Relating to unemployment insurance taxes on employers

Description

Senate File 607 modifies the definition of “taxable wages” for purposes of unemployment insurance taxes on employers by excluding wages paid by Iowa employers to employees who work in another state if the other state extends reciprocity to Iowa for employment purposes. The Bill reduces the taxable wage base used to calculate unemployment insurance taxes for employers from 66.7% to 33.3% of the annualized statewide average wage. The Bill modifies employer contribution rates, including changing the highest contribution rate from 9.0% to 5.4%. The Bill reduces the number of benefit ratio ranks from 21 to 9 and the number of contribution rate tables from 8 to 4. The benefit ratio rank of new nonconstruction contributory employers is changed from 12 to 4 and the benefit ratio rank of new construction or landscaping contributory employers is changed from 21 to 9. The Bill modifies the computation of the reserve fund ratio and changes how the effective contribution rate table is determined.

Background

Under current law, taxable wages include the wages paid by an Iowa employer to an employee who works in Iowa and to an employee who works in another state that extends reciprocity to Iowa for employment purposes. In Iowa, the taxable wage credit applies the wages earned in another state by an employee to the taxable wage base for that employee in a given year. Taxable wages are 66.7% of the statewide average weekly wage from the previous year multiplied by 52 and rounded to the nearest multiple of 100. This results in the current taxable wage base of $39,500. This is the amount that an employer pays an employee that is eligible for unemployment insurance taxation. The taxable wage base is estimated to be $19,800 under the Bill. If the taxable wages under the State definition are lower than the taxable wages under the federal definition ($7,000), then the federal definition is used.

An employer’s contribution rate is a dynamic calculation made each year and is dependent upon the calculation of the current reserve ratio, the benefit ratio rank, and the contribution rate table in effect for the rate year. Contribution Rate Table 8 is in effect for calendar year (CY) 2025. According to the U.S. Department of Labor, as of March 1, 2025, the balance of Iowa’s Unemployment Compensation Trust Fund was $1.887 billion. This does not include the Unemployment Compensation Reserve Fund. Figure 1 shows the historical revenue, expenditure, and balance data for the Trust Fund.

Figure 1 — Unemployment Compensation Trust Fund History (in Millions) More information about the Unemployment Compensation Trust Fund is available in this Fiscal Topic.

Assumptions

• The estimates in this Fiscal Note use CY 2024 data.
• Changes to the taxable wage credit, the taxable wage base, and the tax tables will take effect in CY 2026.
• The taxable wage credit is used by 2.5% of Iowa employers.
• The full-time equivalent (FTE) positions associated with the taxable wage credit may be reassigned to other unemployment insurance activities. There are 3.0 FTE positions at a total annual cost of $195,000 that administer the taxable wage credit and are paid from federal funds.
• Federal funding related to unemployment insurance programs will not change during the projection period.
• The interest rate earned on the Unemployment Compensation Trust Fund in future fiscal years will be 2.2%.
• Contribution Rate Table 8 is currently in effect. Under the Bill, Contribution Rate Table D is assumed to be in effect during the projection period.
• If the Unemployment Compensation Trust Fund balance decreases to the point that the total funds available for the payment of benefits divided by the total wages paid in covered employment excluding reimbursable employment wages is below 1.3%, Contribution Table C would go into effect, which would increase the tax rate and help stabilize the balance of the Trust Fund.
• There will be no one-time federal funds deposited in the Trust Fund during the projection period.
• Employment and unemployment trends will remain constant during the projection period.
• Wages will increase by 3.0% annually.Combined Total Regular

Revenue Benefits Paid Fund Balance

CY 2014 484.1$ 402.6$ 941.7$ CY 2015 403.7 417.6 938.9 CY 2016 492.5 423.5 1,011.5 CY 2017 506.6 402.6 1,106.1 CY 2018 440.7 364.7 1,181.9 CY 2019 444.5 381.8 1,254.0 CY 2020* 934.2 1,254.2 999.5 CY 2021* 688.7 404.7 1,392.9 CY 2022 450.8 253.9 1,610.8 CY 2023 444.6 260.5 1,811.3 CY 2024 474.0 316.4 1,935.8 * Includes one-time federal funds.

Fiscal Impact

Senate File 607 is estimated to decrease revenue to the Unemployment Compensation Trust Fund by the amounts listed under the Fiscal Impact column in Figure 2. Estimates of benefits paid and the balance of the Trust Fund are also included in Figure 2.

Figure 2 — Fiscal Impact of SF 607 (in Millions)

Sources

• Iowa Workforce Development
• U.S. Department of Labor
• Legislative Services Agency calculations