Director, Global Employment Policy & Special Initiatives, U.S. Chamber of Commerce
February 14, 2023
For businesses in the Golden State, “California Dreamin’” is becoming “California Screamin’.” The state’s unemployment insurance (UI) trust fund is $18.7 billion in debt to the federal government, and Governor Gavin Newsom’s plan to pay down the debt has been tabled.
In 2022, the state was benefiting from a $100 billion surplus, greenlighting the appropriation of $750 million to go toward the trust fund. Now, however, the state’s outlook has reversed into a $24 billion deficit, resulting in Governor Newsom proposing to cancel the contribution. While just a drop in the bucket compared to the total sum owed, the $750 million payment would have kickstarted the debt repayment. Now, businesses are solely responsible for making these payments. This is essentially a tax increase by another name.
This was not the only chance officials had to make a dent in the trust fund. California received more than $40 billion in state fiscal recovery funds since March 2021, and yet none of it was applied to the state’s UI trust fund.
Because the state’s trust fund remains insolvent, the Federal Unemployment Tax Act (FUTA) tax credit has been reduced, raising the effective federal UI tax from 0.6% to 0.9%. The effective rate will continue to climb until the trust fund is replenished. This isn’t new for California employers – the state’s trust fund was $10 billion in the hole following the Great Recession. Employers steadily replenished the trust fund over the course of six years. This episode could take much longer.
California employers are not alone. Illinois, New York, and the Virgin Islands also have insolvent trust funds causing employers in those states to pay higher FUTA taxes as well. As usual, things are likely to get worse before they get better. On January 30, the U.S. Department of Labor released the updated rate of interest the Treasury will charge on states’ UI trust fund loans. The interest rate is increasing from 1.5909% in 2022 to 1.6776% for 2023. Interest payments are due on September 30 and are prohibited from being paid out of the UI trust fund. Typically, interest payments are allocated from the state’s general fund.
Despite the insolvency of the UI system in California, the state’s lawmakers are proposing to create a new program that would make the situation even worse by providing unemployment compensation to undocumented workers. The legislation does not include a funding mechanism for the proposed program. Regardless of one’s views on immigration, this makes little sense.
California lawmakers have attempted to pass similar legislation before, but Governor Newsom vetoed the last attempt due to budgetary constraints. Employers must be hoping he does the same again, and ultimately takes action to restore the UI trust fund.