Corporate Tax Reductions Revisited

Embroiled in the 2012 election is a battle over the economy.  Whomever of the presidential candidates wins office will be faced with unemployment numbers exceeding 12,500,000, with 40% of those individuals having been unemployed for greater than 27 weeks.  Polls show the economy being one of the most important issues on deck for voters, with unemployment and jobs creation clearly weighing heavily on the minds of Americans.  As the candidates debate the funding of unemployment benefits and how to get people back to work, companies continue to pay tax dollars to every state where they employ workers to fund state unemployment benefits.  And although the jobless rate did slightly decrease in August, the Bureau of Labor Statistics continually reports very large numbers of mass layoff actions, giving evidence that companies continue to let employees go.  Based on the reported numbers of initial filings for Unemployment Benefits following these layoffs, these companies presumably direct their former employees to seek support from State Unemployment agencies.

Also on the docket is saving corporations from paying taxes.  Slash corporate taxes, give corporations tax breaks for hiring people out of work, revamp the funding of Unemployment Benefits...just a few of the suggestions put out there.  What about, however, suggesting that corporations stop paying the same tax twice for the same person.  SUI and FUTA taxes, paid respectively to the state and federal governments by a company for each of its employees, are the taxes that fund Unemployment Benefits.  Theoretically, these taxes will act to fund Unemployment Benefits paid to a person if that company eliminates their job and lays them off.  If a company terminates an employee and pays severance to that person, SUI and FUTA are also charged by state and federal governments on all severance monies paid.

While several suggestions have been put forth arguing that the federal government stop funding unemployment benefits, what is not addressed in this argument is that states fund the initial 26 weeks of an individual's Unemployment Benefit.  States fund these initial weeks with taxes collected from the corporation who once employed the individual now collecting the benefits.  Federal funding of Unemployment Benefits comes into play when states exhibit high rates of unemployment.  These Emergency Unemployment Compensation (EUC) benefits can last up to 99 weeks in some cases.  While EUC is 100% federally funded, FUTA taxes paid by corporations to the federal government fund these emergency benefits used only in times of high unemployment.   

The Internal Revenue Service, a branch of the federal government, put into place 60 years ago a program to help organizations save money on severance through tax breaks.  This program, called a Supplemental Unemployment Benefits program, allows organizations to save money in SUI and FUTA taxes by paying separation benefits to an employee under an alternative tax structure.  When paying separation benefits under a Supplemental Unemployment Benefits program, an employee takes advantage, in the form of either State or EUC Unemployment Benefits, of funds paid to the government as SUI and FUTA, and the company can first deduct that amount of money from the separation benefits paid to employees.  Second, the former employer does not have to pay SUI and FUTA taxes on separation benefits, as it would by law on a severance payment.  By doing this, a company pays taxes for an employee’s separation benefits one time, when that person was employed, in the form of one-time taxes.  Choosing to pay severance effectively forces an employer to pay these taxes twice, as well as increasing an employer’s overall financial burden to a terminated employee.

Arguably, what should be petitioned for is a revamping of separation benefits programming in all corporations.  Perhaps call it regulation, or perhaps merely revisiting what is too often considered a “golden parachute” to well-paid employees  But at the same time, recognize that it provides a corporate tax break.  A bipartisan solution that doesn't require reinventing the wheel.