Taxpayers in most states may have dodged a billion-dollar bullet on election day. That is, if the outcome had been different, liberal lawmakers would have been uniquely positioned to bail out California and New York unemployment benefit debts, and in the process shift large costs onto taxpayers in other states.
All states levy payroll taxes on employers to cover the cost of state unemployment insurance (UI) benefits, with the revenues held in trust funds tapped to pay weekly UI checks. In recessions, the state trust funds can run dry, causing them to borrow federal funds to continue making good on benefit promises. That’s what happened during the pandemic, when annual state UI payments grew fivefold to a record $143 billion in 2020. By October 2020—just six months into the pandemic—19 states had drawn $34 billion in federal loans to continue paying promised benefits.
If loans are not repaid promptly, states are forced to pay them back with interest, with the repayment mechanism being automatically growing federal unemployment taxes. States strive at all costs to avoid such tax hikes on jobs, which economists believe are ultimately borne by workers as lower wages. That’s one reason why dozens of states used some $27 billion in flexible federal funds provided during the pandemic to bolster their UI trust funds and repay their loans.
Now more than two years after Joe Biden declared the pandemic was over, three states (California, New York, and the US Virgin Islands—which is considered a “state” in the UI system) continue to have federal loan balances. The California and New York balances are massive, at over $20 billion and $6 billion, respectively. California’s nonpartisan Legislative Analyst’s Office projects its loan won’t be repaid until well into the 2030s. Unlike dozens of other states, California and New York devoted almost none of the tens of billions of dollars in flexible federal funds they received during the pandemic toward repaying their loans. They instead spent that money, for example devoting $12 billion to “Golden State stimulus checks” and $2 billion to New York’s unprecedented unemployment benefits program for illegal immigrants.
Recent news accounts detail the shock some businesses now feel at rapidly rising taxes required to repay the loans:
“We just ran payroll. The payroll taxes were 2K higher than calculated. We called the payroll company,” said Gruel. “They explained (in summary) that California has a budget shortfall, and the federal government wants money back that it lent California for UI that it ‘lost.’ They are making up for it by having business owners pay it.”
Many employers in California and New York should be unfortunately familiar with such tax hikes, which have more than doubled the federal unemployment tax rate there. Both states experienced even bigger tax hikes from unemployment loans taken out after the Great Recession.
The current hikes affect taxpayers only in California and New York, but that might not have been the case if the election had turned out differently. A blue sweep would have made former California Senator Kamala Harris President and New York Representative Hakeem Jeffries Speaker of the House, while New York Senator Chuck Schumer would have remained Senate Majority Leader. Especially when crafting future “stimulus” legislation, they would have been uniquely positioned to seek loan relief for their home states at other taxpayers’ expense.
They wouldn’t have had to look far for proposals. At a similar moment following the Great Recession—that is, when California, New York, and other states were similarly experiencing tax hikes due to unrepaid UI loans—President Obama’s FY 2012 budget proposed suspending interest payments along with rising federal payroll taxes in loan states. Republicans in Congress blocked those proposals, but New York’s comptroller went even further in 2021, suggesting that “The federal government could also waive portions of outstanding loans for states that were hardest hit by COVID-19 and pandemic-driven UI claims.”
If enacted, such a bailout would have done more than just shift the massive expense of benefits paid in California and New York onto taxpayers in other states. It also would have encouraged less forward funding of all state UI benefits, more reckless state spending, and ultimately more federal bailouts. Those are all bad policy bullets it’s fortunate voters helped the country dodge.
Reprinted with permission from AEI by Matt Weidinger.
The opinions expressed by columnists are their own and do not necessarily represent the views of AMAC or AMAC Action.