimony here today, because I think you brought before
the Subcommittee in fairly vivid and specific terms how this
perverse pension offset which was put in with perhaps the right
intentions particularly affects some people involved in your
profession.
The only question I have, and this is something I've been
trying to puzzle through the last few days, is how this pension
offset would also potentially interact with the Social Security
earnings limitation, which is an offset in part.
It seems to me there might be some people in the age
bracket of 65 to 69 who would be hit with two offsets at the
same time, and, in effect, would be invited to go to work, take
a substantial cut in the Social Security benefits, and after
work, qualifying for unemployment benefits, would in effect
lose the bulk of those as well.
So this would be a huge disincentive for people to work.
Have you run into instances where actually for this reason
motion picture association members are unable to attract as
many actors as they would like for these sorts of roles?
Mr. Masur. Well, actors, as I'm fond of telling people,
never retire. They don't fade away. They just work until they
drop or can't do the work anymore.
So it takes a lot of discouragement to keep our senior
performers from going to work.
Mr. English. I understand.
Mr. Masur. But I don't know that there have been any cases
where they haven't been able to attract the appropriate people
for the work.
I do know there has been extreme concern about this new
burden caused by a thoughtful action by our pension plan which
didn't use to credit current work in terms of increased
benefits, but now senior actors fall under this harsh offset.
So when the plan changed the way we did our business,
unfortunately it put all of our members in a situation where
suddenly they lost nearly all their unemployment benefits.
So they've been very upset about this for about 8 or 9
years now.
Mr. English. Well, we appreciate your coming before the
Subcommittee again following up on Mr. Heston's testimony last
year. This is something, Mr. Chairman, I'd very much like to
see addressed this year, if we have the opportunity.
And again, I yield back the balance of my time. And I also
want to thank the other panelists, because this is a very good
panel.
Chairman Shaw. Mr. Levin.
Mr. Levin. No questions. I think everybody has presented
their case very well, Mr. Chairman.
Chairman Shaw. Thank you. Mr. Whitefeather, I want to also
point out that Mr. Ramstad also encouraged your appearance here
today. I'd like to also note the appearance of our former
colleague, Mr. Sikorski. Welcome back. Nice to see you.
Then I'd thank all the members of this panel for being with
us this afternoon. I think it has been a very enlightening few
hours here.
Thank you very much, and the hearing is concluded.
[Whereupon, at 1:12 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of Duane Parde, Executive Director, American Legislative
Exchange Council
I. Background
The employment security system, created in the 1930s,
consists of three programs, unemployment insurance, labor
exchange (employment service), and labor market information.
Unemployment insurance is designed to alleviate hardship with
temporary benefits for workers who have lost jobs without fault
on their part. The labor exchange (available to benefit
recipients as well as others looking for work) seeks to match
job seekers with openings listed by employers. Labor market
information programs provide useful labor statistics, including
data on unemployment levels.
These services are provided through state employment
security agencies (SESAs), staffed by state employees, who take
and pay unemployment claims, run the labor exchange, and
collect and disseminate labor market statistics. Unlike the
typical state agency, which is supported by state general
revenue, SESAs rely for their administrative funding primarily
on federal grants received from the U.S. Department of Labor
(DOL).\1\ As with most federal grants, many conditions are
attached and regulatory oversight from DOL is intense.
---------------------------------------------------------------------------
\1\ A separate state tax finances actual benefit payments to the
unemployed.
---------------------------------------------------------------------------
These administrative grants are funded by a federal
employer payroll tax, collected by the IRS, under the Federal
Unemployment Tax Act (FUTA). The tax is levied at a rate of
0.8% on the first $7,000 of each worker's wages. Included in
the present 0.8% rate is a 0.2% surtax scheduled to expire
December 31, 1998. Some of the FUTA funds are deposited into
separate federal trust accounts to pay for extended benefits
(``EB''),\2\ the ``EUCA'' account, and to make loans to
insolvent state jobless trust funds, the ``FUA'' account.
---------------------------------------------------------------------------
\2\ Under the EB program, individuals who have exhausted their
benefit eligibility may receive an additional 13 weeks in payments, but
only when the unemployment level in their State reaches a ``trigger
point.''
---------------------------------------------------------------------------
II. Problems
The present bifurcated employment security system has
created serious problems in the eyes of ALEC's public and
private sector members:
Overtaxation. The main purpose of the FUTA tax is to
finance salary and overhead expenses for the SESAs. But in FY
1996, only $3.38 billion, or 58 percent, of $5.85 billion
collected under FUTA was returned to the States to run their
agencies. The rest was not appropriated by Congress (to offset
the federal deficit); spent on IRS and DOL bureaucracy; or
deposited in the rarely used EUCA and FUA accounts. The federal
government thus removed $2.5 billion from the private sector,
which could have put those dollars to work--in capital
reinvestment, in hiring more workers, in increasing employee
pay or benefits, or in dividend distribution.
Unnecessary Tax Paperwork. The IRS spends $70 million each
year in collecting the FUTA tax, and business spends more than
$290 million annually in filling out FUTA forms. This is
because employers must complete both a federal unemployment tax
return (to pay for SESA administrative costs), and a state
return (to finance jobless benefits), rather than using a
single form.
Shortchanging of States. Not only is less than 60% of FUTA
revenue given back to the States, but esoteric allocation
formulas devised by DOL compound the problem. All but five
States and the Virgin Islands received less money in FY 1995
(the most recent information available) than their employers
paid in FUTA taxes. And 20 States got back 50 percent or less
of the FUTA tax money they sent to Washington.
For example, Tennessee, which paid in $120.8 million and
received grants worth just $43.6 million, or 36.1 percent.
Other States with eye opening grant-to-tax ratios are North
Carolina, 36.6 percent; Florida, 36.7 percent; Indiana, 37
percent; Georgia, 38.9 percent; Virginia, also 38.9 percent;
and Ohio, 39.2 percent.
Unproductive Federal Trust Accounts. At the end of FY 1997,
the EUCA account, which pays for EB benefits, will contain
$9.43 billion; the FUA account's balance, from which loans to
state trust funds are made, will be $6.72 billion. The EB
program has rarely been used, even during the early 1990s
recession, resulting in large balances. The loan program has
seen little activity since the early 1980s, when the federal
government began charging interest for loans not repaid within
the same fiscal year.
The effect of these large balances is to conceal the true
size of the federal deficit, since the trust fund accounts
exist within the unified budget, and, in essence, to finance
other government spending--which the FUTA tax was never
intended to cover.
Inefficient Service Delivery. The present employment
security system promotes inefficient service delivery by SESAs
in several ways:
distinct federal funding streams for different
activities (unemployment insurance, labor exchange, labor
market information) inhibit economies of scale by making it
difficult or impossible to pool monies for personnel and
overhead expenses.
burdensome DOL rules, restrictions, and
requirements result in ``bean counting'' and paperwork
proliferation. This has been estimated to consume not less than
four percent of a SESA's personnel resources.
states receive grant amounts based on archaic DOL
formulas; there is no incentive for economy or better
performance since these do not affect funding levels.
Most important, however, America's state legislatures have
no role in the employment security system. This is because the
federal government sets both the administrative tax rate and
the grant amounts which state agencies receive to run their
programs. SESA program priorities thus are set on a ``one-size-
fits-all'' basis in Washington, rather than by legislators who
know the most about designing an employment security system
that meets local needs. Likewise, employers and citizens are
denied an effective voice in the system, because their local
elected representatives lack any real authority.
III. The ALEC Reform Plan
The ALEC plan for employment security system reform
embraces three simple but essential elements captured by the
words ``replacement,'' ``repeal,'' and ``redistribution.''
Replacement of FUTA with State-set administrative taxes.\3\
Most of the problems in the present system can be erased by
this single reform. If state legislators were permitted to set
an administrative tax rate to finance their SESAs, the
following beneficial changes would occur.
---------------------------------------------------------------------------
\3\ This would be accomplished by permitting the 0.2% surtax to
expire, and raising from 90% to 100%, the credit received against the
actual 6.0% tax rate by employers in States with programs conforming to
remaining federal standards.
---------------------------------------------------------------------------
Overtaxation of employers, caused by the federal
government's failure to return to the States more than two-
fifths of the FUTA revenue collected each year, would end. Most
States would be able to set an administrative tax rate far
lower than the current FUTA level without reducing agency
operating budgets. Annual savings: $2.5 billion.
Unnecessary paperwork for employers would be done
away with, since they could file a single state return for both
administrative and benefit taxes. Annual savings: $290 million.
States would no longer be shortchanged by DOL
administrative grants, since each State would set a tax rate
commensurate with the funds it wants to spend on its agency.
State agencies would be able more efficiently to
allocate resources with the disappearance of separate funding
streams.
Budget, taxing authority, and program oversight
responsibility would be lodged in a single level of government
closer to the citizens. This would encourage more efficient
operation, and enable States to set agency priorities and
performance standards consistent with the needs of their
employers and workforce.
Repeal of burdensome DOL grant conditions. The DOL rules,
restrictions, and requirements that currently accompany federal
grants and hinder effective agency operations would be replaced
with substantive oversight from state legislators. Of course,
some basic federal protections would remain, like uniform
minimum employer coverage standards and due process safeguards
for persons whose claims are denied.
Redistribution of EUCA and FUA funds. By terminating the
unnecessary federal EB program (and letting States enact their
own), and using general revenue to back the current loan
program for state trust funds, more than $16 billion could be
redistributed to state jobless trust accounts. With vastly
increased trust assets, States would have a menu of attractive
options: cutting benefit taxes (or in some cases even enacting
moratoria), improving benefits, or just bolstering trust fund
solvency.
ALEC also advocates using $2.7 billion in unappropriated
administrative revenues to hold harmless for five years those
few States that now receive more in federal grant money than is
attributed to employment in their States; to provide a one-time
enhancement of administrative revenue for other states; and to
pay for necessary transition costs. Also, to limit any impact
on the national deficit, state administrative funds would
continue to be deposited in Washington-based accounts, except
that each State would have its own dedicated account into which
to deposit tax revenue and make withdrawals to pay for SESA
salaries and overhead costs.
IV. The ``UBA-ES Administrators'' Plan
At ALEC, we have also had an opportunity to review the
draft of another plan calling for changes in the employment
security system. This plan is supported by UBA, Inc., and
several state employment security administrators.
On the whole, the ``UBA-ES'' proposal offers only minor
improvement in some parts of the system; in other respects, it
actually makes things worse. Unless the Subcommittee is willing
to make changes going beyond those recommended by ``UBA,'' we
would urge retention of the status quo.
This statement is not the place for a detailed analysis of
the ``UBA-ES'' plan, but ALEC does wish to draw the
Subcommittee's attention to fundamental differences that
separate the two plans.
Unlike the ALEC plan, the ``UBA-ES'' approach maintains the
FUTA tax, rather than effectively eliminating it. As a result,
employers would be denied more than $1 billion in tax relief
available only under the ALEC plan.\4\ Although UBA would
permit States to keep most of the revenue raised by the FUTA
tax in their States, this money would go straight to expansion
of state agency budgets. Many agencies would receive windfall
increases of more than 50%.
---------------------------------------------------------------------------
\4\ Both plans contemplate some tax relief when the 0.2% FUTA
surtax expires at the end of 1998.
---------------------------------------------------------------------------
State legislators would still have no effective control
over the rate of tax and agency . budgets. As a result,
legislatures would be deprived of the ability to establish
priorities and design employment security systems responsive to
the needs of their employers and their workforces. State
agencies would have no incentive to become more efficient,
since their funding would be guaranteed.
The ``UBA-ES'' plan increases DOL regulation by requiring
state agencies to make new reports to Washington on such
matters as the proportion of claimants using re-employment
services and the proportion of employers using employment
services.
The ``UBA-ES'' proposal continues to mandate the federal EB
program on the States, even while redistributing to them funds
in the EUCA account. The ALEC plan permits states full freedom
to determine the conditions, if any, under which benefits
should be extended.
The ``UBA-ES'' plan fails to redistribute $6.7 billion in
assets located in the FUA account to state jobless funds,
limiting States' ability to provide benefit tax relief, to
increase benefit payments, or to raise trust fund solvency
levels.
V. Conclusion
In considering changes to the Nation's employment security
system, ALEC observes that a sharp contrast exists between its
approach and that of UBA and the ES Administrators.
The ``UBA-ES'' idea is that state agency bureaucracies
should be arbitrarily inflated without oversight or
interference from state legislators or taxpaying employers, and
that Washington regulation must be intensified.
The ALEC concept promotes maximum employer tax relief,
substantial deregulation and paperwork reduction, and handing
back real taxing and decision-making power to state legislators
who, after all, are closest to the people the employment
security program is intended to serve.
We hope the Subcommittee will cut taxes and bureaucracy and
reinvigorate our federal system by writing legislation
consistent with the principles I have described here.
Attachment: ``Resolution To Transfer the Employment
Security System to the States,'' American Legislative Exchange
Council.
[The attachment is being retained in the Committees files.]
Statement of American Society for Payroll Management, New York, New
York
ASPM is a professional association of the senior managers
who control the preparation of payroll and employment taxes for
large employers in the United States. We represent large
employers, systems vendors and tax service providers. As a
group, we collect and account for a major proportion of the
income and employment taxes the Internal Revenue Service
receives.
ASPM wishes to submit this statement for inclusion in the
printed record of the of the hearing, although ASPM will not be
testifying in person. FUTA reform efforts greatly affect the
work of our members and we believe that comments from the
payroll professional community should be heard.
We are writing to express our concern about the proposal
under active consideration for inclusion in the FY98 budget to
mandate monthly collection of both federal and state
unemployment insurance taxes. This proposal makes little
economic sense and would impose unnecessary burdens on both
employers and program administrators. We find it quite
inconsistent with government initiatives such the Simplified
Tax and Wage Reporting System (``STAWRS'') that was created to
focus specifically on ways to reduce tax and wage reporting
burdens
Companies represented by our organization withhold, report,
and deposit a large proportion of all taxes paid to the
Treasury each year. For years, we have worked closely with the
IRS and other government agencies to simplify the tax and wage
reporting process. Recently, we met with officials at the
Treasury, the Department of Labor and program officials within
OMB in an attempt to understand a policy rationale that would
justify the burdens imposed by this proposal. The only
justification that we heard was that, even though most of the
UI taxes collected are state revenues, the change can be
``scored'' as a one-time federal revenue raiser in the year of
implementation. This budget justification ignores the real cost
of the increased financial and administrative burden imposed on
both federal and state tax administrators--and on our nation's
employers.
It was most troubling to learn from these meetings that
little consideration had been given to the additional
compliance burden imposed on employers. In light of the
Administration's commitment to both paperwork reduction and
STAWRS, we find this to be quite disappointing. Furthermore,
from these sessions it became clear that this concept was
developed without significant evaluation of its potential
impact on the unemployment insurance (``UI'') program. It
appears to have been developed exclusively as a ``revenue
raiser'' without meaningful input from the federal agency
responsible for UI program policy.
The current two-track federal/state system for collection
of FUTA/SUI taxes has been estimated by state government and
employer groups to cost employers somewhere between $290 to
$500 million a year in processing costs. Increasing employers'
UI filing obligations from 8 to 24 times annually will only
exacerbate the problem. It would increase payroll processing
costs by an amount that in the aggregate will be measured in
the hundreds of million dollars every year--all to achieve a
one-time technical accounting speed-up in the year 2002. We
believe the long-term burden far outweighs the short-term
benefit. The burden would be especially onerous for small
business and would be inconsistent with the purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996,
which is intended to lessen legal, administrative and reporting
requirements imposed on small businesses by the federal
government.
In measuring the overall impact of this proposal, it is
important to remember that the increased state administrative
cost is in reality a federal outlay, since such expenses must
be appropriated from the Unemployment Trust Fund. To the extend
that the federal government chooses not to appropriate
additional funding to cover the states' increased
administrative burden, the states will be confronting yet
another form of unfunded mandate coming to them from
Washington. Moreover, any reduction in available funds for
administration of employment services would further increase
outlays reflected in the federal budget, by reducing employment
services to unemployment compensation claimants, who in turn
would draw additional benefit payments.
As you work to complete preparation of the FY98 budget
submission, we would ask you to give most serious consideration
to the overall implications of this proposal. When evaluated
with a full appreciation of (I) its impact on both federal and
state UI tax administration and (ii) its significant new
administrative burden on employers, we do not believe that it
can be defended from a either a policy or budget perspective.
When enacted, the surtax was to be a temporary surtax to
help keep the FUTA trust funds solvent. The trust funds now
have substantial surplus balances. The funds collected in this
trust fund may not be used for any other purpose, so the surtax
does not really help reduce the deficit in overall spending,
except on paper.
The acceleration of payments is a budget gimmick to show a
first year only increase from collecting taxes two months
earlier. This funding would also go into the trust fund and
would do nothing to relieve the overall deficit. More
importantly, this proposal has a very significant cost burden
to both employers and to the state and federal agencies that
collect and account for these taxes. The proposal would triple
the cost of paying and collecting these taxes in exchange for a
one-time paper benefit to the revenue budget. The current
system could be more meaningfully reformed by having the states
collect all unemployment taxes under their own rules and
forward the federal portion to the IRS
This would produce real, on-going budget savings by
eliminating federal salaries and administrative expenses
presently used for collection efforts. There are opportunities
for real reform of the UI system, but the budget proposals only
create further unnecessary burdens on employers. ASPM, the
employer community and the state unemployment agencies strongly
oppose this proposal.
Respectfully submitted,
Clark G. Case
Vice President of The American Society For Payroll Management
Government Relations Committee Chair
Financial Systems and Employee Accounting Manager
City of Winston-Salem, NC
cc: Dan Glum, ASPM President
ASPM Board Members
ASPM Government Relations Committee Members
Statement of Don Novey, President, California Correctional Peace
Officers Association, West Sacramento, California
Mr. Chairman and Members of the Subcommittee, I appreciate
the opportunity to submit testimony before you regarding a
serious problem with the Federal Employment Tax Act. Under this
law, states are prevented from denying unemployment insurance
for private sector employment during an inmate's incarceration
when an inmate is released from prison. Failure for a state to
conform with the federal statute would result in the loss of
federal tax credits to all businesses in that state.
The California Correctional Peace Officers Association
(CCPOA) represents over 25,000 correctional and parole officers
in the State of California. CCPOA strongly supports passage of
H.R. 562, introduced by Congressman Bill Thomas. H.R. 562 would
correct this flawed law by denying unemployment benefits for
hours worked for a private sector employer when incarcerated.
Since inmates are not eligible for unemployment benefits for
working for a non-profit or public sector employer while in
prison, this bill would provide this same exemption to private
sector employment.
In a nut shell, prisoners should not be entitled to
unemployment benefits simply because they released from prison
and therefore out of a job. These men and women are not being
laid off from a job. If prisoners are able to work while in
prison, it is a privilege he or she is being granted. Inmates
are in prison to serve a debt to society. Taxpayers already pay
a high cost for their crimes--from the victims themselves who
pay the ultimate price to the taxpayers who must pay for the
inmate's incarceration. H.R. 562 needs to be enacted into law
so that inmates are not entitled to the same unemployment
benefits provided to law-abiding and hard working men and women
who lose a job through no fault of their own.
In 1990, voters in California approved proposition 139,
which established a joint venture program between the private
sector and the state Department of Corrections. Businesses were
provided the opportunity to set up operations inside prisons.
This program generates savings and revenue for the state. Wages
to an inmate are subject to local, state and federal taxes.
Twenty percent of the inmate's salary is used to pay
restitution to victims. An inmate's salary is also used to
offset the costs of incarceration and to support his or her
family. The inmate benefits from the program by learning skills
and twenty percent of his or her salary goes into a savings
account which is available to the inmate upon release.
There was a loophole in the California law that was
subsequently corrected. Existing state law provided that
inmates would be eligible for unemployment benefits on the
basis of his or her employment in a joint venture program once
released from prison. CCPOA was a leader in the state effort to
correct this serious problem. On March 26, 1996, voters in
California overwhelmingly passed Proposition 194, which
prevented prisoners from collecting unemployment benefits for
employment in a joint venture program once paroled.
The United States Department of Labor, however, has
determined that California's new law (Section 2717.9 of the
State Penal Code) raises a conformity issue under federal law
(Section 3304(a)(10) of the Federal Unemployment Tax Act). Lack
of conformity with federal law would result in a loss to all
Californian businesses of a federal tax credit, which lowers
their federal unemployment tax payments. The Department has
advised the State of California that there are various ways to
get around the conformity problem, such as making inmates
participating in the program employees of the state. We find
this suggestion nothing short of outrageous. Taxpayers already
pay for an inmate's room, board, education, exercise
facilities, medical and dental expenses, and more. To make
these inmates employees of the state is a serious insult to
correctional officers who are responsible for ensuring the
public is safe from this criminal element.
The Department's response--here's how to get around the
problem--is completely unacceptable. The issue clearly needs to
be addressed and corrected by Congress. Unemployment insurance
is meant to provide assistance to working men and women who
lose their jobs through no fault of their own. It is not meant
for a convicted criminal who is paroled out of a job. The
prisoner was granted the job as a privilege while serving time
for breaking the law.
For these reasons, CCPOA strongly urges this Subcommittee
to pass H.R. 562 and move this bill to the floor of the House
in the very near future. We commend Congressman Thomas for his
leadership and the Chairman of the Subcommittee for addressing
this issue at today's hearing. Thank you again for the
opportunity to present testimony on this important issue.
Statement of Jennifer A. Vasiloff, Executive Director, Coalition on
Human Needs
The Coalition on Human Needs opposes the legislation (H.R.
125) introduced by Representative Phillip Crane (R-IL) which
would overturn a key court case protecting the rights of
unemployed workers to collect unemployment insurance benefits
due them in a timely manner. The Coalition on Human Needs is
concerned that enactment of H.R. 125 would have a particularly
harmful effect on low wage workers and former welfare
recipients making the transition to paid employment. Given the
extensive changes enacted last year as part of welfare reform,
efforts to delay access to unemployment compensation could have
particularly grave consequences on vulnerable workers and their
families.
H.R. 125 is an attempt to reverse the US Court of Appeals,
7th Circuit, decision in the Luella Pennington vs. Lynn
Dohorty, Director of the Illinois Department of Employment
Securitycase. In the 1994 Pennington decision, the court ruled
that the state must count an applicant's most recent earnings
information in determining an applicant's eligibility for
unemployment insurance compensation. In its decision, the court
affirmed the federal requirement that states must pay benefits
in a timely manner. The court rejected the state's claim that
counting the most recent earnings was administratively
infeasible.
H.R. 125 would reverse this court decision and allow
Illinois to continue the administrative shell game of delaying
the payment of benefits to workers that they have already
earned and are entitled to receive. Therefore, H.R. 125 must be
rejected.
Current attempts to limit access to the unemployment
insurance compensation system must be considered in the context
of the historic drop in the number of people able to access the
unemployment system at all. In 1975, seventy five percent of
the unemployed received benefits. Today, only about a third of
all unemployed workers receive unemployment compensation. The
unemployment compensation system should be reformed to cover
more unemployed individuals not to impose new barriers to
accessing earned benefits.
The Department of Labor has estimated that if states used
the most recent earnings information available to calculate
eligibility, an additional six to eight percent of the
unemployed would receive benefits. The study also estimated
that paying these individuals the unemployment compensation
they are due would only increase the cost to states by four to
six percent. This discrepancy is due to the fact that many
individuals who would qualify for benefits if their most recent
earnings information were counted have below-average earnings
levels and therefore would qualify for only minimal benefits.
The group of low wage workers who would benefit from a
state using their most recent earnings information to calculate
eligibility includes higher proportions of women, minorities,
younger workers and workers with limited education. This is
exactly the population that the welfare reform law, the
Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (PL 104-193), targets to move into work. Workers
fitting this profile already face unemployment and underpayment
rates between four and five times the national average.
Furthermore, they are more likely to be required to leave a job
due to disruptions in child care or the illness of a family
member.
The Personal Responsibility and Work Opportunity
Reconciliation Act imposes on poor individuals strict new work
requirements and lifetime limits on the receipt of cash
assistance. Welfare recipients are being pushed to enter a low
wage labor market characterized by high levels of volatility
and contingent work in addition to low wages and a general lack
of benefits. Thus, individuals, such as former welfare
recipients, working in low wage jobs are likely to face periods
of unemployment through no fault of their own.
Delaying payment of unemployment benefits these individuals
have already earned is not only unjust, but also could result
in extreme economic hardship. For example, if an individual who
loses her job has worked long enough and earned enough to
qualify for unemployment benefits--but only if the state counts
her most recent quarter of earnings--she and her family could
be left with no benefits for up to six months if Pennington is
reversed. If this same individual, despite having demonstrated
a strong work effort, had previously exhausted her time limit
of assistance under the Temporary Assistance for Needy Families
(TANF) block grant, it would be even more important that she
have prompt access to any unemployment benefits she had earned.
If these individuals cannot access their unemployment benefits
promptly, there may be no other income support available to
them.
It is indefensible to refuse to pay earned unemployment
benefits in a timely fashion. Significant delays in access to
such benefits are very likely to force some low wage workers
onto welfare, or--if they have exhausted their TANF benefits--
into even more desperate poverty from which they may never
escape. This would be a devastating blow to poor workers who
have made every effort to play by the rules and achieve work-
based self-sufficiency for their families.
In conclusion, enactment of H.R. 125 would cause grave
injustices to be committed against our nation's most vulnerable
workers. It would place additional barriers in the way of
individuals moving off of welfare and into jobs. The
unemployment compensation system should be reformed to cover
more workers who are clearly attached to the labor force, not
to impose new barriers to accessing earned benefits. The
Coalition on Human Needs urges Congress to reject H.R. 125.
The Coalition on Human Needs is an alliance of over 170
national organizations working together to promote public
policies which address the needs of low-income and other
vulnerable Americans. The Coalition's members include civil
rights, religious, labor and professional organizations and
those concerned with the well-being of children, women, the
elderly and people with disabilities. The Coalition on Human
Needs also works with grassroots groups across the country that
share an interest in the human needs agenda.
Statement of Eastern Band of Cherokee Indians, Cherokee, New York
The Eastern Band of Cherokee Indians, located in western
North Carolina, is pleased to have an opportunity to submit
written testimony to the Human Resources Subcommittee regarding
the Subcommittee's consideration of Congressman John Shadegg's
bill, HR 294, the Indian Tribal Government Unemployment
Compensation Act Tax Relief Amendments. We were particularly
pleased to learn that the Subcommittee heard testimony from
Congressman Shadegg and Bobby Whitefeather, the Chairman of the
Red Lake Band of Chippewa Indians. The Eastern Band strongly
supports this legislation, and respectfully urges the
Subcommittee to include it within any legislation the Ways and
Means Committee reports the House amending the Federal
Unemployment Tax Act (FUTA).
Congressman Shadegg's bill would simply amend the tax code
to clarify that Indian tribal governments are to be treated in
the same manner as state governments and local governments.
This bill would ensure equity, but it would not give tribal
governments any greater privileges than all other forms of
government now receive. Furthermore, HR 294 would not have any
negative impact on state coffers, and would save federal,
tribal, and state government funds which are currently lost
because of sporadic and uncertain enforcement, coverage, and
expensive dispute resolution efforts.
The Constitution, the Congress, the Supreme Court, and all
Administrations since President Richard Nixon have long
recognized that Indian tribes are sovereign governing entities.
However, under FUTA as it now stands, ``Indian tribal
government employers'' are not expressly included within the
definition of ``government employers.'' This ambiguity has been
the subject of differing interpretations by the U.S. Internal
Revenue Service, the U.S. Department of Labor and by state
governments. Even within the same federal agency the
interpretations have differed from region to region and state
to state. Furthermore, the interpretation has varied over time.
Clearly this is not a workable situation.
In April of 1996, the Department of Labor sent out an
Unemployment Insurance Program Letter to all state employment
security agencies prohibiting states from treating the Indian
tribal governments, located within their borders, as
governments for the purposes of FUTA. The IRS has not taken a
consistent position, but certain regions have indicated that,
for the purposes of FUTA, they will consider tribal governments
to be mandatorily covered as ``private employers.'' For the
federal government to prohibit state governments from treating
tribal governments as governments violates Congressional
intent, and it could unnecessarily strain and confuse state-
tribal relations.
The practical consequences of the treatment of tribal
governments under FUTA are substantial. FUTA is a joint
federal-state taxation system that levies two taxes on private
sector employers: a 0.8% federal unemployment tax and a state
unemployment tax ranging from near zero percent to more than
9.0% of the payroll wages. Since the 1930s FUTA has exempted
all federal, state and local government employers from the 0.8%
federal FUTA tax. Additionally, it allows government employers
to contribute into the state unemployment funds on a
reimbursable basis. That is, government employers only
reimburse the unemployment insurance system for claims that are
actually paid out to former employees. Whereas, private
employers pay FUTA taxes in advance through a flat tax rate
which runs up to 9% in some states. Congressman Shadegg's bill
would simply extend the same status to tribal government
employers that is enjoyed by these other government employers.
This bill is all the more important, as tribal governments
continue to take over more and more of the functions that used
to be provided by the federal government. As Tribes take over
these federal functions, they are being required to absorb high
FUTA taxes from which the federal government was exempt when it
carried out those functions. The bill would correct this
injustice.
Just as with state and local governments, all employees of
the tribal government should be treated as government employees
for the purpose of FUTA. Neither FUTA nor the IRS distinguish
between state or local government employees who carry out
``traditional'' government functions and those state or local
employees who work in business-type activities that are wholly-
owned and controlled by state and local governments. Such
activities provide substantial revenues to state and local
governments. In fact, in November of 1995, the Congressional
Research Service conducted a survey and determined that state
governments currently generate $46.5 billion in revenues from
the direct operation of business-type activities by state
government employees. As Chairman Whitefeather said in his
testimony, ``All of these state government employees, from the
liquor store stock clerks in Pennsylvania to the massage
therapists in the State park resorts of West Virginia to the
lottery gambling clerks in dozens of states, are treated as
governmental employees for the purposes of FUTA.'' As a matter
of equity, HR 294 treats all tribal government employees as
government employees, regardless of whether or not they work in
tribal business-type activities, so long as the tribal
enterprise is wholly owned and controlled by the Indian tribal
government. Certainly, tribal governments should have the same
opportunities to engage in revenue generating activities as
state and local governments.
The Eastern Band of Chorokee Indians provides all of the
governmental services which most major municipalities, and even
some states, provide to their citizens, including law
enforcement, fire department services, and utilities. Despite
the fact that the governing body of the Eastern Band of
Cherokee Indians provides these many government functions, our
tribal government has paid over $131,000.00 in ``private
employer'' FUTA taxes just since 1995. These monies could have
been used to fund any of the myriad of social programs which
the Tribe is obligated to provide for its members. I hope that
you will give strong consideration to the information contained
within this testimony and support Congressman John Shadegg's
bill, HR 294.
Statement of Robert B. Peacock, Fond du Lac Band of Lake Superior
Chippewa Indians, Cloquet, Minnesota
On behalf of the Fond du Lac Band of Lake Superior Chippewa
Indians, I appreciate the opportunity to submit testimony in
support of H.R. 294, a bill to amend the Federal Unemployment
Tax Act to clarify that Indian tribes are to be treated like
state and local governments with regard to this tax.
The Fond du Lac Band is a federally recognized Indian Tribe
with a reservation in northeastern Minnesota. The Band is
responsible for providing a wide range of governmental services
and programs to Band members--many of whom still live far below
standards of living enjoyed by the majority of Americans. Among
the governmental services provided by the Band are health care,
social services, education, job training, and housing
assistance. The Band is responsible for Reservation
infrastructure--schools, clinics, government offices, community
centers, as well as roads, water and sewer systems. The Band's
governmental functions also include protection and management
of natural resources, planning for land use and economic
development, general civil regulation and law enforcement.
Income from recently established Band enterprises is being used
to supplement federal funds to provide these essential
services. The Band currently has approximately 1,500 employees
working in a variety of government programs and enterprises on
the Reservation.
The Federal Unemployment Tax Act imposes an excise tax on
the employer-employee relationship. As a general rule, the
private employers who are subject to the Act must pay a tax
equal to 6.2% of the first $7,000 in wages paid to each
employee for a calendar year. The Act gives a credit against
the amount of federal tax due for unemployment taxes paid into
a state unemployment system. As a result of the credit, most
employers are effectively taxed by the IRS at 0.8%.
The Federal Unemployment Tax Act specifically provides that
employment services performed for states and their political
subdivisions or for the United States government or an
instrumentality of the United States are not considered
employment for purposes of the FUTA. Thus, these governmental
employers are not subject to the tax. In 1978, the Act was
amended to provide that a state as an employer could either
participate in the state unemployment compensation program as a
private employer or reimburse the state for benefits paid to
its unemployed workers. But while it clearly exempts federal,
state and local governmental employers, the Act is silent with
regard to its applicability to Indian tribes.
For many years, the Act's silence regarding tribes was not
a problem. In 1987, the IRS took the position that Indian
tribes were exempt from FUTA. The IRS specifically advised the
Fond du Lac Band that the Band was not subject to FUTA and was
therefore not required to pay the Federal Unemployment Tax. The
IRS refunded federal taxes that the Band had previously paid. A
copy the IRS letter to the Band is attached for the record.
While there has been no relevant change in the Act, the IRS
has since completely reversed its position. In fact, the IRS
has initiated an action against the Band which is now being
litigated before an Administrative Law Judge. In these
proceedings, the IRS seeks over $2 million in back taxes and
penalties from the Band--even though the Band in good faith
merely complied with the written position of the IRS itself.
The government's change of position on the issue is grossly
unfair to Fond du Lac and similarly situated tribes, and has
generated litigation that is burdensome and inefficient for
both the tribes and the federal government.
Moreover, the IRS is pursuing this matter in a punitive way
even though the Fond du Lac Band has voluntarily participated
in the State's unemployment compensation plan. The Band has
done so because the welfare of our employees and our former
employees is of the utmost importance to us. The IRS' position
has nothing to do with protecting Band employees, who are in
fact already protected by the Band's voluntary action.
Congress must address the unfair and inconsistent treatment
of tribes at the hands of the IRS regarding FUTA. The pending
legislation, H.R. 294, as introduced by Representative Shadegg,
would do just that. The measure would codify the position--
previously espoused by the IRS--that tribes, like other
governmental entities, are not subject to the Federal
Unemployment Tax. This resolution is supported by established
federal Indian policy which for more than two decades, under
Republican and Democratic Administrations alike, has been
directed toward encouraging tribal self-determination, and
economic self-sufficiency. Numerous federal statutes--enacted
to further these ends--recognize and confirm the status of the
tribes as governments. Among other things, the IRS has never
considered tribes to be taxable entities, and Congress has
expressly provided that tribes be treated like states for many
tax purposes. See 26 U.S.C. 2871. H.R. 294 merely makes federal
policy regarding FUTA--which is now unclear--consistent with
federal Indian policy generally.
H.R. 294 would give Indian tribes as employers the option
of either participating in the state unemployment compensation
program as a private employer or reimbursing the state for
benefits paid to the tribe's former employees. Thus, under the
measure Indian tribes would have the same options as states and
their political subdivisions. The bill also provides that
states may require payment bonds to assure payment by tribes
opting to reimburse states. We support this provision as well.
Finally, we understand that section 2(e) of H.R. 294 is
intended to prevent the IRS from seeking to collect FUTA taxes
against any tribe for employment services arising before the
date of enactment, provided that the tribe has reimbursed the
state for benefits provided regarding employment with the
tribe. In other words, it is our understanding that under H.R.
294, the IRS would be required to discontinue its unfair FUTA
collection proceedings against the Fond du Lac Band and other
tribes.
The Band urges the Committee to act favorably on H.R. 294
to ensure that tribes are treated equitably under FUTA.
Respectfully submitted,
Robert B. Peacock, Chairman
Fond du Lac Band of Lake Superior Chippewa
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Statement of Marge Anderson, Chief Executive, Mille Lacs Band of Ojibwe
Indians, Onamia, Minnesota
Mr. Chairman and Members of the Committee, I am very
pleased to submit the written comments of the Mille Lacs Band
of Ojibwe Indians for the Committee's review in consideration
of H.R.294, the Indian Tribal Government Unemployment
Compensation Tax Relief Amendments of 1997. I respectfully
request that my full statement be entered into the official
hearing record.
The Mille Lacs Experience:
The Mille Lacs Band of Ojibwe Indians is located on a small
reservation in east-central Minnesota. We are a federally
recognized American Indian tribal government, and our tribal
membership approximates 3,000, the majority of whom reside and
work on the Mille Lacs Reservation. We are pleased very pleased
to lend our strong support to enactment of H.R.294, and urge
the Committee to act as swiftly as is possible.
H.R.294 would resolve a long-standing and very serious
problem which tribal governments have been experiencing with
regard to IRS policy dealing with administration of the Federal
Unemployment Tax (FUTA). Until recent years, the Mille Lacs
Band believed that it was exempt from paying into the federal
system which administers the FUTA tax. Since we had never paid
into the State system, we had no reason to believe that we were
responsible for making federal payments to the IRS for FUTA
administration. In fact, the State of Minnesota had delineated
the Band and other Minnesota tribes as being exempt within the
Minnesota Unemployment Insurance Plan, a plan approved by the
federal government. When this issue was questioned in the late
1980's, the IRS confirmed that we were in fact exempt. In
essence, the Mille Lacs Band did not pay the federal FUTA share
of 0.8%, nor did we pay into state funds, nor did we have any
reason to believe that we must.
In the early 1990's, the Band was stunned to learn that the
IRS had reversed its policy toward the Mille Lacs Band of
Ojibwe and some of the other Minnesota tribes. You can imagine
our reaction when the IRS began seeking immediate FUTA payments
into the federal system, along with retroactive payments for
the previous years during which time we were believed to be
exempt.
Thus began a lengthy series of negotiations between the
Band and the IRS, which concluded with a final settlement
agreed to by both parties, at great expense and financial
hardship to the Band. Not only are we still aggrieved today at
the injustice which we experienced at the hands of the IRS
during this period, but our employees also suffered directly.
In spite of the fact that we retroactively paid the full rate
for unemployment insurance, not one former employee received
any benefits. All of our former employees who attempted to
collect on unemployment insurance claims during this period
were denied their claims. In essence, the IRS got what it was
after, but our employees were left out in the cold, and the
Band effectively financed a federal system which would never
benefit any tribal employees.
At the conclusion of our negotiations, the Band agreed to
begin paying the federal share for FUTA contributions. To this
day, however, the Band does not make any payments into the
State system. The Band took the position long ago that
inclusion within the state unemployment system was a violation
of tribal sovereignty and self-governance. As a result, we are
not credited for any state contributions, and our entire
contribution goes to the IRS. This inevitably means that when
tribal employees are terminated or laid off, they are still
denied unemployment insurance payments by the State, in spite
of the fact that the Band is paying the full FUTA tax rate for
all employees. Today, we pay 6.2% to the IRS on the first
$7,000 in wages earned by all employees, even though our
employees never get one dime of benefit.
The Position of the Mille Lacs Band of Ojibwe:
1. The Band will continue to forego employee benefits and
await fair treatment under FUTA as a government:While the Band
could ensure that former employees do receive unemployment
insurance payments by simply abandoning our resolve and paying
into the state unemployment system, it has been our experience
that if one tribe holds out long enough, it can eventually
bring a better day for itself and other tribal governments and
Indian people. The Mille Lacs Band is known for such tenacity.
For many years during the 1980's, the Mille Lacs Band was the
only tribal government in Minnesota to routinely turn down
State funds for energy assistance and weatherization for tribal
members. We did so because of a condition within the state
contracts requiring the Band to waive its tribal sovereign
immunity. At Mille Lacs, our sovereignty is our very identity
as a tribal government, and so we refused to waive our
sovereign immunity and instead went without state funds. This
policy, of course, created some hardship for all of us during
those Minnesota winter months. Yet in 1989, our efforts paid
off. After an intense campaign by the Mille Lacs Band, the
State Legislature finally dropped the requirement that tribes
waive sovereign immunity prior to entering into state
contracts, and all tribes in the State continue to benefit
today from our perseverance on this matter.
2. The Band views advance payment into the State system as
a violation of sovereignty: We are aware that some tribes in
other regions have been forced to make advance payments into
their state system, as if they were non-governmental commercial
enterprises. The Mille Lacs Band does not believe that it is
appropriate for the Band to pay into the state system in the
same way that commercial businesses do, since we are an
independent, self-governing and self-determined tribal
government. The State of Minnesota does not exercise regulatory
or civil jurisdiction within the reservation: these government
functions are reserved for tribal government. Therefore, the
Band views participation in the state system as a commercial
enterprise as a violation of our self-determination and self-
governing, autonomous authority. The State apparently agreed,
given that it deemed tribal governments as exempt in its
Minnesota Unemployment Insurance Plan.
3. The Band would prefer to self-insure and run its own
Unemployment Insurance Program: We firmly believe that we have
the internal financial and administrative controls to run our
own unemployment insurance program, and we know that we can do
so more effectively and efficiently than can the state or
federal government. As an example, only a very few tribal
government programmatic employees were laid off or terminated
in 1996. However, the Band's contribution into the federal
system approximated $140,000, a complete windfall for the U.S.
government, since no claims were paid for former tribal
employees. We clearly could have provided fair unemployment
benefits to our former employees at a fraction of that cost,
and at the same time our integrity as a sovereign government
would have remained intact, at no cost to the federal or state
governments.
4. If federal law precludes the Band from adminstering a
self-insured program, then we are supportive of paying the
state on a reimbursable basis for claims paid, as is provided
by H.R.294: If it is not possible for the Band to be considered
wholly exempt or to run its own self-insured program, we are
supportive of being treated in the same ``reimburser'' status
as are other local governments, and as is provided by H.R.294.
The Mille Lacs Band would agree to reimburse state coffers for
claims actually paid out to former tribal employees, but would
not agree to make advance payments into the state system.
H.R.294 would amend the existing statute to clarify expressly
that tribal governments should be treated just as state and
local units of government are treated for FUTA unemployment tax
purposes. Further, we would be exempt from having to make
federal FUTA payments, just as state and local governments as
well as tax-exempt organizations are.
5. The Band urges the Committee to ensure that the
provisions of H.R.294 are extended to all branches of tribal
government, just as the provisions of FUTA are extended to all
branches of state government Most states and many
municipalities run some form of business activity. These
activities include liquor stores, resorts, race tracks,
lotteries, and casinos, just to name a few, and are done in the
name of generating governmental revenue, to ease the tax burden
for state citizens. Indian tribes are no different. We are
governmental units, just like states, and many of us operate
various forms of business enterprises for the purpose of
generating governmental revenue to pay for our tribal programs.
Because most of our population are in the midst of recovering
from a lifetime of poverty, we do not yet have a dependable
citizen tax base from which we can generate government
revenues. Therefore, these enterprises are critical to our
ability to run our government. Today, the Mille Lacs Band of
Ojibwe operates a gas station, a bakery, and two casinos for
the purpose of creating governmental revenue to pay for our new
schools, clinic, human service programs, roads, public works,
and other governmental programs.
In the same way that the federal government does not
distinguish between state service programs and state business
activities with regard to administering FUTA, we would ask that
the Congress not distinguish between service and business
activities for Indian Tribes within H.R.294. To exclude some
tribal activities from the FUTA exemption provisions within
H.R.294 while allowing the exemptions for the exact same state
and municipal activities would be tremendously unfair.
Conclusion:
In closing, we would like to extend our appreciation to the
Chairman and the Committee for taking time to study this very
important matter. Further, we are very grateful to the
Honorable Rep. John Shadegg, the Honorable Rep. Collin
Peterson, and the Honorable Senator John McCain, who have been
staunch supporters of tribal governments on this issue for
several years.
Mr. Chairman, we also thank you for allowing the hearing
record to remain open, so that you could receive the comments
of the Mille Lacs Band of Ojibwe Indians and other tribal
Nations for whom this issue is so critically important. It is
our greatest hope that H.R.294 can move ahead as expeditiously
as possible. Thank you for your consideration.
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Statement of the Navajo Nation
Introduction
Mr. Chairman and members of the Subcommittee, the Navajo
Nation appreciates this opportunity to present our views and
recommendations regarding H.R. 294 the ``Indian Tribal
Government Unemployment Compensation Tax Act Relief
Amendments.''
The Navajo Nation is the largest Indian nation in America
with a population of 250,000 members. Our reservation extends
into the states of Arizona, New Mexico, and Utah, with an area
of 17.5 million acres and is slightly larger than the state of
West Virginia. The unemployment rate on the Navajo Nation
averages 38% to 50% depending on the season. Over 56% of the
Navajo people live below the poverty level. Per capita income
averages $4,106, less than one third of that of the surrounding
states. Basic necessities of life taken for granted elsewhere
in the United States are sorely lacking in the Navajo Nation--
for instance, 77% of Navajo homes lack plumbing, 72% lack
adequate kitchen facilities, and 76% lack telephone services.
Ironically, the Navajo Nation is viewed as one of the more
prosperous Indian nations. Unfortunately, these types of
conditions are mirrored at hundreds of other Indian
reservations throughout the United States, with an average of
56% unemployment nationwide.
Navajo Nation Status as a Government
The Navajo Nation is a government and its inherent
sovereign powers have been recognized by the United States. A
number of U.S. Supreme Court cases have specifically recognized
the Navajo Nation government.
The Navajo Government has been called `probably the most
elaborate' among tribes. H.R. Rep. No. 78, 91st Cong., 1st
Sess. 8 (1969). The legitimacy of the Navajo Tribal Council,
the freely elected governing body of the Navajos, is beyond
question. Kerr McGee Corp. v. Navajo Tribe of Indians, 471 U.S.
195, 201 (1985). See also, Williams v. Lee, 358 U.S. 217
(1959).
The Navajo Nation has a three branch government. The
Legislative Branch consists of a eighty-eight member Council
with a Speaker selected from among the delegates. The Executive
Branch is headed by a President and Vice-President, elected-at-
large, who are empowered to carry out the laws of the Navajo
Nation. The Judicial Branch consists of a three member Supreme
Court and lower district courts.
The Navajo Nation provides essential governmental services
within its territory. These services include law enforcement,
courts, social services, education, health, natural resource
protection and management, emergency services, economic
development, and other governmental services. An example of the
sophistication of the Navajo government is the Navajo
judiciary. The Navajo Nation has an established civil and
criminal court system which operates effectively at the trial
and appellate levels as a separate branch of the Navajo Nation
government. The courts of the Navajo Nation have been in
continuous operation since the early years of the Twentieth
Century. The Navajo Nation currently has seven general
jurisdiction District Courts, plus a system of specialized
limited jurisdiction courts such as the Family Courts and the
world-renowned Peacemaker Court. The Navajo Nation Supreme
Court, located in Window Rock, Navajo Nation (Arizona),
exercises appellate jurisdiction over all matters arising
within the Navajo Nation judicial and administrative forums.
For over 200 years the United States generally has upheld
the principle that each Indian nation is a domestic dependent
nation, free to manage its own internal affairs without state
intervention. The right of self-government, which Indian people
share in common with all other people within the United States,
and which is a constitutionally protected right of all federal
citizens, dictates that it is the prerogative of each Indian
nation to determine what laws will govern its people and what
rights its members and non-members shall have within the
jurisdiction of that particular Indian nation. United States v.
Wheeler, 435 U.S. 313 (1978); Worcester v. Georgia, 31 U.S. (6
Pet.) 515 (1832). See also, R. Barsh and J. Henderson, The
Road: Indian Tribes and Political Liberty (1980). With respect
to the Navajo Nation, its relationship with the United States
is established and governed by two treaties, the Treaty of June
1, 1868, United States-Navajo Nation, 15 Stat. 667, and the
Treaty of September 9, 1849, United States-Navajo Nation, 9
Stat. 974. The United States does not enter into treaties with
private business organizations. Treaties are entered into
between sovereign governments.
Navajo Nation and FUTA
The Navajo Nation strongly supports H.R. 294, the ``Indian
Tribal Government Unemployment Compensation Tax Act Relief
Amendments.'' Currently, the Federal Unemployment Tax Act
(FUTA) does not specifically include ``tribal government
employers'' within the definition of ``government employers.''
H.R. 294 would allow the Navajo Nation's 6,242 employees to be
treated the same as state and local government employees.
There are several reasons why Indian nations should be
specifically included within the definition of ``government
employers.'' Simply put, Indian nations should be treated as
government employers because Indian nations are governments.
These Indian nations are the primary provider of essential
governmental services within their jurisdictions, H.R. 294
simply recognizes this fact.
Various entities such as state governments, the U.S.
Internal Revenue Service, and the U.S. Department of Labor,
have interpreted FUTA differently, resulting in different
treatment of tribal governments-depending in which region of
the country they are located. Federal legislation is needed to
resolve this matter for every tribal government and to provide
certainty for tribal governments. Currently, in many instances
Indian nations are treated like private employers. Indian
Nations, however, are much more than private organizations;
they are sovereign governments with the inherent authority of
self government. This legislation would recognize the inherent
sovereignty of Indian Nations and accord the same treatment to
Indian Nations as given to other states and local governments.
Treatment as a private organization is contrary to well
established federal policy and Supreme Court decisions
recognizing the inherent sovereignty of Indian nations and
their right to self-government.
Conclusion
In closing, the Navajo Nation supports the FUTA amendments
which would accord to Indian nations the proper treatment
consistent with their status as self-governing and inherent
powers of governing. Continued treatment as private
organizations must stop. These FUTA amendments recognize the
Indian nations as being a significant component in providing
the essential governmental services required within their
jurisdictions.
Statement of John E. Echohawk, Executive Director, Native American
Rights Fund
My name is John Echohawk. I am a member of the Pawnee Tribe
of Oklahoma and serve as the Executive Director of the Native
American Rights Fund (NARF). NARF is a national, nonprofit
legal organization dedicated to securing justice on behalf of
Native Americans and Indian tribes--something we have been
doing for 27 years. Our mission is guided by five priorities.
Two of these priorities include the protection of tribal
sovereignty and holding governments accountable to Indian
people and tribes. In this light, NARF joins the National
Congress of American Indians, the Ute Mountain Ute and Southern
Ute Tribes, the Red Lake Band of Chippewa Indians in support of
H.R. 294, the Indian Tribal Government Unemployment
Compensation Tax Relief Amendments of 1997.
H.R. 294 would resolve a long-standing problem confronting
tribal governments--inequitable and differential treatment
under federal unemployment tax law. This important legislation
would effectively plug a loophole in the Federal Unemployment
Tax Act (FUTA) to accord tribal government employers the same
treatment as state and local government employers for
unemployment tax purposes.
FUTA was enacted in 1935. It is a joint federal-state
taxation system that levies two taxes on private sector
employees throughout the Nation: a 0.8 percent federal
unemployment tax and a state unemployment tax which ranges from
nearly zero percent to more than 9.0 percent of payroll wages.
However, FUTA exempts all federal, state and local government
employers, as well as tax-exempt charitable organizations, from
the federal FUTA tax and allows them to pay lower state
unemployment taxes. While the Internal Revenue Code, 26 USC
7871, treats Indian tribal governments as states for numerous
taxation purposes, FUTA does not expressly include tribal
government employers within the definition of governmental
employers. As a result, the IRS considers Indian tribal
governments to be mandatorily covered as private employers
under FUTA. Therein lies the problem which H.R 294 seeks to
remedy.
While it has been long-settled that tribal governments are
not taxable entities under the federal tax code because of
their governmental status, in the 1980s the Internal Revenue
Service began steps to force tribal governments to pay the
federal portion of the tax, and to pay the higher tax rates
that are applied to private sector, for-profit employers. This
has imposed an unfair unemployment tax burden on tribal
government employers.
Moreover, the failure to include tribal governments within
FUTA's definition of governmental employers has led to
differing interpretations as to whether and how tribes are
covered under FUTA. State government, IRS and U.S. Department
of Labor interpretations vary from state to state and region to
region, resulting in differential treatment of Indian tribal
governments. H.R. 294 would resolve these disparities by
providing uniform treatment of Indian tribal governments
nationwide.
It has come to our attention that there is some concern
that enactment of H.R. 294 would result in an unfair benefit to
tribal governments with regard to business-type activities
conducted by tribes to produce revenues for tribal government
services and treasuries. However, this should not be an issue.
According to a November 6, 1995 Congressional Research Service
study completed for the Senate Indian Affairs Committee
(attached), state governments are actively involved in numerous
business-type economic activities that produce significant
revenues for state treasuries, including 34 states which
conduct lotteries and 18 states engaged in the sale of liquor,
as well as a legion of other revenue-producing activities.
State governments are allowed under FUTA to treat state
employees of these business-type enterprises like all other
state employees--exempt from the Federal portion of the FUTA
tax and subject only to reimbursement of FUTA claims actually
paid. As a matter of equity and fairness, tribal government
employees engaged in business-type activities should be treated
the same way.
As you are aware, legislation similar to H.R. 294 was
introduced in the 103rd and 104th Congresses, but did not
advance. The time is long overdue for resolution of this long-
standing problem which continues to visit inequitable and
differential treatment upon tribal government employers and
employees. We applaud you for scheduling a hearing on H.R. 294,
and respectfully urge your Subcommittee to promptly take
favorable action on this most important matter affecting the
fundamental rights and interests of Indian tribal governments.
Thank you for consideration of the views of the Native American
Rights Fund.
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Testimony of Joseph Weisenburger, Deputy Commissioner, New Hampshire
Department of Employment Security, Concord, New Hampshire
Good morning Mr. Chairman and committee members. My name is
Joseph Weisenburger. I am the Deputy Commissioner of the New
Hampshire Department of Employment Security, a position I have
held for over 15 years.
My comments support reforming the financial and program
administration of the Employment Security system which includes
the public employment service and the unemployment compensation
system.
For over 60 years the Employment Security System and
particularly the Unemployment Compensation System (UC) has
served our nation well. However, in the last 15 years or so
efforts to reduce federal spending in order to reduce the
federal deficit have not considered the uniqueness of the
unemployment compensation program. The result is a deteriorated
program straining to meet it's objectives.
The problem is not the availability of resources because
federal unemployment taxes, even without the .2% surtax, are
sufficient to fund the proper and efficient administration of
the program. The problems are the ``budget driven'' process
used to appropriate funding and the inefficient use of
administrative funds at both the federal and state levels.
Regarding the budget, a study of the budgetary treatment of
the Unemployment Trust Funds prepared by Chambers Associates,
Inc. for the Interstate Conference of Employment Security
Agencies Inc. (ICESA) in March of 1993 found the following:
``Even though there is a dedicated source of funding for
the administrative costs of the Unemployment Trust Fund
programs and the cost of the Employment Service, the funding
levels for these programs are discretionary. Thus, they are
subject to specific or across-the-board reductions as part of
the appropriations and Gramm-Rudman-Hollings processes. In
addition, the funding levels are subject to OMB review and
arbitrary reductions regardless of numbers of beneficiaries
being served.''
The study also found that budget rules can prevent the
Unemployment Compensation program from achieving its objectives
as a counter-cyclical program.
``Any legislation affecting unemployment benefits is
subject to the elaborate Pay-Go rules that the Budget
Enforcement Act of 1990 imposes. This act makes no distinction
between programs financed with general revenues or programs
financed with dedicated revenue. Pay-Go subjects unemployment
compensation to a form of budgetary double jeopardy. Since its
start, unemployment compensation has operated as a self-
contained, self-financed system. While borrowing from the
general fund was authorized, these loans had to be repaid with
interest. Revenues would be adjusted to ensure that loans had
to be repaid. Thus, it was truly Pay-Go. The Budget Enforcement
Act added a second pay-go requirement. Legislation could not
increase the deficit in the years covered by the current
Congressional Budge Resolution.
To require the system be deficit neutral during a recession
runs counter to the objectives of the program. In addition, to
increase the cost of labor during a recession by increasing
employer taxes to finance unemployment benefits is a way to
increase unemployment.''
Finally, the report concluded that budgetary rules are
inflexible and do not permit needed exceptions for a program
that is complex by statutory design.
``For as complex and diverse an organization as the Federal
government, it is very difficult to develop general budget
rules applicable to all programs without creating inequities
because of particular program characteristics. Even when a
special rule is developed for a few programs, it may not fit
them all.''
``A recent example of a special rule that did not work is
the treatment of the State administrative costs in the
Unemployment Compensation program. The Budget Enforcement Act
of 1990 prescribed specific procedures for developing
projections of the baseline, the ongoing cost of government. In
general, the baseline is the most recent appropriation adjusted
for inflation. For the administrative costs of certain social
insurance programs, the baseline includes not only an inflation
adjustment, but also, the percentage change in the beneficiary
population for the current year. Inclusion of the Unemployment
Trust Fund in this special definition works to the disadvantage
of programs financed through this fund because the
administrative costs include not only the processing of claims
and payment of benefits, which fluctuate with the unemployment
rate, but also the collection of State unemployment taxes,
which remains relatively static. Revenue collection accounts
for about one-third of State administrative costs. As a result,
the baseline can seriously underestimate actual costs.''
The budget process, because of the federal deficit, ignores
the work load driven and self funding methods historically used
to appropriate funding for the unemployment compensation
program even though the administrative trust fund account is at
its statutory ceiling and that will erode the integrity of the
program.
The direct results are increased errors, longer
unemployment duration and lower tax collections, which all
reduce state benefit trust fund levels and therefore add to the
federal deficit.
Eventually, employer benefit taxes will increase.
To address the funding shortfall a growing number of states
are diverting money from their state taxes to use for program
administration, leaving employers to pay twice for the program.
These diversions also add to the federal deficit. The
diversions have extended to fund training and other initiatives
not directly related to UC benefits. An Interstate Conference
of Employment Security Agencies (ICESA) survey estimates in FY
1997 states will supplement their programs with over $200
million in state funds.
Program inefficiencies are the result of budget decisions,
an over reaching federal partner and outdated process. These
inefficiencies waste hundreds of millions of dollars each year.
States lack the flexibility to operate an efficient program
that meets the needs of its employers and workforce. The
federal government determines the level and the use of
resources available to each state. For example, over $50
million, more than the entire amount the states receive for the
Bureau of Labor Statistics (BLS) programs, is allocated to
gather statistics annually about benefit payment accuracy.
While the information is important none of the money can be
used to correct mistakes. The program simply identifies the
same errors year after year. This relatively useless program
was forced upon the states by regulations promulgated by the
Secretary of Labor because of criticism of the department in
its oversight of the state programs. States should develop
their own quality assurance programs because each has a unique
state UC law.
In 1993 the administration submitted and the Congress
passed legislation requiring the states to ``profile'' UC
claimants who were likely to exhaust their benefits and require
them to participate in a program offering reemployment
orientation and services to the extent those services were
available. No additional funding was provided for reemployment
services. The purpose was clearly to score $300 million
annually in budget savings by disqualifying those profiled
claimants who failed to participate. The savings covered other
federal spending. Many professionals argue the deficit went up
because it ensured claimants in training would exhaust their
benefits.
Billions of dollars sit idly in the Extended Unemployment
Benefit Account and the Federal Unemployment Account that would
be more efficiently used in the state benefit accounts.
Ironically, while these billions of dollars of employer taxes
build the federal accounts to unnecessary levels the United
States Department of Commerce grants billions in federal funds
to the states for economic development.
Employers are required to pay unemployment taxes to two
separate government agencies. Combining the FUTA tax report and
payment with the state benefit tax and report will save
employers enormous amounts of time and money. Those FUTA
administrative funds (about $100 million) charged by the IRS to
collect the FUTA tax leveraged with state administrative funds
would be used more effectively.
Finally, I believe it is important to recognize the trench
work performed by the public employment service and its
potential to positively impact on the federal deficit and the
goals of welfare reform.
The Alabama employment service recently completed a
demonstration project designed to help unemployment
compensation claimants get back to work quicker. Over a three
year period the program saved $83.4 in benefit payments at an
administrative cost of $20.5 million, a savings of better than
$4. for each $1. invested.
Any reform proposal should strengthen the relationship
between the employment service and the UC program.
Adequate funding for the public employment service
supplemented with some welfare administrative funding can
produce similar savings in public assistance programs.
In 1996, the Congress passed Welfare reform which focuses
on ``Work first.'' The States, individually have developed
programs anticipating passage of welfare reform. All of these
state programs have a work component as the core of their
reform. In many states the welfare agencies have contracted
with the Employment Service to provide placement and work
search services for their clients.
As more and more welfare recipients transition from public
assistance to work, their safety net changes from welfare
benefits to unemployment benefits. Like most new entrants and
re-entrants to the workforce these individuals will be the
first affected by negative changes in the economy. Without a
strong public employment service, many will fall back on public
assistance after they exhaust their UC benefits.
In 1997 employers will pay $6 billion in FUTA taxes. Only
$3.4 billion will go back to the states for program
administration. If the states are expected to run efficient and
effective programs with their reduced resources they will need
more program authority and greater flexibility in the use of
these funds.
Statement of George V. Voinovich, Governor, State of Ohio
Mr. Chairman, Mr. Levin and members of the Subcommittee, my
name is George V. Voinovich, Governor of the State of Ohio. As
Ohio's Governor, I respectfully urge the subcommittee to give
consideration to reforming the financing of the employment
security system.
Our current system does not provide adequate funds for
administration of the unemployment compensation and employment
service programs by the states. It relies on tax dollars paid
by employers for funding the administration of the employment
security system. Currently, these ``dedicated'' dollars are
being spent to support discretionary federal spending in other
federal programs and to impact calculations of the federal
deficit.
The current system has under funded state programs and
overtaxed employers for many years. Under this system in 1995,
42 of the 53 states and jurisdictions receiving administrative
funding for employment security functions received less than
the FUTA taxes collected from employers from these states and
jurisdictions. 1995 was not unusual. Since 1990, less than 59
cents of every employer FUTA tax dollar has been returned in
funding for employment security to the states.
In Ohio, this shortfall in funding has resulted in the
closing of 22 local employment service offices and the planned
closing of 14 more in the next two years. The Ohio Bureau of
Employment Services has cut 300 staff positions since 1993, and
now is operating at historically low staffing levels. Almost
every other state has had similar experiences as federal
funding has been cut repeatedly, while large fund balances have
accumulated in federal trust funds dedicated to fund the very
activity that was being cut. I repeat: these unspent balances
of dedicated funds are growing, as the very activities they are
supposed to fund at the state level are being scaled back for
lack of funds.
Despite the reduction in funding for the dedicated purpose
of the FUTA tax, employer FUTA taxes have not been cut. In
fact, the .2 surcharge, initially enacted on a temporary basis
to fund extended benefits in 1976 has been continued, to build
up reserves in the federal trust funds that are already at
historically high levels and overflowing.
The system was originally designed as a federal-state
partnership, with federal unemployment tax rates set only as
high as needed to properly fund administration of employment
security functions. The system has degenerated into one that
taxes employers but shortchanges employment security programs
to make funds available within the federal unified budget for
discretionary spending unrelated to employment security.
It is time for a change! What we need is a system which
properly funds states for administration and minimizes the tax
burden on the employers who pay for it and need these state
services.
In 1996, a number of state employment security agencies,
including Ohio, frustrated with the current system, developed
proposals for change. Simultaneously, employer representatives,
including UBA, Inc., also developed proposals to change the
system. Early this year, these state agencies and employer
representatives combined their ideas into a proposal to
establish a new framework for financing employment security.
Ohio supports the proposal of the coalition of states and UBA,
Inc., which I have attached for your review.
The proposal has been carefully crafted to address the
federal/state partnership, appropriate funding levels, and
employer taxes. The proposal includes provisions to:
Dedicate employer FUTA tax dollars for
administration of employment security by depositing them into
dedicated state accounts within the federal unified budget;
Transfer the responsibility for collecting and
administering the FUTA tax from the Internal Revenue Service to
the states to consolidate tax functions, reduce employer
reporting burden and cut federal administrative costs;
Limit increases in appropriation of administrative
funds to individual states and the U.S. Department of Labor to
40% of the previous years appropriation to assure
accountability and equitable distribution of administrative
funds;
Redefine the role of the U.S. DOL to focus on
assuring compliance with federal requirements, performance
review and oversight;
Require that the states continue to provide public
employment services in conjunction with the administration of
the unemployment compensation program;
Maintain the local Veterans Employment
Representative (LVER) and Disabled Veteran Outreach (DVOP)
programs;
Increase flexibility by states to use real
property initially purchased with federal funds to administer
employment security functions at the state and local level;
Distribute the balance in the federal Extended
Unemployment Compensation Account to state unemployment
compensation benefit accounts to improve state trust fund
solvency, while continuing to provide for extended benefits for
unemployed workers in times of recession; and
Supplement federal revenue with state penalty and
interest funds currently maintained outside the federal unified
budget to aid in making the proposal revenue neutral.
I believe that the proposal of the coalition of states and
UBA, Inc. addresses the fundamental issues of proper
administrative financing, employer taxes to support
administration, and the role of the state and federal
government in administration of employment security. I urge you
to give strong consideration to this proposal. Should you have
questions, feel free to contact my Administrator of the Ohio
Bureau of Employment Services, Debra R. Bowland, for
information or help. You may contact her directly at 145 South
Front Street, Columbus, OH, 43215, or by telephone at
614.466.2100.
I appreciate your personal consideration of my thoughts on
this important matter. Thank you.
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Statement on Behalf of Luella Pennington, Chicago, Illinois, and the
Pennington Class Opposing Legislation To Reverse Pennington v.
Didrickson
I. Introduction
On behalf of Mrs. Luella Pennington and the plaintiff class
in Pennington v. Didrickson, 22 F.3d 1376 (1994) we are
responding to the April 17, 1997 advisory issued by the Ways
and Means Committee's Subcommittee on Human Resources (the
``Subcommittee'') concerning the proposed legislation to
overturn the Pennington decision.
The Federal ``When Due'' Requirement
Since 1938, section 303(a)(1) of the Social Security Act
has required that states' unemployment insurance laws provide
for ``methods of administration ... reasonably calculated to
insure full payment of unemployment compensation when due.'' 42
U.S.C. 503(a)(1) (the ``when due clause''). At least since
1971, when the Supreme Court issued it unanimous decision in
California Department of Human Resources Development v. Java,
402 U.S. 121, the when due clause has been interpreted to
``require that a State [unemployment insurance] law include
provision for such methods of administration as will
reasonabl[y] insure the full payment of unemployment benefits
to eligible claimants with the greatest promptness that is
administratively feasible.'' 20 C.F.R. 640.3(a); Java, 402 U.S.
at 130-33. In 1975, the Court reaffirmed those principles in a
second unanimous opinion, Fusari v. Steinberg, 419 U.S. 379.
In Java, the Court considered the legality of a provision
that suspended payment of benefits to any claimant who had won
an initial determination, during the pendency of any appeal by
the claimant's former employer. 402 U.S. at 122. Though the
case concerned California's unemployment insurance code, the
statutory provision at issue was used in 48 states. See
Appendix to Appellants' Brief in Java, No. 507 (U.S. Sup. Ct.
1970) at 69-70. Nonetheless, the Court held that the provision
violated the when due clause because ``'when due' was intended
to mean at the earliest stage of unemployment that payments
were administratively feasible.'' Id. at 131.
After a thorough review of the Congressional history that
led to enactment of the when due clause, Chief Justice Burger
concluded that the when due clause was designed to provide
prompt wage replacement to displaced workers both ``to tide
them[] over, until they get back to their old work or find
other employment, without having to resort to relief,'' 402
U.S. at 131 (quoting HR Rep No. 615, 74th Cong, 1st Sess, 7
(1935)), and to ``exert[] an influence upon the stabilization
of industry.'' Id. at 132.
The Court's holding in Java confirms that the when due
clause is not just some technical artifice in the Social
Security Clause. Indeed, the Court said that ``the
congressional objective of getting money into the pocket of the
unemployed worker at the earliest point that is
administratively feasible ... is what the Unemployment
Insurance program was all about.'' 402 U.S. at 135.
Accordingly, any change in the requirement that states pay
unemployment insurance when due constitutes an alteration of
the most fundamental objective in the federal statute that
governs the unemployment insurance program.
II. The Pennington Decision
The ``base period'' in any state's unemployment insurance
program is the time period within which claimants must have
earned sufficient wages to qualify for benefits. As defined in
section 237 of the Illinois Unemployment Insurance Act, 820
ILCS 405/237, Illinois's base period is comprised of the ``the
first four of the last five completed calendar quarters
immediately preceding the benefit year'' (``Illinois' base
period''). Accordingly, Illinois' base period skips any wages
earned by a claimant in both the calendar quarter in which he
files his claim (the ``filing quarter''), because that is not a
``completed'' quarter, and the preceding calendar quarter (the
``lag quarter''), because that is the fifth of the five
completed calendar quarters prior to the benefit year.
Consequently, when Illinois determines whether a claimant has
sufficient qualifying wages, it disregards any wages earned in
both the filing and the lag quarters (the ``lag period'').
In Pennington, the Court of Appeals for the Seventh Circuit
held ``that section 237 is an administrative provision and, as
such, is subject to the timeliness requirements of the 'when
due' clause.'' 22 F.3d at 1387. The legislation's proponents,
including the Honorable Lynn Quigley Doherty, the defendant in
the litigation through much of its history, decry the
Pennington decision. But they do so without ever discussing its
reasoning. Indeed, Gray Gilbert from the Ohio Bureau of
Employment Security and ICESA concedes that the proponents have
appealed to Congress in the hopes of being heard by a forum
that will not be restrained by an ``intellectual exercise.''
Statement by Day Gilbert (``Gilbert Stmt.'') at 5. In contrast,
we urge Congress to read not only the Pennington decision, but
also Java and its other progeny, and to consider the courts'
reasoning and the legislative history underlying the when due
clause. We believe that after intellectually honest reflection,
Congress will agree that the Pennington decision assures prompt
payment of unemployment insurance benefits in furtherance of a
public policy that was embodied in the nation's unemployment
insurance program at its inception because it is central to its
purpose.
III. Illinois' Base Period Definition Is An Administrative Method, Not
An Eligibility Criterion
A. Because the when due clause governs only the states'
``methods of administration'' of unemployment insurance
programs, ``applicable Federal laws provide no authority for
the Secretary of Labor to determine the eligibility of
individuals under a State law.'' 20 C.F.R. 640.1(a)(2); see
Ohio Bureau of Employment Services v. Hodory, 431 U.S. 471,
482-87 (1977). The proponents rely heavily on this principle.
See e.g., Testimony by The Honorable Lynn Quigley Doherty
(``Doherty Stmt.'') at 1-2; Gilbert Stmt. at 3-4. As the court
of appeals noted, however, the ``truism [that the when due
clause governs administrative methods but not eligibility
criteria] simply begs the question and, consequently
contributes nothing to the inquiry before us.'' 22 F.3d at
1382.
What is required, of course, is to determine whether
Illinois' base period is an administrative method or an
eligibility criteria. An eligibility provision ``define[s] the
class of persons eligible for benefits.'' Hodory, 431 U.S. at
486-87. In an effort to suggest that a lag period is necessary
to determine eligibility, the proponents characterize the
Pennington claimants as ``individuals who would not qualify
using the first four of the last five quarters,'' Gilbert Stmt.
at 4, and that the Pennington decision ``broaden[s]
eligibility'' to those who were not previously eligible. But
that is not so. In fact, the Pennington claimants are, by
definition, only claimants who have earned sufficient wages to
qualify for benefits. 22 F.3d at 1385.
The lag period does not exclude claimants from eligibility;
it just delays the time at which the state will consider a
claimant's most recent wages in determining his or her
eligibility. To argue the contrary, the proponents ignore the
single most important fact about the operation of the Illinois
base period: that the Pennington claimants become eligible for
benefits by doing nothing more than waiting until sufficient
time has passed to file a second claim, since wages that are
initially disregarded because they fall in a claimant's lag
period, become qualifying wages by the passage of enough time
so that they fall within the first four of the last five
completed calendar quarters prior to the filing of the later-
filed claim. Pennington, 22 F.3d at 1385.
Thus, although Illinois' base period delays the time at
which the state will count a claimant's most recent wages
toward eligibility, it does not prevent a claimant from using
those same wages so long as he waits a sufficiently long time
before filing a claim. Causing a claimant to wait to receive
benefits, however, is just what the when due clause was
designed to prevent. Java, 402 U.S. at 131-33.
B. The legislation's proponents also urge that Illinois'
base period ``ensures that unemployment insurance will be
available for workers with a genuine attachment to the labor
force, but not necessarily for those with only a marginal
connection.'' Doherty Stmt at 1; see Testimony by Albert R.
Miller (``Miller Stmt.'') (``The Pennington alternate base
period would provide for the payment of unemployment benefits
... to individuals with no established connection to the
workforce''). In fact, however, exactly the opposite is true:
the lag period ``causes ... [claimants] with relatively strong
attachment to the work force to wait until that attachment has
weakened before they can receive benefits.'' 22 F.3d at 1385.
Thus, the contention that Illinois' base period restricts
payment of benefits to claimants with stronger workforce
attachment (or alternatively, that the Pennington decision will
extend eligibility to those without such attachment) is not
just wrong; it is perverse.
C. Furthermore, the proponents have repeatedly conceded
that the purpose of Illinois' base period is solely
administrative, not substantive. For instance, in the
Pennington litigation itself, Illinois repeatedly admitted that
the lag period ``is necessary because some time is required for
employers to report wages and for the [state agency] to make
that information available in the local [unemployment
insurance] offices where claims are first taken and
adjudicated.'' 22 F.3d at 1387. And in his submission to the
Subcommittee, Ms. Gilbert concedes that whether states can
shorten their lag periods is dependent solely on whether
``technology ... permits states to collect and process wage
information more quickly.'' Gilbert Stmt. at 4. These
concessions confirm what the court of appeals found: that
Illinois' base period is ``an administrative method employed to
accommodate the time needs of a wage record [data collection]
system. In a world of high-speed information exchange, the lag
quarter would not exist; yet an eligibility requirement like
the `voluntary leaving' provision [which disqualifies claimants
who leave work without good cause attributable to the employer]
would.'' 22 F.3d at 1387.
IV. The Pennington Decision Is Not Only Consistent With, But Required
By The Historic Interpretation Of The When Due Clause
A. The legislation's proponents argue that Pennington
``represents a 180-degree departure from the manner in which
both the federal government and states have construed the
Social Security Act, since the statute's enactment more than 60
years ago.'' Doherty Stmt. at 1. They contend that this
deviation from the historical interpretation of the when due
clause was wrought by ``unelected federal judges'' intent on
usurping the legislature's authority on ``tax and spending
policy.'' Doherty Stmt. at 1; see id. at 2 (``the appellate
court was wrong because its decision vests unelected federal
judges with the authority to substitute their judgment for
governors and state legislatures with regard to tax and
spending policy'').
The district judge who decided the case, and the three
court of appeals' judges, were all appointed by President
Reagan. Moreover, the Pennington decision itself confirms that
they are judicial conservatives.
For example, the proponents argue that ``[t]he United
States Supreme Court has held that the Social Security Act was
intended to recognize the importance of each state establishing
its own eligibility criteria for unemployment insurance.''
Doherty Stmt. at 2. But that, too, just begs the question of
whether Illinois' base period is an eligibility criteria or an
administrative method. Moreover, as set forth in Section I, the
Pennington court's conclusion that Illinois' base period is an
administrative provision, not an eligibility criteria, is not
only consistent with Supreme Court precedent, it is required by
two unanimous Supreme Court cases: California Department of
Human Resources Development v. Java, 402 U.S. 121 (1971) and
Fusari v. Steinberg, 419 U.S. 379 (1975). See 22 F.3d at 1386.
This history of when due jurisprudence belies the
proponents' argument that Pennington represents judicial
encroachment on legislative prerogatives. After all, the when
due clause is itself a legislative enactment. And one with the
backing of the Constitution's Supremacy Clause. U.S. Const.,
art. VI, cl. 2. It is, therefore, entirely appropriate for the
federal courts to enforce the when due clause. Indeed, one
cannot help but feel that the proponents disparage the federal
courts so vigorously because they resent the fact that
unemployed Americans went to the federal courts to enforce
their rights against state policy that violates federal law.
But just as the Java Court struck down a state's administrative
provision because it delayed payment of unemployment insurance
in violation of the timeliness demanded by the when due clause,
the Pennington court concluded that Illinois' base period is an
administrative provision that delays payment to eligible
claimants.
B. The proponents contend, however, that ``since the
establishment of the unemployment insurance system, the Labor
Department ... has considered a base period of the first four
of the last five quarters to be consistent with the [Social
Security] Act.'' Doherty Stmt. at 2; see Gilbert Stmt. at 4.
That, too, is simply wrong. To the contrary, in 1962, the
Secretary of Labor issued a policy statement urging states to
keep their lag periods ``as short as possible,'' Unemployment
Insurance Legislative Policy: Recommendations for State
Legislation, 1962, thus confirming not only that lag periods
should not unnecessarily delay payment of benefits, but also
that the Secretary has historically treated base periods as
administrative methods, which are subject to his regulatory
authority, rather than eligibility criteria, as to which he has
no such authority. See Pennington, 22 F.3d at 1384.
The legislation's proponents rely on draft bills issued by
the Secretary of Labor in 1932 and 1950, one of which includes
a base period definition like the one used in Illinois. From
these draft bills, the proponents contend that ``[t]hroughout
the history of the unemployment insurance program, determining
the period that constitutes the base period for unemployment
insurance claims purposes has been one of many eligibility
criteria that federal law left to the states.'' Gilbert Stmt.
at 3; see also Doherty Stmt. at 1 (Pennington ``represents a
180-degree departure from the manner in which both the federal
government and states have construed the Social Security Act,
since that statute's enactment more than 60 years ago'').
As the court of appeals noted, however, the ``draft bills
do not ... directly address the issue here: whether the lag
period arrangement can be termed a matter of eligibility as
opposed to a matter of administration.'' 22 F.3d at 1384. The
court therefore concluded that:
the mere fact that the draft bills take notice of a lag
period similar to the ... [Illinois base period] does not
indicate that the lag period is in compliance with the `when
due' clause or the corresponding regulations. A state must pay
unemployment benefits `with the greatest promptness that is
administratively feasible.' 29 C.F.R. 640.3(a). Needless to
say, what was `administratively feasible' when the draft bills
were written--1937, 1950, and 1962--is much different from what
is administratively feasible in today's technologically
advanced world. Id. at n. 6.
C. Recent history also belies the proponents' contention
that long lag periods are acceptable. Congress recently
empaneled the Advisory Council on Unemployment Compensation
(``Council'') to study the nation's unemployment insurance
program. See P.L. 102-164. The Council was chaired by Dr. Janet
L. Norwood, the former Commissioner of the Bureau of Labor
Statistics and a senior fellow at The Urban Institute, and a
witness in this Subcommittee's deliberations. In its February
1995 report to the President and Congress, the Council
recommended that ``[a]ll states should use a movable base
period in cases in which its use would qualify an Unemployment
Insurance claimant to meet the state's monetary eligibility
requirements.'' Unemployment Insurance in the United States:
Benefits, Financing, Coverage, Advisory Council on Unemployment
Compensation, Feb. 1995 at 17. The proponents thus ask Congress
to reject a policy suggested to it by the very body Congress
empaneled to provide precisely such advice.
D. Ms. Doherty also argues that ``[i]n the 1970's Congress
itself expressly recognized and took no issue with the states'
widespread use of base periods consisting of the first four of
the last five quarters.'' Doherty Stmt. at 2. But Congress
dealt with base periods only in its enactment of 26 U.S.C.
3304(a)(7), which was designed to control for a wholly separate
problem of ``double dipping'' by those claimants who try to
reuse wages for second claims. Accordingly, the court of
appeals determined that 3304(a)(7) ``had nothing to do with the
operation of the `when due' clause and certainly did not
address the issue of whether the type of base periods used in
the Illinois statute violated that clause.'' 22 F.3d at 1383.
V. The Use Of An Alternative Movable Base Period Will Not Substantially
Increase The Costs Of Operating The Unemployment Insurance Program
A. The proponents also argue that Illinois' base period
``streamlines administration and minimizes the risk of fraud,''
Doherty Stmt. at 1, because it allows for verification of a
claimant's wages with data that ``should already be in the
state's computer system when the initial claim is filed,'' id.;
whereas use of an alternative base period would require
employers to comply with ``additional reporting requirements
with penalties for noncompliance, to verify claimant earnings
that had not yet been reported and entered into the state's
computers.'' Miller Stmt. at 1. In fact, however, the testimony
in Pennington confirms that a movable base period can be most
easily designed by using the very same wage data--collected and
processed in precisely the same way--that Illinois does now.
The only difference would be that, instead of enforcing a
mandatory delay on using a claimant's recent wage data, the
state would assess eligibility based on those wages as soon as
they were reported by the former employer and processed onto
the state's data base, for any claimant who needed his more
recent wages to qualify for benefits. Since exactly the same
wage data would be collected in exactly the same way, a movable
base period would neither affect the efficiency of the existing
data collection system; nor increase opportunities to commit
fraud by submission of improper wage statements; nor impose new
paperwork burdens on employers or the state.
B. The proponents also argue, however, that the Pennington
decision ``could have a costly impact upon employers and state
government[s] ... and aggravate the federal deficit by
hundred's of million's of dollars.'' Doherty Stmt. at 1. Both
she and Ms. Gilbert estimate that administrative costs in
Illinois would be ``million's of dollars in one-time costs and
$2.5 million in yearly operating expenses.'' Id. at 3; see
Gilbert Stmt. at 3 (quantifying the one-time costs at $13
million). The proponents also estimate trust fund outlays of
1.5%; but note one study that, they claim, indicates that
alternate base periods could ``raise state Trust Fund outlays
by four to six percent.'' see Doherty Stmt. at 3; Miller Stmt.
at 1. From these estimates, Doherty contends, the trust fund
outlays for a movable base period would be between $100 to $400
million over 8 years, which she and the other proponents claim,
would trigger automatic tax increases or rising deficits. Id.
And she concludes from all these figures that the Pennington
decision will ``cause nationwide disruption in the various
states' unemployment compensation system.'' Id. at 4.
None of this is realistic. First, as accurately described
by the court of appeals, the claimants' evidence supports a
narrowly-based challenge to the section 237-type base period;
not a challenge based on any alternative base period that any
litigant might conceive. 22 F.3d at 1380 n. 3. Furthermore, as
the proponents concede, eight states (Maine, Massachusetts, New
Jersey, New York, Ohio, Rhode Island, Vermont and Washington
state) already use movable base periods, and Michigan will
begin doing so on July 1, 1997. Yet the sky has not fallen in
any of those states. Indeed, the Council concluded ``that
advances in technology have made it feasible for all states to
use the most recently completed quarter when determining
benefit eligibility.'' Unemployment Insurance in the United
States: Benefits, Financing, Coverage, Advisory Council on
Unemployment Compensation, Feb. 1995 at 16.
Moreover, the provision that the Supreme Court struck down
in Java was used in 48 states. See Appendix to Appellants'
Brief in Java, No. 507 (U.S. Sup. Ct. 1970) at 69-70. Yet the
proponents offer no evidence that compliance with Java
disrupted the nation's unemployment insurance program at all.
C. The Department of Labor has received, but not yet
published, a draft of a report on administrative costs of an
alternative base period. The proponents apparently hope you
will pass this legislation before seeing the report. We believe
that, if you wait until it is published, it will confirm that
Illinois' estimates are wildly inflated.
The proponents' estimates of administrative costs include
unnecessary additional costs for a wage request system to
obtain wage data before it is reported in the normal manner.
The evidence at trial confirmed that if Illinois did pay to add
a wage request component to a movable base period, that
alternative would be ``administratively feasible'' in the sense
that, if there was no cheaper alternative, the costs of those
systems would be worth the benefits they would generate to the
claimants. But, in Illinois, the marginal benefits of adding a
wage request component is too small to justify its greater
expense over the alternative of simply using the most recent
wage data when it is reported in the usual course. Thus, while
Illinois could enhance a movable base period system marginally
by incorporating a wage request component, the when due clause
does not require that it do so.
Those estimates also include costs for a ``reachback''
component to find claimants who were previously denied
benefits. But the Eleventh Amendment to the U.S. Constitution,
U.S. Const., amend. XI, prohibits the courts from ordering any
such relief. See Paschal v. Jackson, 936 F.2d 940 (7th Cir.
1991).
The proponents' insistence on calculating the costs of a
movable base period by including a wage request and a reachback
component is designed merely to inflate the ``costs'' of a
movable base period. The following table compares Illinois'
cost estimates with those components included and the same
estimates with those components eliminated:
------------------------------------------------------------------------
Estimate With Wage Estimate Without
Request and Wage Request and
``Reachback' ``Reachback''
------------------------------------------------------------------------
Conversion Costs:
Non-computer................ $4.0 million........ $411,260
Computer.................... $9.3 million........ $5.8 million
Total conversion............ $13.3 million....... $6.2 million
Operating Costs $2.6 million........ $178,615
------------------------------------------------------------------------
The table confirms that, if the costs of a wage request and
a ``reachback'' component are eliminated, Illinois' estimates
of the conversion costs would drop $7.1 million, from $13.3
million to $6.2 million, and its estimate of the yearly
operating costs would drop $2.4 million, from $2.8 to $400,000.
D. As for trust fund outlays, the evidence at trial
confirmed that an alternative base period in effect in Illinois
during 1986 would have paid a substantial proportion of about
23,000 additional claimants approximately 13.6 million
additional dollars, and approximately 13,000 claimants would
have been paid benefits sooner. In 1994, the Director of the
Illinois Department of Employment Security estimated that the
additional benefits paid to claimants would be about $30-$40
million a year. See Director Doherty's letter of July 7, 1994.
The last time the proposed legislation was introduced,
Illinois ``high side'' estimate is $93.75 million per year. Its
latest ``high side'' estimate is $100 million annually. Doherty
Stmt. at 3. But those figures assume that, because the
percentage of claimants who receive benefits would increase by
as much as 6% if the state used an alternative base period, the
trust fund outlays would also increase that much. That
assumption is unquestionably wrong since the vast majority of
claimants who would be benefitted by a movable base period are
those who would receive at or near the minimum benefit amount.
Moreover, while the applicable federal statutes give the
states wide latitude to assure the solvency of the trust fund
by setting their own benefit amounts, tax rates and eligibility
requirements, the when due clause is one of the few federal
limits on the states' discretion. By assuring that states do
not adopt methods of administration that unreasonably delay the
payment of benefits, the when due clause enforces the
congressional purpose of prompt payment to tide workers over
during periods of unemployment and to prevent the deepening of
recessions. Java, 402 U.S. at 130-33. Accordingly, a state may
not justify a violation of the when due clause by claiming that
it had to delay payment of benefits to maintain its trust fund
balance. See id., 402 U.S. at 129-33.
The when due clause's assurance that states will honor the
claimants' interest in prompt payment of benefits necessarily
means greater outlays from the trust fund. But ``the
congressional objective of getting money into the pocket of the
unemployed worker at the earliest point that is
administratively feasible ... is what the Unemployment
Insurance program was all about.'' Java 402 U.S. at 135. Thus,
to complain that the states are obligated to pay benefits
promptly from the trust fund is to complain of the very purpose
of the unemployment insurance system itself.
E. For the same reason, the tax consequences for employers
is not a cogent reason for abandoning the when due policy.
Using the estimate that recipiency would increase by as much as
6% under an alternate base period, Mr. Miller assumes that
trust fund outlays, and thus taxes, would increase by that same
rate, requiring payment of as much as $40 million in additional
taxes each year. Miller Stmt. at 1. As noted, however, since
the vast majority of claimants who would be benefitted by a
movable base period are those who would receive at or near the
minimum benefit amount, the percentage rise in recipiency is
larger than the percentage rise in trust fund outlays. And
since taxes are related to trust fund expenses, they would not
rise by 6% either.
Mr. Miller also urges that his company, Phoenix Closures,
provides long-term, stable employment. Miller Stmt. 1. That
being so, however, his workforce does not include Pennington
class members since they are, by definition, those who do not
have less recent earnings available to qualify for benefits.
Moreover, since the tax system in Illinois, like most states,
is experienced rated, employers, like Phoenix Closures, who do
not have a substantial unemployment insurance claims
experience, pay substantially less taxes than employers (such
as seasonal businesses) that provide shorter, less stable
employment. Thus, if we take Mr. Miller at his word, he has
little, if any concern that his company will be burdened by
whatever tax increase arises as a result of the Pennington
decision.
Moreover, for many years, those employers who do employ
Pennington class members have not had to finance unemployment
insurance to pay benefits to the Pennington claimants. Those
employers have therefore been permitted to escape that part of
the excise tax they were supposed to pay for use of the
nation's labor supply. Indeed, a study by the U.S. Department
of Labor, using data from Illinois, concludes that some
employers obtain a form of subsidy by laying off workers while
their wages are still within the lag period, thereby avoiding
the charge associated with those workers' unemployment
insurance claims. Unemployment Insurance and Employer Layoffs,
Occasional Paper 93-1, U.S. Dept. of Labor (1993). The
researchers estimated that ``27 percent of all (UI chargeable)
layoffs for a 4-5 quarter period were free layoffs to the firms
initiating the layoffs ... [and that] the percentage of layoffs
that are free varies from only 13 percent for the largest firms
to 39 percent for construction firms.'' Id. at xiv. They
concluded that ``this UI subsidy actually tends to destabilize
rather than stabilize employment.'' Id. at 3.
The General Accounting Office (``GAO'') agrees. A 1993 GAO
report to the Chairman of the Senate Committee on Finance
concerned the reasons why the percentage of unemployed workers
who receive unemployment insurance benefits has declined.
Unemployment Insurance: Program's Ability to Meet Objectives
Jeopardized, GAO/HRD-93-107 (Sept. 1993). In that report, which
was also based on data from Illinois, the GAO noted that
``[s]tate officials ... said some employers control employee
work schedules and earnings to ensure that they do not meet the
qualifying requirements.'' GAO Report at 5.
The unemployment insurance tax is a fair excise on
employers' use of the nation's labor supply. We ought not
undermine a 60-year old policy of paying prompt unemployment
insurance benefits to eligible workers because some employers
who hire the nation's most vulnerable workers prefer not to pay
their fair share of the costs of unemployment when they lay
those workers off.
VI. The Percentage Of Unemployed Americans Who Receive Unemployment
Insurance Benefits Is At An Historic Low, Making This A Particularly
Inappropriate Time To Undermine The Protection Of The When Due Clause
The 74th Congress enacted the when due clause to assure
that unemployed Americans like Mrs. Pennington receive prompt
replacement of lost wages during periods of unemployment. See
Java, 402 U.S. at 130-33. This is a particularly inauspicious
time to undermine that policy.
In its 1993 report to the Chairman of the Senate Committee
on Finance, the GAO confirmed that the percentage of unemployed
workers who receive unemployment insurance benefits has
declined to historic lows of less than 40%. Unemployment
Insurance: Program's Ability to Meet Objectives Jeopardized,
GAO/HRD-93-107 (Sept. 1993). Moreover, in its 1996 report to
Congress, the Council confirmed the GAO's conclusion, finding
that, in 1995, 14 states paid unemployment insurance to a
quarter or fewer of their unemployed workers, and that Illinois
paid only 37.2% of its unemployed. Defining Federal And State
Roles in Unemployment Insurance, A Report to the President and
Congress, Advisory Council on Unemployment Compensation, Jan.
1996; see Table 4-2 ``Ratio Of Unemployment Insurance Claimants
To Total Unemployment, By State, 1995.'' Commissioner Norwood's
testimony confirms that the most recent data shows that ``only
37.4 percent of the unemployed in our labor force survey are
receiving UI benefits.'' Testimony of Janet Norwood (``Norwood
Stmt.'') at 2. Even more frightening, she notes that
``[r]esearch conducted by the Council staff found that the
competitive pressures among the states to attract business
could well lead to a continued decline in the percentage of
unemployed workers who receive benefits.'' Id. at 4-5.
A recent study concludes that ``[t]he presence of an
alternative [movable] base period raises the number of
monetarily eligible claimants by 6 to 8 percent.'' Vroman,
Wayne, The Alternative Base Period in Unemployment Insurance:
Final Report, Jan. 31, 1995. Thus, the Pennington decision
offers some reversal of the precipitous drop in the rate of
unemployment insurance recipiency. And the GAO has confirmed
that ``[t]he receipt of [unemployment insurance] benefits [is]
an important factor in keeping unemployed workers above the
poverty level.'' GAO Report at 5.
Commissioner Norwood's testimony also confirms that the
unemployment insurance system in some states ``discriminates
against the working poor, exactly the group we most need to
help in our society,'' Norwood Stmt. at 5, and that the problem
of insuring the working poor against unemployment will grow
more acute ``as an increasing number of people move from
welfare to jobs as the result of the recent welfare
legislation.'' Id.
Now is not the time for Congress to undermine ``the
congressional objective of getting money into the pocket of the
unemployed worker at the earliest point that is
administratively feasible''--the very principle that defines
``what the Unemployment Insurance program was all about.'' Java
402 U.S. at 135.
Statement of Hon. Stanley Crooks, Chairman, Shakopee Mdewakanton Sioux
(Dakota) Community, Prior Lake, Minnesota
Introduction
Mr. Chairman, my name is Stanley Crooks, the duly-elected
Chairman of the Shakopee Mdewakanton Sioux (Dakota) Community,
a federally-recognized tribal government, located in Prior
Lake, Minnesota.
Please accept the following as the written testimony of
Shakopee Mdewakanton Sioux (Dakota) Community in strong support
of H.R. 294, the Indian Tribal Government Unemployment
Compensation Act Tax Relief Amendments of 1997.
H.R. 294
First, I want to thank you for scheduling this hearing, and
for inviting testimony on H.R. 294. My Tribe also wishes to
thank Representative John Shadegg of Arizona for his
introduction of H.R. 294 and his efforts to advance it and
other measures designed to stimulate economic development on
Indian reservations.
For many years, my Tribe has sought legislative relief like
that proposed in H.R. 294. Rep. Shadegg stands in a long line
of Congressmen and Senators who have lent their support to
legislation substantially identical to H.R. 294. We are
indebted to Members like the Honorable Rep. Collin Peterson,
who introduced H.R. 838 in the 104th with Representatives Minge
and Kildee as co-sponsors, and who introduced H.R. 1382 in the
103rd with Representatives Kopetski and Richardson as co-
sponsors. Likewise, we are indebted to the Honorable Sen. John
McCain, who introduced S. 1305 in the 104th, with Senators
Baucus, Campbell, Domenici, Inouye, Kyl, Stevens, and Thomas as
co-sponsors, and who introduced S. 391 in the 103rd, with
Senators Campbell and Durenberger as co-sponsors.
We are very grateful to each of these Representatives and
Senators who have pressed forward on this issue, year after
year. Today, Mr. Chairman, we are especially grateful to you
for setting this hearing and focusing the Subcommittee's
attention on this problem and how H.R. 294 would resolve it.
H.R. 294 would amend existing FUTA tax statutes to clarify
expressly that tribal governments should be treated just as
state and local units of government are treated for FUTA
unemployment tax purposes. Under H.R. 294, no federal FUTA
taxes could be assessed against tribal governments, (the same
as with state and local governments and tax-exempt
organizations). The bill language would expressly authorize
tribal governments, like state and local governments and tax-
exempt organizations, to contribute to a state unemployment
insurance fund on a reimbursable basis for unemployment
benefits actually paid out to former employees. The bill would
also eradicate any unemployment tax liability of tribal
governments who have not paid unemployment compensation taxes
in the past in the good faith and reasonable belief that tribal
governments were exempt, provided that no benefits were paid to
their former employees.
Our Tribe's Experience with FUTA
Around 1990, Shakopee received a bill from the federal IRS
demanding payment of a substantial amount of what were called
back FUTA taxes. After costly negotiating, the amount demanded
was adjusted downward and we paid it in full.
Ever since the late 1980's when IRS agents in our region
began to impose a new interpretation of the FUTA law on us,
Shakopee has contributed into the State fund and has paid,
under protest, the remaining Federal portion claimed by the IRS
after appropriate credits are made for our State fund
contributions. Our experience-based tax rate as an employer,
for purposes of our contributions to the State fund, is 1.3 per
cent. This tax rate is calculated as if our Tribe was a for-
profit, private sector business. But we are not. We are a
government.
Our participation in the State fund is now permitted only
under the terms imposed upon commercial, for-profit business
employers. We are not allowed to participate as governmental
employers on a reimburser basis.
At no time has either our non-participation, or our
participation, been a burden on the unemployment compensation
system. When we have not participated, we have not cost anyone
anything.
Indeed, our tribal government has been subsidizing the
private sector's use of the unemployment insurance system.
Here's how the subsidy works. Under the present IRS
interpretation of FUTA, all other governments in America and
income-tax-exempt organizations do not pay the federal portion
of the FUTA tax, and they are allowed to contribute to the
State funds only those dollars required to reimburse the State
funds for benefits paid out to their former employees. But the
present federal interpretation of FUTA requires our tribal
government to pay the federal portion of the FUTA tax that
helps administer the system, and requires us to pay an advance,
flat rate of tax to the State fund. In both the federal and
state portions of the FUTA tax, our payments lower the costs
that are borne by private sector employers. If my Tribe was
treated like all other governments, we would pay only for the
allowable benefits paid out to our former employees. But the
policies being advanced by the IRS and by the U.S. Department
of Labor today are forcing our tribal government to help insure
the private sector.
New Interpretations of FUTA Are Being Unfairly Implemented Against
Tribal Governments
The policy against tribal participation as governmental
employers has not been uniformly applied. An October 1, 1993
study by the Congressional Research Service showed a variety of
approaches used by various states. Some states permitted tribes
to participate as governments. Others, like Minnesota, did not.
Only last year did the U.S. Department of Labor clarify its
policy on this matter, when it issued an unemployment insurance
program letter (no. 14-96, April 12, 1996), advising state
governments that----
[I]t is the Department's position that the granting of
reimbursement status to Indian tribes liable for the Federal
unemployment tax is inconsistent with the experience rating
requirements of Section 3303(a)(1), FUTA. However, some States
have nevertheless granted such Indian tribes reimbursement
status. Although Congressional action has been anticipated on
this matter for a considerable time, it does not appear to be
forthcoming. Therefore the Department is issuing this UIPL to
assure consistent treatment of tribes for experience rating
purposes.
The Labor Department opinion notes that since the FUTA
statute does not require states to provide unemployment
compensation coverage to tribal government employers, ``State
UC coverage has not always been extend to the tribes... . If
tribes are not covered under State law, then they will not be
eligible for any credit against the FUTA tax.''
Under the Labor Department's interpretation of FUTA, a
State may refuse to accept a Tribe's contributions to a State
unemployment fund. In this situation, the Tribe has no
coverage. And, the Tribe must pay the full, Federal rate under
FUTA without any offsetting credit.
The result is that, at the whim of a State, a tribal
government can be forced to pay the full Federal rate of FUTA
tax and receive absolutely no benefit whatsoever. This
interpretation of the statute produces a patently unfair result
at odds with the intent of Congress in enacting FUTA.
Tribal Support for H.R. 294
Our Tribe is not alone in its support for H.R. 294. Many
Tribes throughout the United States have supported identical
provisions in prior sessions of Congress. H.R. 294 also enjoys
the active support of the National Congress of American
Indians, most recently in the form of NCAI Resolution SPK-95-
060 on predecessor bill H.R. 838.
H.R. 294 deserves support by the Subcommittee because the
bill would correct an inequity in the unemployment insurance
tax code. In all fairness, Indian tribal governments should be
treated, under FUTA, like all other governments and non-taxable
entities are treated. We are not asking for more than what is
fair.
H.R. 294 would remove the substantial uncertainty about
tribal participation in FUTA that persists in Indian Country,
by clarifying that coverage is mandatory for all tribal
government employers on terms that are uniformly applied and
administered. The bill would end the costly disputes that have
erupted in some areas.
And, H.R. 294 would make FUTA consistent with the
government-to-government relationship that has existed, ever
since the treaty-making era began, between the United States
and federally-recognized Indian tribal governments.
Background on the Shakopee Mdewakanton Sioux (Dakota) Community
Our Tribe has returned to an area that was once included in
the millions of acres our ancestors roamed before they were
forced to relinquish them under a series of disastrous land
treaties. What remains of our lands are approximately 1,500
acres held in trust and in non-trust status for our Tribe. Our
lands are located 25 miles south west of the Twin Cities of
Minneapolis and St. Paul.
In recent years, economic development has surrounded us and
our lands. And our Tribe has been a major factor in
revitalizing our region.
Our tribal government is the largest employer in Scott
County, with a workforce of approximately 3,900. Our tribal
government provides a full range of governmental services to
our Community residents. We administer social services for
children and families, mental health and chemical dependency
counseling, employee assistance, emergency assistance, public
works, roads, water and sewer systems, health programs and a
dental clinic, vehicle fleet and physical plant maintenance,
membership enrollment, education assistance, regulatory
commissions, economic planning and development, enterprise
management and operations, cultural programs, an active
judicial system, and many other governmental activities. Our
tribal government builds all permanent Community
infrastructure, including roads, water, and sewer systems,
subdivision utilities, and tribal government structures. The
Tribe also maintains a home loan program whereby any tribal
member can gain access to loan money with which to build a
home. And, the Tribe operates an economic development loan
program for tribal members who are starting their own
businesses. Fifteen businesses are now owned by individual
tribal members, including a travel agency, a hair salon, rubber
stamp shop, clothing store, and gift shop.
Our tribally-owned and controlled enterprises serve the
Community and are an important source of governmental revenue
for the Tribe. These include two casinos, a recreational
vehicle campground, a hotel, a recreation facility, a
children's entertainment and daycare facility, and a
convenience store and car wash.
Our Tribal Government Enterprises Cannot Be Fairly Distinguished From
State Government Enterprises Under FUTA
Since the 1970's, Federal policy makers in the White House
and in the Congress have pursued a broadly bi-partisan policy
of encouraging tribal government self-determination and self-
sufficiency through the development, by the tribes themselves,
of tribal economic enterprises.
At least three separate rationales have driven this
Federal-Indian policy. First, there is a desire to reverse the
process that has led to considerable land loss and resource
deprivation of tribal resources over the past centuries.
Second, there is an effort to enable Indian tribes to help rid
themselves of the plague of poverty and under-development in
Indian communities that has forced Native Americans, as a
group, to the bottom of every known measure of economic and
social well-being in America. And third, there is support for
an approach that respects the sovereign authority of
governments to set their own course and resolve their own
problems in their own way. For the Shakopee Mdewakanton Sioux
(Dakota) Community that has meant we have actively pursued the
development of appropriate economic development, including
gaming, in order to boost the governmental revenues of our
Tribe.
In all fairness, my Tribe's economic enterprises cannot be
distinguished from those owned and controlled by State and
local governments throughout America. For this reason alone, my
Tribe would strenuously oppose any effort to exclude from the
scope of H.R. 294 those tribal government employees carrying
out the economic enterprise activities of the Tribe.
State and local government employees typically are engaged
in a wide variety of business-type activities. What makes them
governmental is that they are under the exclusive ownership and
control of state and local governments, and the revenues they
raise are dedicated to governmental purposes. Our tribal
enterprise are no different. In fact, by federal law, our
gaming revenues must be applied to statutorily-prescribed
governmental purposes.
A recent CRS and U.S. Census Bureau survey provided to the
Senate Committee on Indian Affairs [attached] estimates that
state governments derive $46.5 billion each year from business-
type activities. Each of the employees in these enterprises,
from lotteries to liquor stores to ferry boats to manufacturing
plants, are all governmental employees who are treated as
governmental employees for purposes of FUTA. It is unfair to
suggest that Indian tribal government enterprises should be
treated any differently.
Conclusion
On behalf of the Shakopee Community which I lead, I thank
you for the opportunity to provide this testimony in strong
support of early enactment of the provisions in H.R. 294.
H.R. 294 is about basic fairness, correcting an inequity
that has recently arisen in the FUTA program. As a tribal
government, we ask for nothing more in H.R. 294 than to be
restored to the same status that has been accorded all other
units of government and tax-exempt entities.
H.R. 294 would not provide tribal governments like Shakopee
any special favor or special treatment. Instead, it would
simply clarify that tribal governments like ours should be
considered, under FUTA, for what we are--governmental
employers.
If there is anything we can do to assist the Congress in
refining and securing passage of H.R. 294, please do not
hesitate to let us know. Thank you.
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Texas Workforce Commission
May 7, 1997
The Honorable E. Clay Shaw, Jr.
United States House of Representatives
2408 Rayburn House Office Building
Washington, DC 20515-0922
Dear Congressman Shaw:
I speak for our Commissioners and many Texas employers when I tell
you how much we appreciate your interest in resolving the
``Pennington'' issue and your willingness to give a fair hearing to
reform of the administrative financing for employment security
programs. As part of the record of the hearing of the Subcommittee on
Human Resources on April 24, 1997, I submit the following comments.
Since Pennington v. Didrickson arose several years ago, Texas
officials have been unequivocal in supporting the State of Illinois
position. The Employment Security System federal/state ``partnership''
relegated setting of base periods to the states; for many years the
unemployment insurance program has operated successfully under this
premise. We are firm in our conviction that the federal court in
Illinois decided the Pennington case incorrectly and the states' right
to set individual base periods is by precedent and logic the correct
position. I am sending you for the record a copy of the letter that the
Texas Workforce Commissioners sent to our congressional delegation
alerting them to the issue.
I also wish to state our support for administrative financing
reform. Such reform is long overdue. Employers are paying too much in
FUTA taxes and receiving too little in services. State agencies, under
great pressure to deliver quality employment and training services to
hard-to-serve populations as well as traditional job seekers, are
strapped for funds. Pretending that there are legitimate reasons for
excess FUTA collections other than federal deficit reduction is a myth
that contributes to public cynicism. In particular, continuing the 0.2%
FUTA surtax on wages, although its purpose was served 10 years ago, is
unjustified. These are dollars that should be used by employers to
continue economic growth, not for masking the deficit. There are,
however, many legitimate reasons to allow states to collect their own
administrative taxes as several of the proposals before this committee
have indicated. For the record, I am enclosing an article that appeared
in the our agency's newsletter for employers, Texas Business Today. It
describes the current situation and the benefits states would derive
from reform of the administrative financing system.
Thank you for allowing me to contribute to the record. I would be
happy to respond further if any of the Committee members have
questions.
Sincerely,
Mike Sheridan
Acting Executive Director
[The attachments are being retained in the Committees files.]
Statement of Ute Mountain Ute Indian Tribe, Towaoc, Colorado; and
Southern Ute Indian Tribe, Ignacio, Colorado
Mr. Chairman and Members of the Committee:
This joint statement is submitted on behalf of Colorado's
two federally recognized Indian tribes with the longstanding
hope that this honorable committee will adopt and support
legislation expressly permitting federally recognized Indian
tribes to be treated under the Federal Unemployment Tax Act in
a manner similar to state and local governments. As reflected
in a Congressional Research Service study of February 16, 1989,
submitted to the then Senate Select Committee on Indian
Affairs, treatment of Indian tribes for FUTA purposes under
certified state unemployment programs was a case study in
confusion, inconsistency and unfairness. Even for tribes, such
as ours, that have worked with Congress and state legislatures
to resolve our difficulties, the confusion reported to the
Senate Select Committed in 1989 persists. In fact, under a
directive issued by Director Mary Ann Wyrsch of the
Unemployment Insurance Service, U.S. Department of Labor, dated
April 12, 1996, it is currently stated, under threat of
decertification of state programs, that it is unlawful to treat
Indian tribes like other governments for FUTA purposes. In
order to correct this unfair situation, Congressman Shadegg has
introduced H.R. 293. We urge the committee to adopt this needed
legislation so that the oldest governments in our nation,
Indian tribes, can extend to their employees the same
unemployment protections provided to other government workers.
Some background on this matter may be helpful. Because
Indian tribes are recognized under federal law as quasi-
sovereign governments, many state governments, including
Colorado, determined them to fall outside the scope of state
unemployment programs. In our case, despite repeated efforts to
enroll in the Colorado unemployment program, we were deemed
legally ineligible to participate. Our employees were,
therefore, not able to obtain the protection provided by the
state's unemployment insurance program. Nonetheless, under
FUTA, we assertedly incurred sizeable federal unemployment tax
liabilities, which the Internal Revenue Service sought to
collect during the mid 1980s.
As part of the 1986 Tax Reform Act, pursuant to an
amendment introduced by our former Senator William Armstrong,
Congress provided retroactive FUTA tax exemption relief to
tribes such as ours, which had not been permitted to
participate in state programs. (Pub. L. No. 99-514, 1705). That
amendment, however, extended such relief only up until January
1, 1988, by which time tribes and states were expected to have
resolved their differences regarding participation in state
programs.
In keeping with the opportunity provided by Congress, our
tribes worked with the Colorado General Assembly to allow for
our participation in the state program. In 1987, the state
unemployment insurance law was amended to include our tribes
within the definition of ``political subdivision'' for the
limited purpose of our tribal participation in the state
program. This treatment allowed us to pay for unemployment
insurance costs at the same level as county and municipal
governments and at a more favorable rate than would have been
assigned to new employers. Between the effective date of that
legislation and issuance of Unemployment Insurance Program
Directive of April 12, 1996, all proceeded well.
Without some legislative remedy, the directive of April 12,
1996 threatens to undo all that we accomplished less than a
decade ago. Threatened with decertification, the State of
Colorado has amended the state law excluding us from the
governmental portion of their program. However, in recognition
that we are working hard to obtain a legislative solution, the
effective date of that change has been postponed until July 1,
1997. The increased rates that would otherwise be applied to
our tribes would multiply our unemployment insurance costs many
times, and between our tribes we estimate increased annual
costs approaching one-half million dollars.
Our concerns have been discussed by Indian tribes
throughout the country. Such broadbased organizations as the
National Congress of American Indians have urged passage of
legislation to eliminate discrimination against tribal
governments in administration of FUTA. Fortunately, a
legislative vehicle to correct the inequities of the current
system has been introduced.
As elected leaders of two affected tribes, we hope that you
will respond to this national problem by supporting H.R. 294, a
bill to enact the ``Indian Tribal Government Unemployment
Compensation Act Tax Relief Amendments of 1997.'' That
legislation will provide states the authority to allow tribal
governments to participate in certified state programs along
with other governments. The legislation also provides tribes
the option to participate in state programs. With passage of
H.R. 294, we strongly believe that all concerned parties will
finally have the explicit authorization apparently demanded by
the Department of Labor as a condition to recognition of
effective state-tribal relations.
In conclusion, we appreciate the opportunity to provide
this testimony to committee, and we request that it be printed
in your record of proceedings.
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