Cost of pandemic unemployment payouts could cripple businesses for years
In response to the pandemic, Gov. Gavin Newsom took a bold step to mitigate the spread of the coronavirus and save lives by ordering large sectors of California’s economy closed.
Millions of Californians suddenly hit the unemployment lines, and the state’s unemployment insurance fund began distributing unprecedented sums of benefits.
In addition to legitimate claims from out-ofwork Californians, there was large-scale fraud that was successful because ofmismanagementatthe Employment Development Department. An estimated 10% of payments were confirmed as fraudulent, and another 17% as potentially fraudulent — $11.4 billion in confirmed fraud, with a potential of approximately $20 billion more.
Unless the state steps in to help California businesses, employers will be on the hook for repaying the costs caused by the pandemic and the department’s mistakes.
According to the department’s latest unemployment insurance fund report, the fund had a $3.28 billion surplus before going into a deficit beginning June 3, 2020. In total, California paid $26.8 billion in claims in 2020.
California was one of 18 states that needed a federal loan to continue paying benefits, as the enormous overnight increase in unemployment claims wiped out state funds. The Legislative Analyst’s Office noted that California’s amount borrowed per worker ($1,070) “is higher than in other states due to a combination of relatively generous state UI benefits and the state’s above-average unemployment rate throughout the pandemic.”
To date, California has borrowed $21.8 billion from the federal government. If California doesn’t repay these loans in full by Sept. 6, interest will begin to accrue at more than 2.27%.
The Employment Development Department forecasts that the unemployment insurance fund will have a $26.7 billion deficit at the end of 2022. Employers have been paying the maximum payroll tax (for the state’s largest employers, this is 6.2% on the first $7,000 of each employee’s wages, a taxable wage base set by the Legislature).
California’s unemployment insurance fund deficit means the federal government will reduce the Federal Unemployment Tax Act credit, resulting in even higher taxes on employers. The credit stands at 5.4%. For each year of deficit, the feds reduce the credit 0.3% until all loans and interest are repaid. The credit reduction will occur beginning next year, with higher taxes due in 2023.
For every 0.3% reduction in the credit, employers pay an additional $21 per employee. Businesses pay $77 more per employee in 2023 and
$98 more per employee in 2024.
If employers are held responsible for repaying the entire loan, businesses will pay $34.2 billion in higher taxes and will not
pay off the loans until 2032, at which point they would be paying $266 per employee in higher taxes. These figures assume no further economic closures or recessions, and no change in the state’s civilian labor force of 19.3 million.
The governor’s plan of reducing the principal by $1.1 billion would reduce the tax obligation to $29 billion and result in a oneyear tax savings.
As California continues reopening, the Legislature and governor should enact policies that promote job growth and, equally important, job retention in a changing labor market. As the pandemic highlighted, the rise of remote work could result in California companies shifting employees out of state.
With a record state budget surplus of an estimated $80 billion and approximately $27 billion in additional federal stimulus dollars, the Legislature and administration should commit to paying down the unemployment insurance debt to avoid significant tax increases for employers and help ensure that businesses remain in the Golden State. Our home-state employers and working families deserve no less.