While unemployment insurance is essentially a state-level program, small businesses are hit with a double whammy because unemployment taxes are collected at both the state and federal levels. The federal unemployment tax (FUTA) pays for the program's administration, and the state tax pays for the actual benefits. To make matters worse, the federal government collected $6.1 billion in FUTA taxes in 1998, but only spent $3.5 billion on unemployment administration. The rest was spent on non-related government programs. This is an inefficient system that imposes its tax burden on employers and helps make payroll taxes the highest of all taxes that small businesses pay.
Congress should eliminate the FUTA surtax, lower the FUTA tax and return the unemployment insurance system to the states. This will provide small-business owners with much-needed payroll tax and paperwork relief, while streamlining our nation's unemployment-insurance system.