BILL ANALYSIS �
AB 2191
Page 1
Date of Hearing: April 23, 2014
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 2191 (Wagner) - As Introduced: February 20, 2014
SUBJECT : Unemployment Insurance Tax Payments
SUMMARY : Permits employers to spread out state unemployment
insurance (UI) tax payments across four quarterly installments.
Specifically, this bill :
1)Makes numerous findings and declarations regarding the payment
of UI taxes by employers.
2)Permits employers to pay their annual UI tax obligation in
four installments based on an estimate of the employer's
annual UI tax obligation.
3)Imposes penalty and interest charges if an employer's payments
in any quarter are less than twenty-five percent of the
employer's actual UI tax obligation.
EXISTING LAW :
1)Requires employers to pay state UI taxes on the first $7,000
in wages paid to each employee.
2)Establishes an employer's state UI tax rate based on the
amount of UI benefits paid to the employer's former workers.
3)Requires employers to make UI tax payments within 30 days of
the end of each calendar quarter.
4)Permits individuals who employ domestic workers in their homes
or private clubs to pay UI taxes an annual basis.
FISCAL EFFECT : Undetermined
COMMENTS :
1)Purpose . According to the author, an employer that does not
pay its incurred UI tax liability each quarter is subject to a
10% penalty, and interest until paid. The substantially larger
first quarter UI tax payment comes due April 1, at a time when
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many business owners are faced with other large expenses such
as personal income tax payments, property taxes and corporate
income taxes. This creates a "cash crunch," for businesses,
stifling economic growth and prompting many to utilize credit
lines to pay the UI tax liability. By eliminating the
disparately large first quarter payment and subsequent
progressively reduced quarterly payments, businesses of all
sizes will have greater flexibility and predictability with
cash flow to invest in economic growth, capital purchases and
job creation. Because AB 2191 does not reduce an employer's
overall annual Unemployment Insurance tax liability, there is
no lost revenue to the state.
2)UI Taxes . Unemployment Insurance benefits are funded by a
state payroll tax paid by California employers. Each employer
pays UI taxes based upon the tax schedule in effect and the
employer's individual experience with the UI program.
Employers pay the UI tax on the first $7,000 paid to each
employee each year. This liability is paid on a quarterly
basis. Because of the relatively low taxable wage ceiling,
the overwhelming majority of UI taxes are paid in the first
quarter of each year.
3)Process Challenges . Spreading out an employer's UI tax
payments across the entire Calendar Year would provide some
relief for employers, and if an employer's workforce was
constant with no employee turnover, this could be a viable
option. However, historically the workforce in California has
not been constant, and approximately 10 percent of California
businesses go out of business sometime during the year. More
than 100,000 employers went out of business in both 2011 and
2012. If the UI liability is paid over a one-year period and
the employer goes out of business in the middle of the year,
it is extremely unlikely that the Employment Development
Department (EDD) could collect the remaining UI taxes owed.
Usually when employers go out of business, they do not have
money to pay additional tax liabilities. If the UI liability
is collected in quarterly installments, not all UI tax
liabilities would be paid when an employer goes out of
business during the middle of the year. In addition,
employees often work for more than one employer in a year or
work for an employer for just a few months and find another
job. Employers paying quarterly installments would also
continue to pay UI taxes on employees who no longer work
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there. This would increase the difficulty or paying and
collecting UI taxes for both employers and EDD respectively.
4)Federal Tax Impact . California employers are currently paying
higher federal UI taxes as a result of the incremental loss of
a tax credit resulting from California's outstanding federal
UI trust fund loan. The incremental reduction of the federal
tax credit is designed to provide a means to ensure the
federal government that the loan is repaid. California
employers have been subject to this incremental credit
reduction since 2011. Outstanding trust fund debt to the
federal government can also trigger other federal rules that
reduce the credit more quickly. California may be subject to
one of these additional credit reductions this year, but
California (like other states) can obtain a waiver from this
additional credit reduction as long as the state does not take
any action that would worsen the condition of the UI trust
fund. Bills that increase the cost of benefits from the trust
fund or reduce revenue to the trust fund could prevent
California from receiving the required waiver. If California
does not qualify for the necessary waiver, it is estimated to
increase employer tax liabilities by $2 billion on top of what
they currently pay. This additional liability would start
with the 2014 tax year, which employers would begin paying in
2015. Allowing quarterly installment payments of UI taxes is
likely to negatively impact the UI trust fund. This negative
impact to the UI trust fund is likely to endanger California's
ability to qualify for this waiver in the future and trigger a
$2 billion tax increase for California's employers.
5)Experience Rating . Paying UI contributions in quarterly
installments would initially result in higher tax rates for
employers. Under the current system of paying UI
contributions on the first $7,000 of each employee's wages,
the employer pays most of the UI contributions in the first
and second quarters of the year. The employer receives a
credit for the amount paid and this amount is used in the
rating process (the annual process whereby employers are
assigned their UI tax rate for the following year). Since an
employer's UI rate is calculated on June 30th for the
following year, any UI contributions paid in the third or
fourth quarters of that year would not be credited to the
employer. This would cause the employer's UI rate to increase
during the first year.
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REGISTERED SUPPORT / OPPOSITION :
Support
South Orange County Regional Chamber of Commerce (sponsor)
Opposition
None received
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086