California businesses expected to pay higher taxes to make up for unemployment shortfall
California’s unemployment fund is deep in debt to the federal government from money the state borrowed to pay pandemic benefits, and that’s going to cost both the state and private employers billions of dollars over the next few years.
Gov. Gavin Newsom this week announced a plan to a portion of the debt — $3 billion — but it’s not enough to avoid a probable tax hike for employers.
“The debt is anticipated to have substantial costs to the state and the state’s employers over the coming years,” said the budget Newsom proposed this week.
State business leaders are furious. “What he’s proposing is a new hidden tax, especially now we’re trying to work through a pandemic recovery. Business has no idea they’re about to get hit in the face,” said Robert Lapsley, president of the California Business Roundtable.
Employers pay contributions on behalf of each employee to the state’s Unemployment Insurance Trust Fund to pay for benefits to unemployed workers.
Employers also provide another smaller contribution to the federal government to pay for administration of the program and other expenses such as extended benefits during recessions.
The unemployment fund is supposed to get its money from payroll taxes paid by employers. But when the fund runs short of money, as it did in the spring of 2020, the federal government provides low interest loans
The unemployment fund’s deficit is currently estimated at about $19.4 billion, the Newsom budget said. The administration suggested that paying down $3 billion soon would ease the burden on employers in the future.
The tax structure is complex. The nonpartisan Legislative Analyst’s Office makes this calculation: An employer who now pays about $324 per year per employee could be obligated to pay another $42 next year and as much as $189 by 2030. California employers pay the tax only on annual wages up to $7,000.
Chris Hoene, executive director of the California Budget & Policy Center, an nonpartisan budget watchdog, said businesses have been paying too little into the unemployment fund for years.
A big reason for the trust fund deficit, he said, was “largely because, for decades, California had not required businesses — particularly large, profitable corporations — to cover the true cost of state unemployment benefits for their workers.”
Are higher business taxes needed?
Hoene charged that the administration’s $3 billion spending plan “amounts to an unnecessary business tax break, primarily benefiting large businesses and corporations (those with more employees), by letting them off the hook for not having paid into the UI system adequately for decades.”
Instead of devoting $3 billion to pay down the debt, Hoene said, “state leaders could use those funds to address Californians’ urgent public health, housing and food needs.”
Business interests and taxpayer advocates, though, see a big problem ahead as taxes go up.
“As with all taxes, it’s a cost of doing business, and when the cost of doing business rises, the ability to hire new employees, give raises, and allow overtime work declines. So, everyone has a stake in how solvent the state’s unemployment insurance trust fund is,” said John Kabateck, California director of the National Federation of Independent Business.
Robert Gutierrez, president of the California Taxpayers Association, maintained that “since taxes on employers lead to higher prices for consumers, this tax increase impacts all Californians.”
The unemployment fund had a $3.3 billion surplus at the beginning of 2020, but the overwhelming demand for unemployment benefits as the COVID-19 pandemic triggered an economic collapse led to a $23 billion deficit in the fund by last summer. That’s more that twice the sum California borrowed to pay unemployment benefits at the height of the 2007-09 recession.
During that downturn, California’s fund also became insolvent. The money was not fully repaid until 2018.
This story was originally published January 13, 2022 at 5:25 AM with the headline "California businesses expected to pay higher taxes to make up for unemployment shortfall."
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