States are tapping into their COVID-19 aid to cover the massive cost of unemployment benefits paid out during the pandemic, following a directive from the U.S. Treasury.
States have borrowed more than $50 billion from the Treasury since March 2020 to provide jobless benefits, after depleting $75 billion they held in pre-pandemic unemployment reserves. Some have delayed automatic tax hikes on employers triggered when those funds exhaust.
Treasury earlier this week indicated that states can use any of the $350 billion the American Rescue Plan sent their way to recoup their reserves and avoid tax hikes, and repay their federal debt.
Ohio Gov. Mike DeWine (R) plans to use his state’s money to pay off the $1.5 billion it owes Treasury for loans taken out to furnish its unemployment trust fund, according to a spokesperson in the governor’s office.
Louisiana Gov. John Bel Edwards (D) wants the same thing. Last month in an outline of priorities for spending his state’s relief funds, he advocated in favor of directing $400 million into his state’s trust fund. A formal spending bill will have to be agreed upon with both legislatures before either happens.
A provision in the latest relief law barring them from using federal aid to cut taxes had prompted some states to hold off using funds for jobless benefits, as that prevents tax hikes on employers triggered when unemployment reserves fall below certain levels. A swath of Republican states are suing the Biden Administration over that limitation, though guidance clarifies filling those trust funds with the aid is OK.
“Treasury viewed depleted trust funds as a revenue loss,” said Joe Bishop-Henchman, vice president of tax policy and litigation at the National Taxpayers Union Foundation. “It effectively reduces the tax hikes that employers would have to pay to replenish those funds, and ultimately ensures funds will go to provide payments to jobless workers.”
Prior to that guidance, some states had considered reducing the length of worker benefits or issuing bonds to replenish their funds. Those options remain in places such as Tennessee, where a bill awaiting Gov. Bill Lee’s (R) signature will cut the maximum number of weeks a person can collect unemployment, beginning in 2023. Some have partially repaid loans taken out from Treasury, although it’s unclear how much.
Washington state had already counted on the guidance in how it used federal aid. After delaying an anticipated $1.7 billion tax hike on employers over the next four years, Washington sent an extra $82 million into its unemployment trust fund, and an extra $500 million to relieve benefit charges for smaller employers.
The guidance affirms that investment, according to spokesperson for Washington Gov. Jay Inslee (D).
Allowing states to replenish their trust funds without levying taxes on employers already hit hard by the pandemic should aid the recovery the relief law intended, said Jared Walczak, vice president of state projects at the Tax Foundation.
New Jersey, Texas and Alabama are still reviewing the guidance and have yet to direct any of their spending towards jobless benefit reserves according to their governors’ offices.
New Jersey has borrowed more than $4 billion from the federal government, in part to foot its jobless benefits. Alabama had been considering using funds to refill its unemployment reserves, as it did with a previous round of federal aid.
Even with the federal aid, states still need to consider longer-term changes, possibly including reductions to the duration of benefits, said Isabel Soto, director of labor market policy at the center-right think tank American Action Forum. Otherwise, they’ll fall back into the chronic problem of unemployment trust fund insolvency that many faced for years after the recession of 2008-09.
“Assuming all states use this to fill some of those holes, it’s not really a solution. It’s just shifting cost over to the federal government,” Soto said.
Florida is going to use revenue from its new tax on online sales to replenish its reserves, according to a spokesperson for Gov. Ron DeSantis (R).
That relief law restriction gives them one less avenue to cut taxes without the federal government coming back for its money, according to Chris Moran, a tax lawyer at Venable LLP in Baltimore, as the guidance permits states to pay for any tax cuts only through laws that create new revenue passed after March 3rd.
“If Florida cut taxes, it could have been offset with these new sales tax collections,” Moran said.
Florida is one of the states suingover the relief law’s tax cut provision.
Maryland and Kentucky planned to use their restricted federal aid to shore up funds prior to guidance. Their governors could not be reached for comment Thursday.
“There had been some question around whether you could replenish these funds, the argument in favor being that their depletion was a consequence of the pandemic,” Walczak said. “Treasury’s clarification on the use is a good one for states.”