On May 23, 2017, the Trump Administration released its detailed proposed Budget for fiscal year 2018, expanding on highlights released last month in a talking-points document. Although the proposal likely faces an up-hill battle in Congress, it reveals the President's vision as it pertains to unemployment insurance and other systems of interest to employers. (Tax Alert 2017-698; A New Foundation for American Greatness, Fiscal Year 2018.)

Overall, the proposals would raise unemployment insurance taxes, require employers to further assist in the collection of child support and consider if tax incentives for hiring people with disabilities should be available.

Parental leave funded by higher unemployment insurance tax

The Budget calls for up to six weeks of paid family leave with an average benefit of $300 per week for new mothers, fathers and adoptive parents administered by the state and funded through unemployment insurance reforms. Some of these reforms would expand on current program integrity policies such as further curtailment of improper payments and speedier job placement of the unemployed. (A New Foundation for American Greatness, Fiscal Year 2018, page 20.)

Unlike previous administrations, this Budget proposal does not call for an increase in the federal unemployment insurance (FUTA) wage base (currently $7,000), a move that indirectly forces states to raise their threshold to match the federal and theoretically increase their trust fund balances. President Trump does, however, adopt an Obama Administration proposal to expand the current FUTA credit reduction. (Budget of the US Government, Major Savings and Reforms, Fiscal Year 2018, page 146.)

How the FUTA credit currently works.

Under current law, if a state has an outstanding federal unemployment insurance loan balance on January 1 of two consecutive years and fails to repay the entire balance by November 10 of the second year, employers in that state are subject to a reduction in the maximum 5 .4% FUTA credit. With certain exceptions, the credit reduction increases in 0 .3% increments each subsequent year the loan balance remains unpaid. The additional FUTA tax per employee that results from this FUTA credit reduction can be substantial, particularly if federal UI loan balances linger over several years. (See Figure 1.)

Figure 1: Current normal FUTA credit reduction

Proposed FUTA credit reduction

In addition to a FUTA credit reduction for failing to pay federal UI loan balances, the Trump Administration proposes that the credit reduction also apply if a state fails to meet a federally-specified solvency standard for two consecutive years. The proposal states that by expanding the FUTA credit reduction in this way, states would have an incentive to adequately fund their trust funds before they face debt and borrowing.

Child support enforcement and employer reporting

The proposed Budget would trim deficits arising from welfare spending by more aggressively collecting child support obligations. For example, states would be provided tools to improve their ability to intercept sources of income for child support such as lump-sum payments made by employers and would establish a federal mandate that employers report indirect contractors to the National Directory of New Hires.

The requirement for employers to report new hires was enacted in 1996 as part of President Clinton's welfare reform initiative. According to the Federal Office of Child Support Enforcement, only 12 states currently require that private employers report their independent contractors to the National Directory of New Hires. (Budget of the US Government, Major Savings and Reforms, Fiscal Year 2018, page 136.)

Possible employment tax incentives for hiring persons with disabilities

The proposed Budget would reduce expenditures in the disability insurance system by developing effective practices to increase the employment of people with disabilities by redeploying the current Disability Employment Initiative (DEI) to a new demonstration project. Some of the key features of this demonstration project would include care and service coordination, population screening and monitoring, increased access and targeted vocational rehabilitation and work supports, workplace accommodations, and technical assistance to health care providers and employers.

Other optional interventions that could be tested by grantees include additional income support in absence of other temporary disability supports, partial wage support to allow for part-time return-to-work, increased access to specific medical or holistic care, and employer incentives. (Budget of the US Government, Major Savings and Reforms, Fiscal Year 2018, page 62.)

Ernst & Young LLP insights

One Budget proposal that has likelihood of enactment is the expansion of the FUTA credit reduction. The great recession of 2008-09 created historic shortfalls in state unemployment insurance trust funds. At its peak in 2011, 21 states were subject to the FUTA credit reduction due to unpaid federal loan balances with some jurisdictions continuing to carry a balance. This has been a record slow repayment of federal unemployment insurance loans and indicates a deeper crisis ahead should some states not take significant steps to ensure rainy-day solvency.

The proposal by the Trump Administration to expand the FUTA credit reduction is one that could garner favor since it gives states the flexibility of determining just how they will ensure future solvency while avoiding mandates like an increase in the wage base.

For more information about the unemployment insurance system, see our special report.

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