Executive Summary:

The COVID-19 pandemic exposed significant flaws in the nation’s unemployment insurance (UI) system, which resulted in the improper payment of at least $191 billion—and potentially upwards of $400 billion—in taxpayer funds. The direct causes of those extensive losses included the poor design of temporary federal benefit programs, which opened the door to abuse, and the expanded benefits themselves, which created a greater target for criminals bent on defrauding the system. Those and other factors contributed to unprecedented demand for benefits at the sudden onset of the pandemic in March 2020. Some argue that insufficient administrative funding bears significant blame for those improper benefit payments and other program failings, as sufficient administrative funding is needed to dispense benefits efficiently and effectively to deserving claimants. According to this view, a key reform required to provide prompt and proper payment of unemployment benefits in the future is to increase UI administrative funding compared with recent levels and the current baseline going forward. Without such increased funding, the argument goes, states will be unable to improve the administration of UI benefits before another recession when claims, and likely attempts to defraud the system, will once again spike. This report reviews the recent history of UI administrative funding, including the various components of federal and state administrative funding, and the revenue sources behind those funds. It breaks down which states receive relatively more or less funding to administer UI benefits compared with employer-paid federal tax revenues collected for that and other purposes. In the process, it reviews the complex dynamics behind the administrative funding of the nation’s critical UI system, explains nuances involved in this long-standing partnership between states and the federal government, and considers recent reform proposals. The report discusses why raising federal unemployment taxes is not sufficient, because that would simply disperse more funds through today’s flawed distribution system. It offers a more practical solution: to allow all, or at least some, states to set and collect the revenues they deem appropriate to administer state and, when payable, federal unemployment benefits, subject to strengthened federal anti-fraud requirements. Applying lessons learned from the pandemic, this report reviews how such reforms could improve administrative systems, reducing the risk of fraud and boosting the efficiency and accuracy of state and federal unemployment benefit payments in the future.