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The Payroll Tax Predicament: State Lawmakers, It’s Time to Wake Up and Smell the Withholding

 

By Mattias Gugel, Jess Ward, National Taxpayers Union

Oh, state lawmakers, always so focused on the bright, shiny object of income tax reform. In contrast, the hulking, complex beast of payroll taxes lurks in the shadows, quietly feasting on the paychecks of hardworking Americans and small businesses. It’s almost as if you’ve forgotten that payroll taxes are not just the “cost of doing business” but a significant burden on employers and employees. It’s high time to pull back the curtain and face the ugly truth: our unemployment insurance systems are messes, and the payroll tax isn’t doing us any favors.

Before you get back to legislative sessions next year, it’s time to start cramming hard on the importance of reforming unemployment so that you can reduce payroll taxes and help families and workers struggling to afford life in 2024.

Let’s start with a reality check. The pandemic laid bare the inefficiencies and vulnerabilities of our state unemployment programs. Fraudsters had a field day, using the Social Security numbers of the deceased and incarcerated to siphon off benefits. Who knew zombies and jailbirds were so interested in our unemployment insurance? Yet here we are, with states mismanaging unemployment systems, businesses bearing the brunt of increased unemployment insurance costs and legitimate claimants left high and dry.

So, what’s the grand solution? First, stop throwing money at people who don’t deserve it. Simple eligibility checks could save millions. If you’re dead, in prison, or fired for misconduct, maybe—just maybe—you shouldn’t be getting unemployment benefits. It seems like common sense, but it’s revolutionary thinking in some legislative halls. Then there’s the perennial problem of workers who haven’t paid into the system getting benefits. Independent contractors got a sweet deal during the pandemic despite never contributing a dime. Sure, they need a safety net, too, but how about they pay into the system first? If you want to play the game, buy a ticket. We’re tired of footing the bill for freeloaders who didn’t pay their premiums.

And let’s talk about incentives. Currently, claimants have all the motivation of a teenager on a rainy Sunday morning. They can meet job-search requirements by simply sending out a few resumes or chatting with a hiring manager, then sit back and collect benefits. How about we try something different? States like Arizona and Colorado have offered return-to-work bonuses instead of enhanced benefits. Guess what? Those who were unemployed pursued and accepted jobs. More states should jump on this bandwagon and offer one-time bonuses for finding employment. Let’s reward action, not complacency.

But wait! Did you know that, in many states, benefits are often the same in boom times and bust? When the economy roars, why do we still provide the same benefits as during a recession? Let’s implement a sliding scale that adjusts benefits based on the state of the economy. Indexing benefits to the unemployment rate isn’t rocket science—it’s just smart policy.

And don’t get me started on those lovely people scamming the system from out of state. Benefits are supposed to support local economies, not fund someone’s beach house. States need to flag and verify claimants better, ensuring benefits go to actual residents. Cross-reference corrections, birth and death records—whatever it takes to ensure we’re not paying out to ghost claimants.

Now, for a radical idea: treat unemployment like traditional insurance. Risk pooling works for car accidents, health crises, and house fires—why not unemployment? If the government steps back, private insurers could step in, offering more flexible and efficient options. It’s bold, it’s innovative, and it might just work.

State lawmakers, consider this your wake-up call. The next legislative session is right around the corner, and it’s high time you stopped ignoring the elephant in the room. The National Taxpayers Union Foundation (NTUF) has a toolkit ready to help you navigate these murky waters. Use it. Learn from it. Implement reforms that make sense.

Because, dear lawmakers, while reducing income tax is essential, the rest of America has also been struggling with another colossal cost of doing business—the payroll tax monster that’s been hiding under our beds. It’s time to drag it into the light and give it the desperately needed makeover. And maybe, just maybe, you’ll save some taxpayer dollars in the process.

 


Mattias Gugel is the Director of State External Affairs for the National Taxpayers Union. Jess Ward is the Senior Director of State Affairs for the National Taxpayers Union, working with legislators and policymakers to promote pro-taxpayer policy at the state and local level.