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High unemployment has been a problem for the nation and most states throughout the Great Recession and during the economic recovery. While unemployment rates are down significantly in most states, the impact on state and federal financing mechanisms continues.
The unemployment system is a financial partnership between the federal and state governments. The federal government levies an unemployment tax, under the Federal Unemployment Tax Act (FUTA), primarily to finance administrative costs of the system, fund loans to states and cover extended benefits.
State governments levy payroll taxes on employers to pay for unemployment insurance benefits. These taxes, calculated on state financing formulas and an employer’s history of claims, are deposited into the federal Unemployment Trust Fund. Each state, plus the District of Columbia, Puerto Rico and the U.S. Virgin Islands, has its own account within the trust fund.
Many individual state accounts in the federal Unemployment Trust Fund have faced shortfalls, due to the increase in claims for unemployment benefits and the decrease in payroll tax revenue during the economic downturn that started in late 2007. A small number of states continue to borrow to cover benefits, while other states have begun to repay their loans from the federal fund.
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