States face substantial challenges in optimizing their unemployment insurance (UI) systems, with trust fund solvency remaining a serious concern. A well-funded UI system is one of the most important tools states have for managing large-scale labor market disruptions, whether driven by recessions, pandemics, or technological changes such as the rapid growth in the use of Artificial Intelligence (AI). But this tool is only effective if states have built up adequate reserves before a crisis occurs.
Kansas recently took a significant step to do just that, positioning itself well to address the inevitable downturns of the future. In 2024, Governor Laura Kelly signed Substitute HB 2570, a landmark reform package developed by state legislators, including Representative Sean Tarwater, that went into effect on January 1, 2026. By indexing the state’s taxable wage base to a percentage of state average wages and restructuring employer contribution schedules, the legislation represents a fiscally sustainable approach to UI financing that other states — many of which still rely on shrinking and inadequately low wage bases — should consider adopting.
The UI financing challenge
State UI programs are intended to be self-financed and fiscally sustainable, building up trust fund reserves during periods of economic growth and drawing on them during recessions and other periods of high unemployment. In reality, many states have struggled to maintain adequate solvency levels, in part because their financing mechanisms have not kept pace with changes in the labor market over time. One persistent source of this problem is the taxable wage base (TWB). The TWB is the amount of each worker’s earnings subject to UI taxes paid by employers. When the wage base is set in nominal terms (i.e. a set dollar amount), wage growth causes it to cover a shrinking share of total payroll over time, eroding the system’s revenue base.
The Federal Unemployment Tax Act (FUTA) requires each state’s taxable wage base to be set at at least $7,000, a figure that has not changed since 1983. Adjusted for inflation, that $7,000 would be $23,242 today. While some states set their bases higher, the range is extensive. In 2025, Washington’s taxable wage base was $72,800 and Hawaii’s was $62,000; several others remained at or near the federal minimum.
The consequences of an insufficient wage base became starkly evident during the COVID-19 pandemic. Aggregate state UI reserves plummeted from nearly $76 billion in 2019 to approximately $2.7 billion by August 2020. Twenty-two states needed to borrow from the federal government to continue paying benefits, and states collectively accumulated roughly $93 billion in trust fund losses against prepandemic balances. Among the hardest hit were states that had failed to ensure that their UI financing structures kept pace with their benefit obligations. California, which maintains the federal minimum $7,000 wage base, ran up over $20 billion in federal debt; New York, whose trust fund has not met the U.S. Department of Labor’s solvency standard since 1974, borrowed more than $8 billion.
While many states have taken steps to rebuild their reserves, the Department of Labor’s latest solvency report shows that many have yet to reach the levels needed to withstand another major downturn. For most states, the underlying financing problem — eroding wage bases that produce inadequate revenue during expansions — remains unaddressed.
How Kansas is approaching UI financing
For years, Kansas’s UI fund was hampered by a fixed $14,000 taxable wage base. As state average wages grew while the base remained static, the system’s relative funding capacity eroded. HB 2570 corrects this by replacing that static cap with a dynamic formula tied to the state average annual wage. The reform uses a phased rollout: The base rose to 25 percent of the average wage in 2026 and is scheduled to reach 40 percent by 2030. Moreover, the statute includes a “contingency trigger” allowing the base to reach 45 percent after 2031 if economic conditions require sustained higher-rate contribution schedules.
These changes will put Kansas’s UI taxable wage base on par with regional neighbors Oklahoma and Colorado and well ahead of Nebraska and Missouri. While Kansas has strengthened its UI system, Iowa and several others have weakened theirs.
Kansas’s legislation also pairs its wage base expansion with adjustments to the employer contribution rate schedules. In particular, it reduced rates for positively rated employers — that is, those whose contributions to the UI fund exceed withdrawals, a group that accounts for roughly 97 percent of all active rated employers in Kansas — and raised rates for the most negatively rated employers. The new employer rate for nonconstruction industries dropped from 2.7 percent in 2024 to 1.75 percent in 2025.
This combination — a broader base with lower rates — is a deliberate design choice. By taxing more wages at lower rates, the system distributes the tax burden more broadly and generates revenue that is more responsive to changes in the labor market. And it does so without necessarily increasing the total tax burden on most employers.
Why indexing matters for solvency
Indexing the taxable wage base to wages is a common feature in states with stronger UI financing. Washington and Hawaii both tie their bases to a percentage of average wages and maintain substantially higher taxable wage bases than the national average. Utah, which indexes its wage base, is a model of balanced UI program design, covering a high proportion of lost wages for unemployed workers while keeping its trust fund on sound financial footing.
The core advantage of indexing is that it makes UI financing more self-sustaining. When wages rise, the taxable base rises with them, so revenue grows with the economy rather than falling behind. This produces more stable trust fund accumulation during expansions, which reduces the likelihood of federal borrowing when recessions arrive. It also helps states avoid the cycle of waiting until a trust fund is depleted, then sharply raising contribution rates or cutting benefits under pressure, which harm both workers and employers.
States that fail to maintain adequate solvency also face federal consequences. Under FUTA, states with outstanding federal loans that are not repaid on time are subject to automatic credit reductions, which effectively increase the federal unemployment tax on every employer in the state. Following the pandemic, this penalty applied to employers in California and New York, among other states.
A model for other states
Kansas’s reform is notable for being proactive rather than reactive. The Sunflower State didn’t wait for the rain to start before starting to save for a rainy day. Nor does it rely on a one-time rate adjustment, emergency borrowing, or postrecession legislation. Instead, the capacity to keep pace with the labor market is built into the permanent architecture of the program. In this way, Kansas joins a growing number of states, including Connecticut, Colorado, and even New York, that have recognized the need for proactive UI financing reform and responded by expanding and indexing their UI taxable wage bases.
Other states face the same underlying dynamic: taxable wage bases that were adequate two decades ago now cover a diminishing fraction of total payroll. The longer a state waits to address this erosion, the bigger the eventual problem — and the more likely it is to arrive during an economic downturn, precisely when abrupt tax increases are most harmful to employers and benefit reductions are most harmful to workers. Kansas acted while its trust fund was stable and its labor market was healthy. Other states should do the same and prioritize the responsible management of UI funding to ensure its long-term sustainability and effectiveness. Doing so protects workers, employers, and state budgets from the consequences of the next recession.
