North America’s Divide - The Political Geography of Inequality - page 128

the final CES report from recommending a national unemployment insurance
system.
In addition, early supporters of unemployment insurance at the state level
worried about a national program. They saw it is a political risk in that it
would eliminate provisions tailored specifically toward state labor markets and
impose dysfunctional policy designs. Witte himself, a member of the Commons'
School instrumental in the development of the Wisconsin model of unemploy-
ment insurance (Nelson 1969 , 119-169), held this position, as did Wagner
from New York (Altmeyer 1968 : 18-24;Orloff 1988 : 69-75). Combined with
Roosevelt's recommendations, these reservations shaped deliberations within
the CES. On 9 November 1934 a motion according to which “all the thought
of an exclusively federal system be abandoned” (Witte 1962 : 118) received
approval. By November 14 Roosevelt announced that unemployment insur-
ance would be a “federal-state undertaking.” In other words, there would be
no national unemployment insurance system in the United States. Roosevelt's
administration had factored into its planning the heterogeneity of preferences
across states and the likelihood of meeting legal objections on the constitution-
ality of such an initiative. Theretofore, the question had been narrowed down
to a choice between a “subsidy plan” and a tax offset system. After several
rounds of consultation between the CES and the Advisory Committee of the
Department of Labor (initially in favor of the subsidy plan by nine to seven
votes), it was decided to draft the unemployment insurance provisions along
the lines of the Wagner-Lewis Bill, not only because it guaranteed each state the
possibility of pursuing its own strategy, but also for reasons of constitutional
pragmatism. According to Douglas (1936: 48), “the one major argument that
came to be urged for the offset plan as opposed to the tax remission system was
that, if the latter were later to be declared unconstitutional, the whole system
of unemployment insurance would necessarily collapse, whereas, even if the
tax offset method were finally rejected by the Supreme Court, the states would
in the meantime have passed acts that would continue.”
On August 18, 1935 Roosevelt signed the Social Security Act, with the
following provisions on unemployment insurance:

1. Unemployment insurance is a joint effort between the federal government
and the states, and takes the form of a tax offset system in which the
participation of the states is voluntary.
2. The federal government levies a payroll tax on employment that would
be equal to 1% of total payroll in 1936, 2%in1937 and finally equal
to 3%from1938 onward. This tax is deposited in a federal unemploy-
ment trust fund under the control of the Secretary of the Treasury. 90%
of the revenues are devoted to transfers to the states that effectively
develop their own unemployment insurance system. The remaining 10%
is devoted to cover administrative costs.
3. States are free to choose the specific institutional form of their unem-
ployment insurance system (plant reserves, industry reserves, etc.).