Federal Unemployment Tax Act (1939)

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Federal Unemployment Tax Act (1939)

Ellen P. Aprill

The Federal Unemployment Tax Act (FUTA) (P.L. 76-379) emerged from the country's experience during the Great Depression. By 1932, 25 percent of the workers in the United States were unemployed. In his presidential message of June 8, 1934, President Franklin D. Roosevelt declared that the American people wanted "some safeguard against misfortunes which cannot be wholly eliminated in this man-made world of ours." In the summer of 1934, President Roosevelt created the Committee on Economic Security to draft legislation that would help alleviate the pain of the Great Depression and prepare for future economic downturns.

Members of the committee gave the highest priority to the establishment of some form of unemployment insurance. They believed that involuntarily unemployed workers had earned the right to a temporary and partial wage replacement. A wage replacement program would not only prevent the need for welfare relief but also maintain workers' purchasing power and thus stabilize and stimulate the economy during recessions. Sections of the Social Security Act of 1935 created such a program, and the Federal Unemployment Tax Act of 1939 established the framework for a joint state and federal scheme of unemployment insurance as set out in the 1935 act.


FUTA applies a uniform nationwide tax to "employers" on certain "wages" paid to individuals with respect to "employment." Since the time of enactment, the definition of these terms has excluded large numbers of agricultural and domestic workers from coverage. As originally enacted, FUTA applied only to employers of eight or more. It now applies to employers that pay at least $1,500 in wages in any calendar quarter or who have at least one employee on any given day in each of twenty different calendar weeks.

Both as originally enacted and under current law, FUTA provides that, if a state has a state unemployment law that satisfies certain requirements, an employer can claim a 90 percent credit against the federal tax otherwise due for contributions to the state fund. The federal government also makes grants to the state for the administrative costs of any qualifying program. For employers to be eligible for the credit and for states to qualify for federal money to cover administrative costs, federal law requires that (1) the money from any state funds go to a central fund controlled by the federal government, (2) money from the fund be spent only on unemployment compensation, (3) a state account for how it spends the money, and (4) the state provide certain due process procedures in administration of the fund. All fifty states, the District of Columbia, Puerto Rico, and the Virgin Islands have unemployment programs satisfying these requirements.


Subject to the relatively minimal federal requirements, states have had wide discretion in their unemployment compensation laws. Each state determines its own rate of compensation, waiting periods before compensation is made available to the unemployed worker, and the maximum duration of the benefits. States vary widely in the benefits they provide. Typically, state programs provide up to twenty-six weeks of benefits and replace on average 38 percent of a worker's immediate previous wages. State eligibility generally depends on amounts of earnings from recent employment as well as the worker's demonstrated ability and willingness to seek and accept suitable employment.

At the time FUTA was enacted, proponents of unemployment insurance believed that a nationwide system was necessary. Without a nationwide system, they argued, no state would enact an unemployment scheme because each state feared competition with states that did not impose such a burden on employers. Although some proponents argued that the federal government should set the level and duration of unemployment benefits, the program as enacted involved both state and federal control. This joint control was designed to enable the plan both to pass Congress and to withstand constitutional scrutiny. In two 1937 cases involving five-to-four votes, Steward Machine Co. v. Davis and Carmichael v. Southern Coal & Coke Co., the Supreme Court upheld the joint federal-state unemployment system. The Court rejected the argument that federal inducement for state participation through the 90 percent credit coerced states in violation of the constitutional guarantee of state autonomy.


Congress has made various changes to the unemployment system since its enactment. In addition to the basic federal-state benefit, the current system of unemployment compensation includes an extended benefits program, funded half by the federal government and half by state governments. The extended benefit program, which was first enacted in 1970 and revised substantially in 1981, provides additional weeks of benefits to jobless workers in particular states where unemployment has worsened dramatically. Moreover, in times of national recession, the federal government has historically provided funding for additional weeks of benefits in every state. For example, the federal government did so in March 2002 under a program called Temporary Emergency Unemployment Compensation. Such additional weeks of benefits are financed entirely by funds from the federal unemployment tax, without contribution from state funds. Federal funds are also available to make loans to insolvent state unemployment funds. Under the Reed Act of 1954, transfers are made to state unemployment funds when the federal unemployment fund balance reaches a certain high level. Since 1986 unemployment benefits have been subject in full to federal income tax.

Congress has from time to time adjusted both the tax rate and amount of wages subject to FUTA taxes. The taxable wage base was set at $3,000 in 1939, raised to $4,200 in 1972, $6000 in 1978, and $7,000 in 1983. The effective tax rate (after credit for state unemployment taxes) began at 0.3 percent in 1939 and was raised to 0.8 percent in 1983. This 0.8 percent rate includes a surtax of 0.2 percent enacted by Congress in 1976. The surtax, extended several times, was extended through 2007 by the Taxpayer Relief Act of 1997. Further changes can be expected.

See also: Social Security act of 1935.


Jannsson, B. The Recluctant Welfare State: American Social Welfare Policies: Past, Present, and Future, 4th Ed. Cambria, CA: Wadsworth Thomson Learning, 2000.


Cornell University Law School. <http://www.law.cornell.edu/topics/unemployment_compensation.html>.

U.S. Department of Labor, Employment and Training Administration. <http://workforcesecurity.doleta.gov/uitaxtopic.asp>.

University of Texas at Dallas. <http://www.utdallas.edu/~jargo/green2000/Section_4.pdf>.

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Federal Unemployment Tax Act (1939)