Experience Rating for Unemployment Insurance, What’s That?

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Starting a business is difficult. States with long “experience rating” policies make it even more difficult. Policymakers can and should release some of this burden, since it is a great pain-point for entrepreneurs when they are just starting out.

When someone starts a new business, one of the many costs is unemployment insurance (UI) for the business’s employees. It can be expensive, especially for a new business, as they usually have a higher UI payment than businesses that have been around longer. That’s where the term “experience rating” gets its meaning. States have different amounts of time for a business to become “experienced” at which the business is considered established enough to reduce their UI costs. States with longer experience rating timelines put that much more of a cost burden on startup businesses.

Experience rating is within the larger topic of state unemployment insurance, and it works similarly to an individual’s credit rating. But instead of paying a lower interest rate on a loan, a business pays taxes at a lower percentage rate for unemployment insurance.

This means that new business rates are significantly higher than established business rates. For example, in Georgia, Alabama, and Indiana, UI tax rates for new businesses were 105 percent higher, 139 percent higher, and 57 percent higher, respectively.

The solution is clear:

Give entrepreneurs access to lower, experience-rated tax rates sooner. At the critical start-up period for a new business, lowering costs is just that much more important. It frees up resources that would have gone towards paying taxes and allows business owners to focus on growth and hiring.

The Foundation for Government Accountability (FGA) provides a solution to this issue. It’s really quite simple. Allow entrepreneurs to operate as ‘experience rated’ 12 months after the first employee who was hired maxes out the taxable wage base, if it results in a lower tax rate.

Maxing out the taxable wage base happens for an employee when the employer has paid all the tax required for the taxable time period. Providing an experience rating 12 months after this follows naturally with the growth of a new business.

The FGA solution also supports every entity involved in UI. For the state economy, employment increases, and the state becomes a better place to earn a living. For individual businesses, this change means more flexibility and more cashflow during the start-up months—some of the most crucial for a new business.

When new businesses are set up to succeed, it leads to an increase in the availability of jobs for workers and an increase in innovation in the marketplace. Lowering tax rates for new businesses will free up their resources for hiring and growth. This in turn generates additional tax revenue for the state without raising tax rates on job creators. The increased tax revenue generated from new business start-ups and additional hiring will help shore up the unemployment trust fund and preserve it for future economic downturns.

And, this solution is widely supported by the American people, according to FGA polling—of all political stripes. 70 percent of Democrats, 71 percent of independents, and 74 percent of Republicans support allowing entrepreneurs to become experience rated earlier.

It’s a no-brainer policy that supports start-ups, enables hiring more workers, and strengthens the overall state economy.