Unemployment Insurance Tax Burdens and Benefits: Funding Family Leave and Reforming the Payroll Tax‪.‬

INTRODUCTION The Unemployment Insurance (UI) system was created by the Social Security Act of 1935. Originally, both UI and Old-Age, Survivors, and Disability Insurance (OASDI) were financed by a tax on the first $3,000 in wages. In 1940, this amount was roughly equal to average earnings. While the tax base for OASDI has risen over time, reaching $90,000 in 2005, the federal tax base for unemployment insurance remains at $7,000. While many states do have UI tax bases above the federal base, most are not much higher than the federal base, with none anywhere close to the OASDI base. As a result of this anomaly, only those with very low earnings pay the tax on their entire wages. Additionally, workers who have already paid taxes up to the taxable wage base with one employer in a calendar year must pay again if they change jobs or moonlight. Thus, those who lose a job or work additional hours at a second job are also more likely to pay taxes on a higher fraction of earnings.