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BILL # HB 2805 |
TITLE: unemployment insurance; benefits; tax base |
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SPONSOR: Cook |
STATUS: As Introduced |
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PREPARED BY: Patrick Moran and Molly Murphy |
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The bill increases the taxable wage base for employer unemployment insurance (UI) payroll taxes from the first $7,000 of wages to $8,000; increases the maximum unemployment weekly benefit amount from $240 to $300; and increases the income disregard from $30 to $160 per week.
Estimated Impact
We estimate that the bill would increase UI Trust Fund revenues by $77.9 million in calendar year (CY) 2022 and comparable amounts in CY 2023 and CY 2024. We also estimate that the bill would increase UI benefit expenditures by $65.5 million in CY 2022, $51.0 million in CY 2023, and $36.4 million in CY 2024. The resulting net increase in the cash balance of the UI Trust Fund balance relative to current law would be $12.4 million in CY 2022, $27.7 million in CY 2023, and $43.1 million in CY 2024 (see Table 1).
The likelihood of the above estimates depends on the state unemployment rate and the corresponding level of claims for benefits between now and CY 2024. Our estimates assume that current law average weekly claims compensated will be 45,000 in CY 2022, 35,000 in CY 2023, and 25,000 in CY 2024. By comparison, actual weeks compensated were approximately 120,000 in CY 2020 and 16,600 in CY 2019. Our cost estimates could therefore change by several orders of magnitude if the actual unemployment level is higher or lower than we assume. As a result, our estimates should be treated as speculative.
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Table 1 |
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HB 2805 Fiscal Impact Summary |
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($ in Millions) |
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UI Payroll Tax Revenues |
CY 2022 |
CY 2023 |
CY 2024 |
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A |
Current Law UI Tax Collections (2.4%) |
$ 545.2 |
$ 550.8 |
$ 556.4 |
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B |
Expanded Payroll Base |
$ 77.9 |
$ 78.7 |
$ 79.5 |
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C |
HB 2805 Total Revenues (A + B) |
$ 623.1 |
$ 629.5 |
$ 635.9 |
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UI Benefits Expenditures |
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D |
Current Law Benefits Spending |
$ 542.9 |
$ 422.2 |
$ 301.6 |
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E |
Increase Maximum Benefit Cap to $300 |
$ 56.2 |
$ 43.7 |
$ 31.2 |
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F |
Increase Income Disregard to $160 |
$ 9.4 |
$ 7.3 |
$ 5.2 |
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G |
Total Spending Changes from Adjustment to Benefits |
$ 65.5 |
$ 51.0 |
$ 36.4 |
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H |
HB 2805 Total Spending (D + G) |
$ 608.4 |
$ 473.2 |
$ 338.0 |
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UI Trust Fund Balance Change |
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I |
Current Law Trust Fund Cash Balance Change |
$ 2.3 |
$ 128.6 |
$ 254.8 |
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J |
HB 2805 Trust Fund Cash Balance Change |
$ 12.4 |
$ 27.7 |
$ 43.1 |
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K |
HB 2805 Total Trust Fund Cash Balance Change (I+J) |
$ 14.7 |
$ 156.3 |
$ 297.9 |
(Continued)
DES estimates the $300 benefit cap would increase UI benefit expenditures by $35.9 million in CY 2022 and that the $160 income disregard would increase UI benefit expenditures by $6.7 million. The agency's lower estimates appear to be based on lower assumed unemployment caseloads in CY 2022 in comparison with the JLBC Staff and national forecasts. The agency did not provide an estimate of the increase in tax revenues under the bill.
Since the state also pays UI benefits as an employer, state government costs would also increase. We anticipate the magnitude of these cost increases would be minimal.
UI Payroll Base Expansion
Under current law, Arizona state unemployment tax is applied to the first $7,000 of wages. The bill would increase the wage base to include the first $8,000 of wages effective January 1, 2022, or approximately a 14.3% increase above current law. As a result, we assume there would be a comparable 14.3% increase in employer UI tax collections. Assuming the maximum 2.4% average rate is in effect through CY 2024 based on current UI Trust Fund balances, we estimate the expanded tax base would generate additional revenues to the UI Trust Fund of $77.9 million in CY 2022, $78.7 million in CY 2023, and $79.5 million in CY 2024 (see Row B of Table 1).
Increase in the Maximum Benefit
A.R.S. § 23-779 establishes a weekly benefit level for UI recipients equal to one-twenty-fifth of the person's total wages in a quarter, or effectively 52% of their weekly pre-unemployment income, subject to a cap of $240. The bill would increase the weekly cap to $300, or an increase of $60. The resulting increase in the average weekly spending on benefits would be less than $60, however, because current law still limits the weekly benefit to 52% of pre-unemployment earnings.
To estimate the increase in Arizona's average weekly spending on unemployment benefits under a $300 cap, we analyzed UI spending data reported by the U.S. Department of Labor for the four states with income caps nearest to $300, which were Florida ($275), Tennessee ($275), Missouri ($320), and South Carolina ($326). Average weekly benefit spending in
those 4 states in 2019 ranged from a low of $240 in Tennessee to a high of $266 in Missouri and averaged 85.6% of the maximum benefit level in each state. Assuming Arizona's average weekly spending would be comparable would suggest that under a $300 cap, Arizona's average weekly benefit spending would increase to $256.80 (85.6% X 300 = $256.80). By comparison, for calendar year 2019 Arizona's average weekly benefit spending was $232.66, meaning that the $300 benefit cap would represent an increase in average spending on benefits of $24 per week per recipient in comparison to current law. The actual increase could be higher or lower if pre-unemployment income among Arizona unemployment applicants is higher or lower than in the comparison states.
The resulting increase in unemployment benefit spending would depend on the number of unemployment recipients. The Congressional Budget Office's February 2021 Budget and Economic Outlook forecasts that the national unemployment rate will decline from 8.1% in CY 2020 to 5.7% in 2021, 5.0% in 2022, 4.7% in 2023, and 4.4% in 2024. Assuming that Arizona's unemployment rate (currently 7.8%) also declines, our unemployment caseloads will be lower in CY 2021 and CY 2022. Based on these forecasts and historical UI program participation rates, we assume Arizona's average UI benefits compensated per week will decline to an average of 45,000 in CY 2022, 35,000 in CY 2023, and 25,000 in CY 2024. At those UI caseload levels, the $300 cap would increase UI benefits expenditures relative to current law by $56.2 million in CY 2022, $43.7 million in CY 2023, and $31.2 million in CY 2024 (see Row E of Table 1).
DES estimates that the $300 cap would generate costs of $35.9 million in CY 2022. This estimate assumes that average weekly benefit spending increases by $46 and that the department pays an average of 15,000 claims per week (compared to the 45,000 JLBC Staff estimate). Given that the DES forecast appears to assume a much larger drop in unemployment levels compared with other national forecasts, we think the DES estimate likely understates the cost of the $300 cap. We have asked DES for more information on their estimate that average weekly benefit spending would increase by $46.
(Continued)
Income Disregard
A.R.S. § 23-779 permits UI recipients to supplement their UI benefits with wages earned on a part-time basis of up to $30 per week without a reduction in UI benefits, meaning that the maximum weekly income of a UI recipient is $270 ($240 maximum weekly benefit + $30 income disregard = $270). Every dollar of wages earned above $30 results in a dollar-for-dollar reduction in UI benefits paid. For example, a UI recipient with $100 in weekly wages from part-time work
currently retains their $100 of wages, but has their maximum weekly benefit reduced from $240 to $170 ($240 - $70 of weekly earnings in excess of $30 = $170), such that total weekly income is $270.
The bill would increase the income disregard from $30 to $160. In combination with the $300 benefit cap, the increase in the income disregard would result in a corresponding increase in the maximum weekly income for UI recipients to $460 ($300 weekly benefit cap plus $160 income disregard = $460).
After adjusting DES data for the different levels of UI claims, we estimate that the higher disregard would affect 1,384 weekly UI claims (or 72,000 per year). Assuming a cost increase of $130 per claim, we estimate the cost would be $9.4 million. That cost would decline to $7.3 million in CY 2023 and $5.2 million in CY 2024 as total unemployment claims decline. (see Row F of Table 1). DES estimates the cost of the disregard in CY 2022 would be approximately $6.7 million.
State as an Employer
State employees are eligible for unemployment insurance via the state's decision to make "payments in lieu of contributions" pursuant to A.R.S. § 23-750. Under this arrangement, the state as an employer is exempt from paying regular state unemployment taxes, but is required to reimburse the Unemployment Insurance Trust Fund for the costs of any former state employees that received unemployment benefits in the prior quarter. Unemployment benefits for state employees are calculated using the same formula as all other employees. As a result, the increase in the maximum benefit cap and income disregard would increase the state's costs associated with payments in lieu of contributions.
The Arizona Department of Administration (ADOA) collects approximately $1.2 million to $1.3 million annually through a 0.1% charge to state agency payrolls to cover the costs of payments in lieu of contributions for most state agencies. In comparison, ADOA reported payments in lieu of contributions of approximately $913,000 in FY 2019 and $1.4 million in FY 2020. In addition, the agency estimates that the current cumulative balances from these collections totaled $5.0 million at the end of FY 2020. As a result, while the bill would increase ADOA's expenses for UI, it is not clear that the cost increase would result in an adjustment in the current 0.1% charge to agencies given the current accumulated balances.
The ADOA figures do not include spending on payments in lieu of contributions from select state agencies that pay such claims themselves instead of paying ADOA's 0.1% charge. Those agencies include the universities, DES, the Department of Public Safety, and the Arizona Department of Transportation.
Local Government Impact
There would be costs for local governments associated increased UI benefit payments for their former employees. Like the state, local governments have the option of participating in the UI system via payments in lieu of contributions.
2/24/21