Proposed UI tax cuts guarantee annual deficit and threaten trust-fund solvency in next recession

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Republicans in Des Moines are again advancing legislation to slash unemployment insurance (UI) taxes for Iowa businesses. This move would give employers a break now — at the expense of the very system that protects Iowans during economic downturns.

The nonpartisan Legislative Services Agency (LSA) recently released a fiscal analysis of House File 980, the latest version of the bill, and the analysis projects significant reductions in UI trust fund revenue that could put the system’s long-term stability at risk.

Proposed legislation would provide biggest tax break to high-layoff employers

Under the proposal, Iowa would cut the UI taxable wage base in half. That means employers would stop paying UI taxes on wages after the first $19,500 per employee, regardless of whether the worker earns $20,000 or $80,000. The change would shift the financial burden away from employers with high turnover: The highest-layoff companies would get a 22.8% reduction in taxes, while the vast majority of low-layoff employers would see little to no benefit.

The bills would also:

• Reduce the number of tax tables and reduce the top tax rate from between 7% and 9% to 5.4%, regardless of fund health.

• Eliminate a long-standing method of adjusting the tax based on historical fund health.

• Cut down the initial unemployment insurance tax rate paid by new employers.

Iowa’s Unemployment Insurance Trust Fund could be gutted by the next recession

Iowa has traditionally followed sound fiscal policy when it comes to UI. However, in 2023, the Legislature reduced the length of UI benefits available from 26 to 16 weeks, causing a reduction in benefits payouts and weakening the system. Those changes, combined with COVID-era federal unemployment aid that inflated the UI Trust Fund, mean the Trust Fund balance is at historically high levels. The current system is designed to rebalance itself over time, which it has done effectively for decades. (Second figure, below)

By collecting more in premiums than it pays out in benefits during good times — known as forward funding — the state builds reserves to weather recessions. In 2024, Iowa collected $474 million in employer UI taxes and paid out $316 million in benefits, banking the surplus.[1] If the proposed tax cuts are enacted, annual revenues could fall to around $300 million, eliminating those savings entirely.[2] Once the next recession hits, demand for UI benefits will rise, but the fund won’t have enough to keep up.

Under an average recession, the UI trust fund would fall from $1.95 billion today to just $600 million by 2031.[3] That’s less than half the amount needed to meet federal solvency standards — and would leave Iowa in the company of chronically underfunded states like California and New York.[4]

Trust fund's solvency measures indicate no need for massive revenue reforms

Standards allow it to rebalance itself without legislative intervention

Even more concerning: If Iowa’s fund drops below solvency standards, the state would lose its eligibility for interest-free loans from the federal government and employers could face higher federal payroll taxes under the Federal Unemployment Tax Act (FUTA).[5]

Lawmakers have other (better) options to temporarily slow UI Trust Fund growth

No responsible policymaker intentionally creates a budget deficit — especially in a program that working people rely on in times of hardship. If lawmakers want to return some of the current UI trust fund surplus to businesses, there are smarter, safer ways to do it.

• Provide a one-year UI tax holiday for low-layoff employers.

• Temporarily reduce tax rates by shifting to the lowest UI tax table for a defined length, then return to standard funding practices.

• Maintain current rates but reinvest UI surplus funds in reemployment services and job training — further improving workforce outcomes.

Iowa’s unemployment insurance system isn’t just a safety net — it’s a stabilizer for the entire economy. It supports workers and families during layoffs, keeps money flowing into local businesses, and shortens recessions by preserving consumer spending.

Instead of weakening the system for a short-term gain, we must protect it for the long haul. Lawmakers should reject HF 980 and explore responsible, temporary alternatives that preserve UI solvency. Iowa’s workers, businesses and communities deserve an unemployment insurance system that will be there when they need it most.