Measuring Tax Rate Adequacy UI Benefit Financing Seminar Division - PowerPoint PPT Presentation

Measuring Tax Rate Adequacy UI Benefit Financing Seminar Division of Fiscal and Actuarial Services U.S. DOL/ETA/OUI October 23-26, 2018 1

Tax Rate Adequacy • Understanding significant measures of State UI tax systems • How to calculate an Adequate Financing Rate 2

Why is Tax “Adequacy” Important Maryland Total UI Benefits Paid (As % of Total Wages, 1970-2017) 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Forward Funding for Recessionary Periods • 3

Unemployment Insurance Program Forward Funding Aggregate State Benefits and Contributions Trust Funds as % of Total Wages 3.5 3 State Contributions 2.5 State 2 Benefits 1.5 1 0.5 0 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Year 4

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Significant Measures of State UI Tax Systems Report http://workforcesecurity.doleta.gov/unemploy/sig_measure.asp • • Significant Measures of State UI Tax Systems Report Years with Actual Data Available: CY 2018 • CY 2017 • CY 2016 • CY 2015 • CY 2014 • CY 2013 • CY 2012 • CY 2011 • CY 2010 • CY 2009 • CY 2008 • 6

Significant Measures of State Tax Systems Report State Tax Structure Description Maryland 2017 1) Type of Experience Rating Method: Benefit Ratio 2) Type of Employer Ranking: Fixed 3) Type of Charging Method: Proportionally 4) Taxable Wage Base ($): $8,500 5) Avg. Tax Rate (Total / Taxable Wages) %: 0.40 / 2.41 6) New Employer Tax Rate (%): 2.6 7) Statutory Tax Rate (Min. / Max.)%: .30 / 7.50 8) Average High Cost Multiple (1/1/2017): .80 7

Significant Measures of State Tax Systems Report Maryland 2017 State Tax Levels Avg. Per Covered Employee Avg. For Every $100 of Wages Pd. 9) Est. Employer Contributions: $230 $.40 Min. Rate Max Rate 10) Contributions Per Employee at the Tax Base: $26 $638 Definitions 9. Total UI Contributions / Covered Employment 10. a) Tax Base * Min. Tax Rate b) Tax Base * Max. Tax Rate

Significant Measures of State Tax Systems Report Contribution Levels To pay benefits in Previous Into the Computation Year Trust fund 11) For Every One Dollar of Contributions the Amount Going: $1.03 -$.03 12) Average Tax Rate Compared to Adequate Financing Rate: Current Avg. Adequate Financing % Diff. Tax Rate Tax Rate _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -37% 3.67% 3.84% Definitions 11a) Total Benefits Paid Previous Year / Current Year Est. Total Contributions b) (1 – a) 9

Adequate Tax Rate • How much money should a state bring in each year in revenues in order to reach an adequate Trust Fund. Depends on two Items: 1) Amount of benefits state is paying 2) Amount of benefits the state wants to forward fund 10

Significant Measures of State Tax Systems Report Definitions 12) The Adequate Financing Rate is the flat tax rate necessary to fund the State’s average historical level of UI benefits and adequately forward fund the UI Trust Fund. Adequate Long Term Avg. Financing Rate = Benefit Cost Rate + Solvency Amount Long Term Benefit Cost Rate = 10 Year Avg. of (Benefits / Taxable Wages) Solvency Amount = Difference Between Current Trust Fund and Amount needed to Reach AHCM 1.0 in 5 years. 13) Percentage Difference Between the AFR and the State Avg. Tax Rate: (Avg. Tax Rate - AFR) / AFR 11

% of Total Wages 0.2 0.4 0.6 0.8 1.2 1.4 0 1 VI NJ PR AK ND PA IA CT HI MA WV OR WY MT RI State Benefit Cost Rates VT IL WA (Benefits / Total wages, 2017) CA MN NV NM ME MI KY OH MD NY TX State Average: .44% ID WI OK CO DE AR DC LA MO UT KS AL IN MS NE SC SD AZ NH VA TN GA FL 12 NC

Michigan Yearly Benefit Cost Ratio (1977-2013) 3.5 3 2.5 2 10 Year Average Benefit Cost Rate: 1.4% 1.5 20 Year Avg. Benefit Cost Rate: 1.1% 1 0.5 0 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 13

Maryland Benefit Cost Rates 1990 - 2017 (Benefits / Total Wages) 1.4 1.27 1.19 Average 3 Year High Benefit Cost Rate: 1.20 1.15 1.2 1 % of Total Wages 0.8 0.6 0.4 0.2 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Year 14

Calculation of Solvency Amount Difference Between Current Trust Fund and Amount needed to Reach AHCM 1.0 in 5 years: Current Trust Fund Amount - AHCM 1.0 = Difference Amount Solvency Amt = Difference / 5 Trust Fund Balance Needed to Have a 1.0 Average High Cost Multiple: Reserve Ratio = Avg. High Average High Cost Rate Cost Multiple (Trust Fund Balance / Total Wages) = 1 Avg. of 3 Highest Ben. Cost Ratios Avg. Ben. Cost Rate * Total Wages = Trust Fund needed for 1.0 AHCM 15

Calculation of Adequate Financing Rate Step 1: Divide Yearly Total Benefits by yearly Taxable Wages for each of the last ten years. Step 2: Take the average of those Benefit Cost Rates. Step 3: Calculate the Trust Fund Needed for a AHCM of 1.0 (Multiply the total wages in the past year by the Average High Cost Rate). Step 4: Subtract the Trust Fund from the 1.0 AHCM Trust Fund and divide by five. Step 5: Divide that amount by taxable wages and add to the Avg. Benefit Cost Rate to get the Adequate Financing Rate 16

STATE ADEQUATE FINANCING RATE CALCULATOR INPUTS: STATE: YEAR OF AFR CALCULATION: NUMBER OF YEARS OF BENEFITS TO USE FOR AFR: DESIRED LEVEL OF TRUST FUND SOLVENCY: 1.00 **(0.5 to 3.0 AHCM)** MAXIMUM LEVEL OF TRUST FUND SOLVENCY: 1.50 **(1 to 3.0 AHCM)** 1.92% of Taxable Wages for 2015 ADEQUATE FINANCING RATE: 17

Distribution of Total Benefits Maryland- 2017 BENEFITS ASSIGNED TO INDIVIDUAL EMPLOYER EXPERIENCE RATING 14 )Total Benefits Paid 15) Benefits Assigned 79% of Total Bnefits to Active Employers 16) Benefits Assigned 4% of Total Benefits to Inactive Employers 10% of Total 17) Reimbursable Benefits Benefits 18) Benefits in Excess of 0% of Total Benefits Taxes from Max. Rated Employers 0 100 200 300 400 500 600 Millions $ 18

Distribution of Wages, Accounts, Benefits and Contributions Maryland - 2017 DISTRIBUTION OF WAGES, BENEFITS, AND CONTRIBUTIONS BY EFFECTIVE TAX RATES < = .5% .5% - 1.0% 1.0% - 1.5% 1.5% - 2.0% >2.0% 19) Proportion of Total Wages: 70% 22% 7% 1% 0% 20) Proportion of Employers: 85% 8% 6% 1% 0% 21) Proportion of Total Benefits Charged: 45% 28% 23% 4% 0% 22) Proportion of Total Estimated Contributions: 39% 36% 20% 4% 0% < = .5% .5% - 1.0% 1.0% - 1.5% 1.5% - 2.0% >2.0% 19