States use COVID-19 relief dollars to hold down taxes

Governors and lawmakers in at least eight states have used millions of federal coronavirus relief dollars to protect businesses from tax increases as unemployment skyrockets.

They’re pushing relief dollars into unemployment insurance trust funds, which are funded by business taxes and pay out benefits to laid-off workers. If the funds start to run out of money — as they now are in many states — state and federal law triggers tax increases to replenish the accounts.

Many Republicans and business groups say avoiding business tax increases during a recession is a no-brainer. West Virginia Gov. Jim Justice, a

Republican, wants to spend $687 million — more than half the money the state received in March — on unemployment insurance, for instance.

But some Democrats and unemployment insurance experts say the money could be better spent on direct assistance to workers and local governments, such as money for rental assistance and food banks, rather than on preventing minor tax increases that won’t kick in until next year or 2022.

“I think it’s bad policy,” West Virginia state Del. Mick Bates, a Democrat, said of Justice’s plan, “and doesn’t address what Congress wanted us to address, which is the needs we have today.”

The March federal payments may have been the last such assistance states get this year. While congressional Democrats want to give states and cities more money in a new coronavirus relief package, Republicans want to let states use existing federal aid in more ways.

So far, lawmakers in Iowa, Maine, Mississippi, Nebraska, North Dakota, South Carolina, Tennessee and West Virginia have announced that they’ll spend federal aid dollars on their unemployment insurance trust funds.

States and the federal government work together to fund unemployment benefits. State trust funds rely on a per-employee tax that’s higher for companies that have laid off a lot of workers recently. The federal trust fund, meanwhile, relies on a tax that maxes out at $42 per employee per year for companies that pay state taxes on time in states with solvent trust funds.

State funds have been rapidly depleted this year as a recession and public health orders have led to business closures and layoffs. But states must keep paying unemployment benefits, even when their trust funds run low.

To do that, states charge businesses higher taxes and borrow money from the federal trust fund. Ten states already have borrowed money this year, including West Virginia. If the federal loans aren’t repaid in two years, federal unemployment insurance taxes start to creep up, too.

South Carolina business groups and elected leaders want to stop the state trust fund from cratering the way it did after the

Great Recession.

“Many businesses will not survive paying higher taxes to replenish the fund twice in one decade,” Republican Gov. Henry McMaster wrote in a June letter to the legislature. Two weeks later, lawmakers approved his plan to spend about a quarter of the state’s $1.9 billion in federal aid on the trust fund.

McMaster’s plan wasn’t controversial, said Ted Pitts, president and CEO of the South Carolina Chamber of Commerce. “There was really little debate,” Pitts said. “There was broad agreement that this was a way to help businesses get back on their feet.”

South Carolina unemployment insurance taxes range from $8.40 to $764.40 per employee per year, depending on a company’s layoff record.