During COVID, California is unable to pay a $20 billion debt incurred as a result of unemployment benefits., but you may not have heard about them.
Another problem has been silently growing in the Golden State’s unemployment system since the pandemic began: The state currently has more unemployment debt than all other states put together.
Unemployment insurance benefits in California must be funded somehow before they can be paid out.
The state’s unemployment insurance trust fund, which is supported by a tax on employers, is where the money goes. During the pandemic, millions of people used unemployment benefits, depleting the state’s coffers, and now the state is approximately $20 billion in debt. Most states do not owe any money.
Eventually, the loan will be repaid. But when will it be paid off, and how much money will the taxpayers put into it?
To recoup the costs, employers, who provide the benefits, will have to pay higher taxes for many years.
At the time, Gov. Gavin Newsom advocated putting $3 billion of the state’s estimated $21 billion surpluses toward a debt repayment plan, as well as hundreds of millions to cover the loan’s interest payments. There’s no certainty that the policy will directly assist businesses, even if it is primarily aimed at doing so.
In February of 2020, the U.S. Department of Labor assessed California’s unemployment system as the least financially stable of all 50 states.
A pandemic’s severe impact on the economy was difficult to foresee. However, it now looks like California’s unemployment system is having a particularly difficult time returning to normal.
Economists argue that if California doesn’t modify the way it supports unemployment, we might see the state’s unemployment system sink into debt over and over again.
How Did the Debt Get to This Point?
The trust fund for California’s unemployment benefits is an integral part of the state’s system. Taxes from employers are used to fund it. When a worker is claiming unemployment benefits, they receive money from it.
State unemployment programs were bolstered when the federal government loaned out money early in the epidemic. Though many have paid back their federal loans, California still has the biggest sum of any state two years later.
Audrey Guo, an economist at Santa Clara University and an expert on California’s unemployment insurance system, says that while lawmakers have raised unemployment benefits over the last decade to keep pace with inflation, businesses’ contributions to the system have not kept pace.
In addition, a higher percentage of Californians than the national average had been unemployed during the pandemic. According to Bureau of Labor Statistics data, the national unemployment rate rose to 14.7 percent in April of 2020 and had fallen to 8.4 percent by August of 2020.
However, California’s unemployment rate rose sharply and did not recover as rapidly. By April 2020, it was 15.9 percent, and by August it had fallen to 11.9 percent. By the end of December 2021, the state of California still had one of the nation’s highest percentages of joblessness.
Additionally, several states have paid off some or all of their unemployment insurance debt with federal COVID relief money, while California has not.
Because California only taxes businesses on the first $7,000 a person make each year, the money from employers hasn’t kept up. Employers of both full-time employees and part-time employees alike would contribute the same amount to the unemployed piggy bank each year, for example.
As a result, a worker can get unemployment benefits that cover 50% of their salary up to $450 per week. According to federal Labor Department data, the average weekly benefit handed out in California in 2021 was less than $320. According to Census estimates, 28 percent of Californians working full-time earned less than $35,000 in 2019.
This means that if the sanitation worker and the accountant both lost their jobs and began collecting unemployment benefits, the accountant would receive significantly larger checks.
According to Stanford economist Mark Duggan, who researches unemployment insurance, the $7,000 number is “preposterous.” Only a few states utilize it, and it hasn’t changed since at least 1984.
That’s the smallest amount permitted under federal law. Since then, the internet has grown more widely available, mom jeans have gone out of style and come back in style, and earnings and unemployment benefits have risen significantly.
There have been changes made in other states. Firms in Washington are taxed on the first $56,500 in wages earned by employees, but employers in Oregon are taxed on the first $43,800 in wages earned by employees. Tax bases of more than $38,000 aren’t just found in blue states: North Dakota and Utah are the other two.
Contrary to popular belief, this does not imply that California’s employers are inherently low-cost. As a result, employers in California pay taxes that are near to the national average in terms of their proportion of total salaries earned by their employees. However, there is a downside to this design.
Duggan points out that if the tax is passed on to workers in the form of lower salaries, shorter hours, or less employment, it is a regressive system. The lowest-paid workers, such as seasonal, part-time, and student workers pay for most of the greater unemployment benefits.
Two part-time jobs each paying $8,000 would send twice as much money into the system as one full-time job for an accountant who makes $100,000.
According to Duggan, “Our system fails the most vulnerable members of society.” “People with six-figure incomes love it.”
Unemployment insurance funds for Californians have had to turn to the federal government before. It took approximately a decade for California employers to get the fund back on its feet after the Great Recession.
The loan’s interest payments ended up costing taxpayers $1.4 billion. Analysts at the independent Legislative Analyst’s Office cautioned in 2016 that the fund may go into debt again during the next recession when California firms were still paying down debt from the Great Recession.
What is the next step?
In 2023, federal law will automatically raise the federal taxes California firms pay by 0.3 percent, or $21 per employee, to begin chipping away at the debt. There will be annual increases of $21 per employee until the debt is repaid, which might be as early as the early 2030s if another recession does not occur.
It all depends on where you are in relation to the rest of the population.
For the most part, it’s a negligible rise in wages for workers, according to an analysis by the California Budget and Policy Center (CalMatters).
By the time the tax is fully implemented in 2029, it will only boost payroll costs for businesses that employ full-time workers earning the federal minimum wage by less than.5%. The proportional rise would be smaller for companies that pay their employees more than the minimum wage.
However, a coalition of almost 20 business organizations claimed in a letter to Newsom last December that the tax increase is big enough to negatively impact hiring in the coming years.
According to Andrew Johnston, an economist at UC Merced who studies unemployment insurance, economic research does show that employment decreases when the cost of hiring people increases. He cited the standard estimate that a 10% rise in labor expenses would result in a 5% reduction in employment.
Economists are unlikely to be able to accurately measure the impact of the annual tax rise on California firms, but that doesn’t imply it won’t have an impact, he added.
When it comes to hiring, Johnston discovered that even a one-percentage-point rise in the unemployment tax has a significant impact on already cash-strapped businesses. It is possible that tiny tax increases could have a significant impact on California businesses that are already struggling to make ends meet.
Many other states have utilized federal COVID relief payments to cover their jobless bills, according to business organizations. A substantial budget surplus in the state of California was mentioned as an example. And they asked for $10 billion from the state to help pay down the debt.
When Brooke Armour Spiegel of the California Business Roundtable signed on to an open letter to the White House in which she proclaimed: “This was not a recession that the business community-produced,” she meant it literally. A global pandemic led to a recession that was sparked by government initiatives.
To help the state’s unemployment fund recover, the state has imposed a 15 percent surcharge on the state’s unemployment tax bill. According to the Legislative Analyst’s Office, the surcharge has been in force since 2004.
In a February letter to the governor, a group of moderate Democrats in the Assembly recommended another sum: $7.25 billion state cash to reduce the debt.
According to Newsom’s initial budget proposal, the state would spend $1 billion this year and another $2 billion the following year to reduce debt. He also recommended spending an additional $400 million to pay off the interest that would accumulate by September if the loan is not paid off by then.
Senate Finance Committee chair Sen. Mara Elena Durazo of Los Angeles questioned whether the state’s low wage base contributed to California’s huge debt during a budget hearing in March.
According to the Legislative Analyst’s Office’s Chas Alamo, the state’s debt would be lower today if it had increased its tax base before the pandemic.
According to the Legislative Analyst’s Office’s recent evaluation, Newsom’s $3 billion proposal would either preempt a tax hike on employers or provide any short-term assistance to businesses. Instead, it might reduce the amount of time that companies are subject to higher taxes.
H.D. Palmer, a representative for the state Department of Finance, thinks that $3 billion would shorten the loan’s term by a year. However, this timetable estimate, like many other estimates in the budget, is subject to change due to factors such as the size of California’s workforce and the unemployment rate.
Business tax relief won’t come sooner, according to Alamo if the $3 billion doesn’t cut the loan period by a full year, as expected.
Alamo said in the analyst’s office study that “Employers may experience no direct benefit if the payment is too low to reduce the payback schedule by a full year.”
Unemployment benefits would be paid for by the increased taxes companies pay above and beyond what is required to repay a loan if less than a year is shaved off.
It is estimated that the planned $3 billion will save the state $550 million to $1.1 billion in interest payments, according to the Legislative Analyst’s Office.
According to in-depth research, the debt firms face is mostly unrelated to the issue of bogus unemployment claims made by state workers. While temporary federal unemployment programs were funded by the federal government and did not add to California’s unemployment debt, the great bulk of suspected fraud occurred there.
Debt and tax increases aren’t universally feared by business owners, and some are more concerned than others.
It’s a topic that’s rarely brought up by small-business owners. As Bianca Blomquist of the small-company advocacy group Small Business Majority put it: “I don’t mean at all.”
There was a missed chance to provide small businesses with relief tailored to their specific requirements, such as assistance with commercial rent or the cost of providing additional paid sick days for COVID, she said.
There is another $3 billion that may be used elsewhere. Anderson added that families face high food and gas expenditures, as well as high rent rates. Three billion dollars, she remarked, “might go a long way” in aiding those families.
Is there a greater need for reform?
Unemployment benefits in California are viewed by Duggan as the least progressive and fiscally unsustainable in the country.
Economic experts Guo and Johnston have proposed a solution to the problem: triple the amount of wages that can be taxed. Then, tax rates might be reduced as well.
High-wage firms would have to pay more into the system, which would assist to offset the higher benefits granted to their workers in the event of layoff or termination. Low-wage employers would see a reduction in their costs.
Restoring the health of California’s unemployed piggy bank would reduce the likelihood of the state going into debt in future recessions and the likelihood that taxpayer money would be used to make significant interest payments if it were done correctly.
Other recommendations have also been drawn up by the Legislative Analyst Office, including increasing the taxable wage base to $12,000 while cutting benefits.
Duggan says that a change in the way unemployment benefits are funded should have bipartisan support. A regressive system needs to be fixed if progressive values are being preached. If fiscal responsibility is important to you, you should work to change California’s debt-inducing policies.
In addition, there are the actual workings of politics. Using Duggan’s phrase, the issue is not “sexy.” An explanation is a challenge, and making a case for it is even more so. Even if his plan is a redistribution of taxes, anyone who supports it may be accused of being a tax raiser.
It’s disheartening when you study economic policy to see ridiculous ideas remain because of the political process,” Duggan said.