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Billions Spent on Unemployment Will Mean Higher Employer Taxes

Sept. 25, 2020, 6:35 PM

State unemployment agencies have borrowed $32 billion and counting from the U.S. Treasury to pay record-high jobless benefits claimed during the coronavirus pandemic. Repaying that debt is likely to involve raising the unemployment taxes that employers pay.

Some businesses could see tax increases as soon as 2021, as states look to replenish their depleted unemployment trust funds and begin repaying the Treasury loans. Employers also will see automatic increases in federal unemployment taxes if states haven’t repaid their 2020 Treasury loans by a November 2022 deadline.

The likely tax increases represent one of many ways businesses will have to help foot the bill for the massive costs of Covid-19 in 2021 and beyond, even as unemployment remains elevated after more than six months of the pandemic.

The $32 billion that states have borrowed is only a portion of the $108 billion they’ve spent on traditional state-funded unemployment benefits, draining their trust funds. This is despite the federal government directly covering a majority of pandemic-related unemployment benefits through temporary benefit expansions such as the $600 per week bonus that expired in July and the Pandemic Unemployment Assistance for self-employed and gig workers that runs through December.

These federally funded programs have contributed roughly three-quarters of the $465 billion in total state and federal jobless benefits paid out so far this year.

“Unless and until the federal government acts, the biggest priority now for states should be making sure taxes aren’t going to skyrocket on all these businesses that are on the brink trying to survive,” said Katherine Loughead, a senior policy analyst at the D.C.-based Tax Foundation. “There were so many more claims in such a short time that this is much bigger than anything we saw even in the Great Recession.”

Several states have tried to mitigate the impact on employers, some by using federal relief money that every state received through the Coronavirus Aid, Relief, and Economic Security Act—more popularly known as the CARES Act—to partially replenish their unemployment trust funds, thus preventing automatic tax rate increases that would be triggered by low trust fund balances.

Sean O’Leary, senior policy analyst at the progressive West Virginia Center on Budget & Policy, disagrees with that strategy.

He argued in a policy brief this summer that using CARES Act money to prevent tax increases on employers isn’t the best option for the federal relief dollars that states received. O’Leary’s analysis came in response to Gov. Jim Justice’s (R) plan to spend about half of the state’s $1.25 billion in CARES Act money on rebuilding the unemployment trust fund to limit employer tax increases.

“West Virginia currently has more urgent needs than avoiding having to repay federal unemployment trust fund loans two years from now, including ensuring schools are safe to open, funding any changes that need to be made in education, increasing testing capacity, providing PPE, and supporting child care infrastructure,” O’Leary wrote. “The state should maximize its CARES Act funding to meet those needs.”

While the best use of states’ CARES Act cash is debatable, and—unlike the Treasury loans for unemployment benefits, doesn’t need to be repaid—the money will be forfeited if not spent by the year’s end and states are restricted from using it to fill general budget deficits.

Business Closures Feared

Several factors determine an employer’s state unemployment tax rate. They vary by industry in some states and also vary based on each employer’s history of layoffs that lead to benefit claims. States often have multiple tax rate schedules and change schedules each Jan. 1 based on the amount of money in their unemployment trust funds.

To avoid or ease the impact of those Jan. 1 rate changes, Alabama and South Carolina announced plans earlier this month to commit $300 million and $450 million, respectively, of their CARES money toward replenishing their trust funds. They join at least seven others that devoted that federal infusion to their trust funds, including Iowa, Maine, Mississippi, Nebraska, North Dakota, Tennessee and West Virginia.

In Alabama’s case, the “shared cost” portion of the state unemployment tax rate is still expected to triple to 1.95% for 2021, but without that federal relief money the state would have to multiply the tax rate by six next year, Gov. Kay Ivey (R) said earlier this month.

That kind of increase “could very well force many businesses to close their doors forever, resulting in even more job losses in Alabama,” the state’s Labor Secretary Fitzgerald Washington said in a press release announcing the decision. Alabama so far has been able to pay this year’s unemployment benefits without borrowing from the U.S. Treasury.

In a few cases, the mitigation efforts are expected to entirely prevent state tax increases on employers—as in Iowa, where Gov. Kim Reynolds (R) said using CARES cash for the unemployment trust fund would keep the tax rates steady for 2021 and save employers $400 million.

Iowa also has avoided borrowing from the Treasury to pay benefits this year.

The timing and amount of potential tax increases isn’t clear yet in most states, according to information provided by state agency representatives. Georgia’s labor commissioner is beginning talks with state legislators about the trust fund and potential rate increases. Michigan still had $1.5 billion in its trust fund as of Aug. 31, a level that has spared it from borrowing Treasury funds but will trigger an increase in the wage base that’s subject to unemployment tax, barring potential legislative action to block the increase.

Pennsylvania is continuing to work through a five-year plan designed to strengthen its trust fund, and so 2021 tax rates won’t change from the current year.

California was already operating at its highest unemployment tax rate schedule before the pandemic began, with rates ranging from 1.5% to 6.2%, according to an Ernst & Young analysis of the state’s unemployment taxes. Loree Levy, a spokeswoman for the state’s Employment Development Department, said any rate increases in 2021 would vary by individual employer.

New York’s labor department also couldn’t pin down a figure for any rate increases employers might see next year, partly because it isn’t clear yet how many people will remain unemployed and for how long.

“We recognize this is an unprecedented situation for both New York’s workers and business owners,” said Deanna Cohen, spokeswoman for the department. “We are actively exploring all options to reduce the burden on businesses and will continue to work with New York’s business community as we all navigate this crisis.”

California Hit Hard, Again

Seventeen states so far have begun drawing down Treasury loans to pay unemployment benefits, and more are expected to begin borrowing soon.

The biggest borrowers on the list include several of the most-populous states and those that have been hit hardest by virus outbreaks—and in some cases have more generous unemployment benefit payouts.

Topping the list as of Sept. 23 are California, which has borrowed $12.6 billion, New York at $7.7 billion, Texas at $4.7 billion, Illinois at $2.1 billion, and Massachusetts at $1.6 billion. States aren’t finished paying high levels of claims and continue to borrow, such as California, which is on track to add more than $2 billion to its Treasury debt in one month.

If past experience is any guide, a number of states will need more than the two-year window allowed for repaying their Treasury loans without penalty, yielding higher federal unemployment taxes for businesses.

Ordinarily, employers get a tax credit that lets them reduce their federal unemployment tax to as low as 0.6%, which they pay in addition to their state unemployment taxes, but for each year a state is past due on repayment, employers must add back another 0.3% to the federal rate.

After the Great Recession of 2007-09, employers in 21 states paid higher federal taxes in 2011 because their states still owed Treasury money for unemployment loans, dropping to 19 states in 2012 and 14 states in 2013, according to another EY analysis of unemployment taxes nationally.

California’s trust fund was insolvent for nine years after the Great Recession, and the state didn’t finish repaying its Treasury loans until 2018. The federal tax increase works out to $21 per employee in the first year, $42 in the second year, $63 in the third year, and so on, but with the possibility of additional penalties beyond year three.

The taxes add up. California employers paid nearly $10 billion in extra federal unemployment taxes between 2012 and 2018, because of the state’s past-due Treasury loans for Great Recession unemployment benefits, according to a report from the state’s Employment Development Department.

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editors responsible for this story: Andrew Harris at aharris@bloomberglaw.com; Karl Hardy at khardy@bloomberglaw.com

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