Robert Fellner

Unemployment Insurance Tax: Background

Nevada finances state unemployment benefits by imposing an Unemployment Insurance Tax on state employers. The exact rate each employer will pay is determined by a process known as the Reserve Ratio schedule, which is designed to assess a tax rate proportional to the experience of an employer as it pertains to the unemployment system.[1] This is done by calculating the difference between the employer’s yearly tax contributions and the unemployment benefits charged to their account. Thus, employers who frequently discharge employees without good cause will pay higher rates than employers with low turnover.

Key Points

Nevada has the fourth-worst UI tax system in the nation, according to a 2020 analysis conducted by the nonpartisan Tax Foundation.[2] This poor ranking reflects Nevada’s failure to assign the costs of the system in a fair and equitable manner, as well as the fact that costs are generally too high, particularly for new employers.

Because Nevada has an atypically large number of employers in the service industry, which by its nature has exceptionally high turnover rates, it is especially important that Nevada’s UI tax structure operates fairly and does not impose excessive costs on employers who experience high turnover through no fault of their own.

Recommendations

Reduce the taxable wage base. As of 2020, Nevada employers must pay UI tax on the first $32,500 of wages paid to any employee.[3] This is vastly higher than the wage base found in most states. Nevada should reduce the taxable wage base to an amount equal to 25 percent of the average wage or, alternatively, adopt the wage base used by the federal government (currently $7,000).

Reduce the penalty on new employers. New employers must pay a 2.95 percent UI tax rate for their first 14 to 17 calendar quarters, depending on when the employer became subject to the law. This rate is significantly higher than the rate most firms pay after they are moved to the Reserve Ratio schedule.

While new businesses have no experience to draw on and thus cannot immediately be placed on the Reserve Ratio schedule, Nevada should follow the best practices of other states and allow new businesses to move to the Reserve Ratio schedule after 1 year.

Allow good-faith exemptions. Unemployment insurance benefits are supposed to aid those who lost their jobs through no fault of their own. As such, businesses who discharge employees without cause pay higher rates, as they are in theory contributing to the need for higher unemployment benefits.

Nevada, however, charges benefits to employers in multiple situations when it is not warranted to do so, like when the employee refuses suitable work elsewhere, has had their benefit award reversed or continues to work in a part-time capacity. Nevada should follow the best practices of other states and provide exclusions for employers in these situations.

Charge benefits fairly. Benefits are charged to employers in two situations, both of which are profoundly unfair and inequitable. First, if a single employer was responsible for 75 percent or more of wages paid for the year preceding employment, all of that person’s benefits are charged to the experience record of that employer. Benefits should instead be charged in proportion to the wages paid.

Stop penalizing employers for employee misconduct. In the event a single employer was not responsible for 75 percent or more of the employee’s wages in the year preceding unemployment, the benefits are charged to all employers in proportion to the amount of wages paid. Unfortunately, employers are not permitted to seek an exemption from charges even if the worker voluntarily quit without good cause or was discharged for misconduct.[4]

All employers should be exempt from charges in the event of voluntary quits or discharges for misconduct and the 75 percent threshold should be abolished in favor of a system that always charges employers in proportion to the amount of wages paid.


[1]Nevada Unemployment Compensation Program, Employer Handbook http://ui.nv.gov/ESSHTML/Handbook/Employer_Handbook.pdf
[2] Cammenga, J. (2019, December 18). Ranking Unemployment Insurance Taxes on the 2020 State Business Tax Climate Index. Retrieved from Tax Foundation: https://taxfoundation.org/best-worst-unemployment-insurance-tax-codes-in-the-country-2019/
[3] Nevada Unemployment Compensation Program, Employer Handbook http://ui.nv.gov/ESSHTML/Handbook/Employer_Handbook.pdf
[4] Ibid.

For more policy solutions from NPRI, be sure to download a free copy of Solutions: A Sourcebook for Nevada policymakers today

Robert Fellner

Vice President & Director of Policy

Robert Fellner joined the Nevada Policy Research Institute in December 2013 and currently serves as the Institute’s Vice President and Director of Policy. Robert has written extensively on the issue of transparency in government. He has also conducted legal research and assisted in crafting legal arguments for numerous public records-related lawsuits, including one which prevailed at the Nevada Supreme Court, resulting in a landmark decision that protected and expanded Nevadans’ rights to access and inspect government records.An expert on government compensation and its impact on taxes, Robert has authored multiple studies on public pay and pensions. He has been published in Business Insider, Forbes.com, the Las Vegas Review-Journal, the Los Angeles Times, the Orange County Register, RealClearPolicy.com, the San Diego Union-Tribune, the Wall Street Journal, the Washington Examiner, ZeroHedge.com and elsewhere.

Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes and being ranked #1 in the world at 10/20 Pot-Limit Omaha cash games.

Additionally, his economic analysis on the minimum wage won first place in a 2011 George Mason University essay contest. He also independently organized a successful grassroots media and fundraising effort for a 2012 presidential candidate, before joining the campaign in an official capacity.

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