Taxing Work

This January, a hidden tax increase will penalize almost every employee and employer in Oregon. Due to the recent high unemployment rate, State payroll taxes, which fund the unemployment insurance system, will increase from an average of 1.97% of base wages to 2.76%. In other words, assuming you make at least $32,100* (before taxes), your employer will have to pay an additional $269, for a total of $886 next year. Over time, higher payroll taxes may make Oregon’s economy worse.

While employers technically pay the unemployment insurance tax, economists generally agree that workers ultimately pay it through reduced wages. However, wages do not easily shrink. If employers cannot absorb the cost of the tax increase through smaller employee paychecks or eliminating pay increases, they will have to find another way, like laying off workers.
For a company paying the average payroll tax rate, it would cost more than $32,000 to pay for 120 employees making at least $31,000 per year. When you add the other hidden costs of employees, businesses large and small may find the only way to make ends meet is to lay off workers. When lower wages mean workers have less disposable income to spend, and many workers lose their jobs altogether, it is evident how this hidden tax increase is bound to jeopardize Oregon’s economic recovery.

*This figure was corrected by the author 12-7-09.

Christina Martin is Director of the Asset Ownership Project at Cascade Policy Institute, Oregon’s free market public policy research organization.