TABLE 11. COMPOSITION OF SOCIAL INSURANCE TAXES AND CONTRIBUTIONS: 1940 TO 1992-Continued

TABLE 11.-COMPOSITION OF SOCIAL INSURANCE TAXES AND CONTRIBUTIONS: 1940 TO 1992-Continued

[In millions of dollars]

1 $500 thousand or less.

2 On-budget and off-budget.

Note: Unless otherwise noted, all receipts shown in this table are trust funds and on-budget.

Source: Office of Management and Budget. Budget Baselines, Historical Data, and Alternatives for the Future. January 1993.

Section 8. Unemployment Compensation Payroll Taxes

OVERVIEW

The Social Security Act of 1935 (P.L. 74-271) created the Federal-State unemployment compensation (UC) system. It has two main objectives: (1) to provide temporary and partial wage replacement to involuntarily unemployed workers who were recently employed; and (2) to help stabilize the economy during recessions. The U.S. Department of Labor oversees the system, but each State administers its own program. Because Federal law defines the District of Columbia, Puerto Rico, and the Virgin Islands as "States" for the purposes of unemployment compensation, there are 53 State programs.

The Federal Unemployment Tax Act of 1939 (P.L. 76-379) and titles III, IX, and XII of the Social Security Act form the framework of the system. The Federal Unemployment Tax Act (FUTA) currently imposes a 6.2 percent gross tax rate on the first $7,000 paid annually by covered employers to each employee. Employers in States with programs approved by the Federal Government and with no delinquent Federal loans may credit 5.4 percentage points against the 6.2 percent tax rate. Thus, the net Federal unemployment tax rate generally applied is 0.8 percent. This Federal revenue finances administration of the system, half of the Federal-State extended benefits program, and a Federal account for State loans. In theory, the States are supposed to use the revenue turned back to them by the 5.4 percent credit to finance their regular State programs and half of the Federal-State extended benefits program.

In 1976 Congress passed a temporary surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate (P.L. 94-566). Thus, the current 0.8 percent FUTA tax rate has two components: a permanent tax rate of 0.6 percent and a temporary surtax rate of 0.2 percent. Under the Omnibus Budget Reconciliation Act of 1987, the 0.2 percent surtax was extended for 3 years through 1990. This was done to build up reserves to be used to cover increased outlays for extended benefits and Federal loans to insolvent State UC programs resulting from a future recession. The 0.2 percent surtax was extended again, through 1995, by the Omnibus Budget Reconciliation Act of 1990, and through 1996 by the Emergency Unemployment Compensation Act of 1991.