By MADISON HIRNEISEN
THE CENTER SQUARE STAFF REPORTER
(The Center Square) — After a budget year with a historic surplus, over $17 billion in unemployment insurance debt looms over the Golden State – a deficit that will result in an increased cost burden on California employers in the years to come.
California borrowed nearly $20 billion from the federal government when its Unemployment Insurance Trust Fund went insolvent in the early months of the COVID-19 pandemic as millions of claims flooded in. The state currently has an outstanding balance of $17.4 billion that it owes back to the federal government in UI debt.
Should the state’s UI Trust Fund remain insolvent, employers will see their federal payroll tax rate increase by 0.3% – equal to $21 per employee – for tax year 2022, according to the Legislative Analyst’s Office. Businesses will pay the higher rate in 2023 “when employers remit their 2022 payroll taxes” to the Employee Development Department, according to the LAO. The interest paid on these loans typically becomes the burden of the taxpayers, the LAO report said.
For every year the fund remains insolvent, the federal UI payroll tax add-on will increase for California employers, swelling to $42 per employee in 2024, $63 per employee in 2025 and $84 per employee in 2026.
Rob Moutrie, policy advocate for the California Chamber of Commerce, told The Center Square that California’s UI fund could remain insolvent for six to eight years, but that timeline could expand if the country faces another recession.
“This first year’s tax increase is not the biggest concern – the biggest concern comes when the tax amount ratchets up in future years,” Mr. Moutrie said.
The larger tax increases resulting from the state’s UI debt in the future is one of the reasons CalChamber and other business groups had urged the state to pay down a larger share of the debt this year, Mr. Moutrie added.
This year, the state had a budget surplus of $97.5 billion. About $49.2 billion of that was discretionary. Gov. Gavin Newsom had initially proposed paying down $3 billion of the debt in his earlier budget proposal, but the final budget plans to pay down $1 billion of the debt over two years and spend $342 million to pay down the forecasted UI interest payment due in September.
That investment, however, still leaves billions in unpaid debt, which is expected to have “substantial costs to the state and the state’s employers over the coming years,” the budget states.
To offset the rise in payroll taxes, the state earmarked $500 million in the state budget to provide relief to small businesses. However, budget documents do not make it clear what employers qualify as “small businesses.” Details on eligibility and implementation are still “to be determined,” the Department of Finance told The Center Square.
The looming tax increase for state employers is prompting concern from industry leaders who say higher payroll taxes will lead to thinner operational margins that help businesses survive.
John Kabateck, California state director of the National Federation of Independent Businesses, told The Center Square that small businesses are facing the “highest wall of debt, uncertainty and challenges than ever before in recent history.”
“For a small business, even a few $100 out of their pocket to help pay down a debt they didn’t create can be massive and damaging for them,” he said.
Mr. Kabateck also noted the state’s historic budget surplus of $97.5 billion, saying that despite the “financial comfort” the state finds itself in, lawmakers have “chosen to do very little to seriously address this major problem.”
When asked why the state chose to pay down $1 billion of the outstanding debt despite the size of the budget surplus, Department of Finance spokesman HD Palmer told The Center Square that the $1 billion payment was “balanced among multiple spending priorities within the multi-year spending plan agreed to (by) the Administration and Legislature.”
Mr. Palmer added that the payment will “benefit small businesses in the future by accelerating the payoff of the unemployment debt by up to a year, which will restore the Federal Unemployment Tax Act tax credits.”
Earlier this year, lawmakers had pitched proposals to pay down a greater share of the UI debt.
One bill proposed using a $7.25 billion of the state budget surplus to pay down the debt, though that bill failed to advance out of the Assembly Appropriations Committee in May.
California has the largest outstanding debt of any state, though several other states still owe money to the federal government. Those states include New York, Massachusetts, Illinois, Connecticut and Colorado. California has a greater debt than all of these states combined.
Twenty states borrowed from the federal government to pay unemployment benefits during the pandemic, and many made investments to pay down the debt in recent budget years. In November, Texas announced that it would appropriate $7.2 billion to pay down its debt and return its UI trust to solvency.
Looking forward, Mr. Moutrie said the state has made a “statement of intention” to contribute $250 million directly to the fund in the budget next year, but beyond 2024, “it’s not guaranteed that any aid will be provided to help cover the tax increases or to help pay down the fund.”
“The overall picture for this year’s budget is we see it as a drop in the bucket towards the size of the overall UI debt,” he said. “We see kind of a looming wave of those tax increases coming. This budget helps with some of them and pushes the moment down the road a little bit, but we see that wave coming regardless.”
Madison Hirneisen covers California for The Center Square.