California employers still pay debt from recession
Often mystifying tax should end this year, though
California’s unemployment rate may have dropped to a record low 4.3 percent in December, but the state’s employers are still paying for jobless benefits paid out during the Great Recession in the form of a special tax due at the end of this month.
The tax repays a federal debt incurred when the state’s unemployment insurance fund, which is funded entirely by employers, went negative in 2009 and the federal government began paying benefits to laid-off Californians.
Even though the loan debt peaked at $10.2 billion in 2012 and has been whittled down to just $1.2 billion, every year the tax goes up, thanks to a convoluted formula that perplexes and infuriates many employers.
The good news is, thanks to rising employment, the debt should be retired in 2018 and by year end, the once-depleted fund should have a $1.8 billion surplus, according to the California Department of Finance. That means this should be the last year employers in the state owe the aggravating tax.
Other state funds took on this debt during the recession, but California and the U.S. Virgin Islands are the only places still paying it off.
“The worst part is, we don’t know until January” what the tax for the previous year will be, said Susan Thomas, a payroll specialist with Professional Small Business Services in Vacaville. The tax bill comes in early January and must be paid by Jan. 31. “It’s a surprise to our payroll clients,” she said.
This year the bill, for 2017, works out to $147 for each
employee who made at least $7,000 last year, up from $126 per worker in 2016.
Bill Pro-estler, who operates 5 Star Car Wash and Detail Centers in Vacaville and Fairfield, has about 70 employees. His extra tax bill for 2017 comes to $10,564.
To pay it, he may have to hire one or two fewer people this year. “We are looking everywhere we can to improve efficiency. We are looking for ways we can automate where we couldn’t before. But we are a labor-intensive business; there is only so much you can do,” he said.
This tax is separate from the regular unemployment insurance taxes employers pay throughout the year. Employers pay a state tax that is based on the industry and history of layoffs. In California, this rate generally ranges from 1.5 to 6.2 percent of an employee’s first $7,000 in annual wages.
They also pay a federal tax that is a flat rate that (after a convoluted credit) works out to $42 per year on the employee’s first $7,000 in wages.
Both taxes go into the same fund for each state from which unemployment benefits for that state are paid.
If a state fund runs out of money, the federal government will loan money to continue paying benefits to that state’s unemployed. If the state owes money for two consecutive years, the federal government will levy a tax on that state’s employers to repay the balance. Each year there is a loan outstanding, the tax goes up by $21 per employee.
California’s fund went into debt in 2009 and employers started paying the extra tax in 2012 for tax year 2011. So after seven years, the extra tax is $147 per worker, on top of the $42 regular federal tax.
States must pay interest on this debt; California expects to pay about $10.3 million in interest for 2018 out of its general fund.
In 2012, California’s debt was three times the nextbiggest state debt, said Marti Fisher, policy advocate for the California Chamber of Commerce.
She traces the problem to late 2001 when the Legislature passed a bill to increase unemployment benefits (for the first time since 1992) without increasing taxes, changing eligibility requirements or making any changes to make the system more efficient. “The chamber was opposed at the time,” she said. “We said the fund is going to become insolvent.”
The bill gradually raised the maximum benefit to $450 per week for six months, where it has been since 2005.
During the recession, some people who exhausted their regular state benefits and were still unemployed could get extended benefits that lasted up to 73 additional weeks in some states, including California. However, extended benefits were funded entirely by the federal government and are not part of the debt being repaid by employers.
Other state funds went into debt during the recession, but “a combination of relatively high unemployment and relatively generous benefits” exacerbated the situation in California, said Mike Trabold, director of compliance with Paychex, a payroll services firm.
Some states found “creative ways” to retire their fund’s debt, Trabold said. Some reduced benefits, some sold bonds to repay the debt (although the bonds must be repaid), and a very few dipped into state funds.
California lawmakers considered various ways to pay off the debt but never took action.
By the end of this year, the chamber estimates that employers will have paid an additional $9.6 billion in increased federal unemployment taxes, and the state will have paid more than $1.4 billion in interest on the loan.