[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:]
    [GRAPHIC] [TIFF OMITTED] T0099.057
    
    [GRAPHIC] [TIFF OMITTED] T0099.058
    
    [GRAPHIC] [TIFF OMITTED] T0099.059
    
      

                                

    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.

                                   -