SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Unemployment Tax Equity Act of 
2006''.

SEC. 2. DEMONSTRATION PROGRAM FOR STATE ADMINISTRATION OF UNEMPLOYMENT 
              COMPENSATION PROGRAM.

    (a) In General.--Chapter 23 of the Internal Revenue Code of 1986 
(26 U.S.C. 3301-3311) is amended--
            (1) by redesignating section 3311 as section 3312; and
            (2) by inserting after section 3310 the following new 
        section:

``SEC. 3311. DEMONSTRATION PROGRAM FOR STATE ADMINISTRATION OF 
              UNEMPLOYMENT COMPENSATION PROGRAM.

    ``(a) In General.--The Secretary of Labor shall establish a 
demonstration program under which the primary responsibility for the 
proper and efficient administration of a State's unemployment 
compensation law is transferred (by agreement with the Secretary of 
Labor) to each participating State for the duration of the 
demonstration project under such program. Such agreement shall contain 
such terms and conditions as the Secretary of Labor determines 
necessary or appropriate to carry out this section.
    ``(b) Limitation on Number of Participating States.--The Secretary 
of Labor may not enter into agreements under this section for 
demonstration projects under the demonstration program with more than 5 
States.
    ``(c) Application.--
            ``(1) In general.--The Governor of any State which desires 
        to enter into an agreement under this section may submit an 
        application to the Secretary of Labor at such time, in such 
        manner, and including such information as the Secretary of 
        Labor may require. Such application shall, at a minimum, 
        include--
                    ``(A) a description of the demonstration project, 
                including the authorization under State law for 
                conducting the demonstration project and the time 
                period during which such demonstration project would be 
                conducted;
                    ``(B) a description of the goals relating to the 
                demonstration project and the expected programmatic 
                outcomes if the application to participate in the 
                demonstration project is approved, including how the 
                demonstration project will assist in meeting the 
                purposes of the demonstration program described in 
                subsection (a);
                    ``(C) assurances, accompanied by detailed analysis, 
                that the demonstration project will provide the amount 
                of funding necessary for the proper and efficient 
                administration of the State's unemployment compensation 
                law;
                    ``(D) a description of the manner in which the 
                State will conduct an impact evaluation, using a 
                control or comparison group or other methodology, of 
                the demonstration project described in subparagraph (A) 
                and determine whether the goals and outcomes described 
                in subparagraph (B) are achieved; and
                    ``(E) assurances that the State will provide any 
                reports relating to the demonstration project as the 
                Secretary may require.
            ``(2) Notice.--
                    ``(A) Application procedure.--The Secretary of 
                Labor shall provide notice to each State setting forth 
                the purposes of the demonstration program, the 
                application requirements, and a due date for the 
                receipt of applications.
                    ``(B) Approval or denial of application.--The 
                Secretary of Labor shall provide public notice of the 
                decision to approve or deny any application submitted 
                under this section within 30 days after notifying the 
                State of such approval or disapproval. Notice under 
                this subparagraph may be provided through the Internet 
                or other appropriate means.
    ``(d) Period for Which Demonstration Project Is in Effect.--
            ``(1) In general.--A demonstration project for which the 
        Secretary of Labor enters into an agreement with a State under 
        this section shall, except as provided in paragraphs (2) and 
        (3)--
                    ``(A) be for a period of 5 years,
                    ``(B) not begin before January 1, 2008, and
                    ``(C) terminate before January 1, 2014.
            ``(2) Termination of agreement by secretary of labor.--The 
        Secretary of Labor may terminate an agreement entered into 
        under this section if the Secretary determines that the State 
        has not complied with the terms and conditions specified in 
        such agreement.
            ``(3) Termination of agreement by state.--Any State which 
        is a party to an agreement under this section may, upon 
        providing 30 days written notice to the Secretary of Labor, 
        terminate such agreement.
    ``(e) Adjustment of Credit.--In the case of credits allowed to a 
taxpayer under section 3302 with respect to the unemployment 
compensation law of a State for which a demonstration project is in 
effect under this section, section 3302 shall be applied--
            ``(1) in subsection (b) thereof by substituting `5.8%' for 
        `5.4%', and
            ``(2) in subsection (c)(1) thereof by substituting `96.67 
        percent' for `90 percent'.''.
    (b) Ineligibility for Grants for Unemployment Compensation 
Administration.--Section 302 of the Social Security Act (42 U.S.C. 502) 
is amended by adding at the end the following new subsection:
    ``(d) The Secretary of Labor shall make no certification under 
subsection (a) for payment to any State with respect to any fiscal year 
(or portion of a fiscal year) during which such State is participating 
in a demonstration project established under section 3311 of the 
Internal Revenue Code of 1986.''.
    (c) Conforming Amendment.--The table of sections for chapter 23 of 
such Code is amended by striking the item relating to section 3311 and 
inserting after the item relating to section 3310 the following:

``Sec. 3311. Demonstration program for State administration of 
                            unemployment compensation program.
``Sec. 3312. Short title.''.
Unemployment Tax Equity Act of 2006 - Amends the Internal Revenue Code to direct the Secretary of Labor to enter into agreements with no more than five states for the establishment of demonstration programs to permit such states to assume primary responsibility for the administration of their unemployment compensation laws.
To amend the Federal Unemployment Tax Act to provide for the establishment of a demonstration project program to permit States to more properly and efficiently administer the State's unemployment compensation law, and for other purposes.