The Revenue and Distributional Impacts of Unemployment Insurance Reform: Evidence from California

In the United States, unemployment insurance (UI) is funded through employer-side payroll taxes that are experience-rated based on previous UI claims. States differ significantly with respect to the financing of their programs, and a majority of state programs do not currently meet minimum UI trust fund solvency standards. A common culprit in the least solvent states is a very low tax base of earnings on which UI taxes are levied. We focus on California, the least solvent of the 50 state UI programs, with debt currently to the federal government of $21 billion, and which has the lowest base of taxable earnings at $7000 per year. We use matched employer-employee administrative data to estimate the impact of financing reforms to California’s UI system. We find that raising the taxable earnings base would replenish the state’s UI trust fund and would increase experience rating by reducing the number of systematically subsidized firms. While this improves vertical equity of the UI system, it would also worsen horizontal equity by imposing much larger percentage increases in tax costs on the firms with the fewest layoffs. Alternatively, matching the higher tax base with both higher maximum and lower minimum rates could improve both experience rating and horizontal equity.