Audrey Guo’s Research Advocates for Greater Tax Equity in Unemployment Insurance Reform
The US unemployment insurance (UI) system was established following the Great Depression, with the intent to offer a financial lifeline for jobless workers and support them through times of economic turmoil, or until they found work that provided adequate pay and aligned with their skills and circumstances.
Much like in the 1930s, the UI system played a pivotal role during the COVID-19 pandemic when millions of US workers lost their jobs due to widespread shutdowns and economic disruptions. The pandemic underscored both the strengths and weaknesses of the existing system and ignited interest among researchers focused on tax reform and public policy. One such scholar is Audrey Guo, Assistant Professor of Economics at the Leavey School of Business, who aims to provide valuable insights and predictions about the outcomes of specific tax reforms to enable policymakers to make more informed and data-driven decisions.
Discussions around UI often center on how firms and workers respond to benefit generosity, how states can enhance benefits, and how coverage might be expanded to include more workers. Yet, critical elements often overlooked and understudied include how these changes are financed. Over the past few decades, proposals to improve UI have largely ignored the need for corresponding adjustments in funding mechanisms, such as increases in taxes or changes to financing structures.
“This was made apparent during the COVID-19 pandemic,” Guo notes. “Many states depleted their UI trust funds and had to borrow from the federal government to continue paying benefits. This revealed the inadequate funding of state programs and raised concerns about their solvency. Without sufficient funding, states will not be able to sustain UI benefits during future recessions or crises, much less expand them as often discussed.”
To confront this issue, Guo’s research presents the option of expanding the taxable earnings base at the federal level. This would enable states to collect more tax revenue, ensuring greater financial stability for UI programs. But of course, there are potential implications of UI financing, which Guo and her co-authors also address.
“Some worry this approach would lead to higher taxes,” Guo explains, “but our findings show it could actually lower taxes for firms employing low-wage workers while increasing taxes for those employing higher-wage workers. Higher taxable earnings paired with lower tax rates would create a system that is more equitable overall.”
Because UI benefits are handled at the state level, the issue of UI financing is not universal. For example, Washington has the highest taxable earnings, proving that taxes don’t have to be high for every firm. Rather, firms that claim more benefits pay higher taxes and are able to offer more benefits to jobless workers. On the other hand, California has one of the lowest taxable earnings, which contributed to their inability to pay off their UI loans borrowed during the pandemic and why they are currently in debt to the federal government.
Guo hopes that her research will educate and aid policymakers, at the state and federal levels, in their decisions on tax reform, because UI benefits are essential not only for supporting unemployed workers and vulnerable Americans but also for bolstering the broader economy. They keep local economies afloat during periods of disruption and allow workers to seek jobs that best align with their skills, ultimately enhancing the long-term productivity of the workforce.