Washington State House of Representatives Office of Program Research	BILL ANALYSIS
Commerce & Labor Committee

HB 2604

Brief Description:  Modifying new and successor unemployment contribution rates.

Sponsors:  Representatives Clements, Conway, McMorris and Wood.

Brief Summary of Bill

$Changes the unemployment insurance contribution rate for certain unqualified employers to the average industry rate plus 25 percent.

Hearing Date:  1/30/02

Staff:  Chris Cordes (786‑7103).

Background:

Unemployment Insurance Contribution Rates

For most covered employers, unemployment insurance contribution rates are determined by the rate in the employer's assigned rate class under the unemployment insurance tax schedule in effect for that calendar year.  Rates under the 2002 tax schedule range from 0.47 percent to 5.4 percent, not including various statutory surcharges.

Some covered employers, however, are not qualified to be assigned a rate class.  Unqualified employers include those who do not report enough periods of employment during the previous three years.  These employers pay the average industry rate in their industry, as determined by the commissioner of the Employment Security Department, but not less than 1 percent.  (Under the Federal Unemployment Tax Act, states must set a 1 percent minimum rate for unqualified employers to maintain the credit that employers in the state may take against their federal unemployment insurance tax.)

The average industry rate also applies to certain successor employers who were not employers at the time of acquiring a business.  Until a new successor employer becomes a qualified employer, the rate for these successor employers is the lower of the rate assigned to the predecessor employer or the average industry rate with a 1 percent minimum rate.

Inactive Accounts and Socialized Costs

Employers who go out of business, become insolvent, or for other reasons no longer maintain an active unemployment insurance account in Washington may continue to have benefit charges that result from benefits paid to their former employees.  If the employer's previous tax payments are less than these charges, the charges become part of the system's "socialized costs" that are borne by all active employers.

In 1998 the Employment Security Department contracted for a study of various issues in the unemployment insurance tax system.  The study's author, Wayne Vroman, concluded that employers in Washington's unemployment insurance system exhibited an unusually high degree of turnover.  The data indicated a high rate of new employer formation and inactivation of employer accounts, but a low rate of successorship.  Dr. Vroman suggested further research, concluding that "...we do not know how much of this turnover reflects the normal functioning of Washington's labor market and how much reflects 'gaming' by employers looking to secure lower [unemployment insurance] tax rates."

Summary of Bill:

The unemployment insurance contribution rate for certain unqualified employers is modified.  The rate is changed from the average industry rate to a rate that is the average industry rate plus 25 percent (with the minimum rate remaining at 1 percent).  The maximum rate that may be assigned to these employers is the rate that applies in rate class 20 for the rate year (5.4 percent for 2002).

These provisions apply to employers who:

$are not qualified to be in the tax array (except for those disqualified for nonpayment of contributions); and

$are successor employers who were not employers at the time the business was transferred and whose contribution rate is lowest when using the option of the average industry rate plus 25 percent.

These changes in the contribution rate apply beginning January 1, 2003.

Rules Authority:  The bill does not contain provisions addressing the rule-making powers of an agency.

Appropriation:  None.

Fiscal Note:  Requested on January 24, 2002.

Effective Date:  Ninety days after adjournment of session in which bill is passed.