Employers on the hook for state's loan default
California business owners received an unpleasant surprise in filing their taxes this year — the state of California has defaulted on its $18.5 billion federal unemployment insurance loans, and as a result, every employer in California is being forced to pay additional federal taxes to make up the difference until the loan is repaid in full.
If you found this news baffling, you're not alone. I did too.
Federal unemployment insurance loans were essential to helping Californians weather the COVID-19 pandemic, and in fact, most states participated in the federal loan program. As the state mandated business closures for months on end, these payments helped Californians who were out of work to put food on the table and keep the lights on. However, out of the 22 states that were forced to take federal loans during the pandemic, California is one of only four to fail to repay its loan, and it owes the largest amount of any state by far.
When states across the country received loan-free federal aid as a result of the federal government's unprecedented emergency spending packages, most chose to use at least a portion of those funds to pay back the federal loans they'd been forced to take to support their unemployment programs. California received $15.3 billion in federal Coronavirus Relief Funds, but allocated none of it to repaying its outstanding loans.
Even more baffling is the fact that last year California declared a historic $97.5 billion budget surplus after passing a $300 billion budget in May. That budget surplus was enough money to repay the federal government loan more than five times over. Instead of making the fiscally prudent decision to pay off the debt with part of this vast surplus, California has instead allowed its loan obligations from the Federal Unemployment Trust Fund to go unfulfilled for two years in a row, triggering a provision that transfers responsibility for repaying the debt from a state government to that state's employers.
As a result of California's failure to repay its debt, millions of our state's employers will be required to pay penalties to the federal government this month in the form of higher Federal Unemployment Act (FUTA) taxes. FUTA imposes a 6% gross federal unemployment tax rate on the first $7,000 paid by employers for each employee. This results in a maximum federal tax of $420 per employee per year. Typically, California employers receive a credit which reduces the tax paid per employee to only $42 per worker per year.
When a state fails to repay federal unemployment insurance loans it takes from the Federal Unemployment Trust for two or more consecutive years as California has done, the FUTA credit is reduced for that state, meaning every businesses in the state is forced to pay progressively more in FUTA taxes for each year the state remains delinquent on its loans. After five years, a different FUTA credit reduction calculation kicks in, levying an even bigger penalty on the state's employers and its economy.
The last time California was in arrears on these Title XII loans, it took seven years to repay them, meaning that in the final year of repayment (2017), every employer in California was forced to pay an extra $147 per employee in FUTA penalties. That amounted to thousands of dollars for the average small business that could have instead been used to grow employment in our communities.
Small and large companies in California alike are already reeling from economic instability, high interest rates, and skyrocketing inflation. They're also still struggling with supply chain fluctuations and recovering from one of the longest state-mandated COVID-19 economic shutdowns in the country. Forcing a higher tax burden on our employers as a result of California's gross fiscal mismanagement will undermine job creation and drive prices even higher.
To add insult to injury, it is notable that better fraud enforcement by the Employment Development Department alone could have repaid the state's federal loans.
A LexisNexis data analysis performed by the reporters at KCRA showed that California paid out at least $32.6 billion and counting in fraudulent disability and unemployment compensation during the pandemic, much higher than the department's publicized $20 billion number. But by either statistic, the state would have had more than enough to repay its loans from the federal government if it had only administered its programs correctly.
It was the state's own actions that shut down businesses and caused much of the resulting unemployment that California faced, and yet it is our small businesses that will once again be forced to pay the penalty for California's mismanagement. Forcing Californians to pay higher federal taxes because of the state's failure to either prevent rampant fraud or repay its debts in a year when the state had a multibillion-dollar budget surplus is nothing short of theft.
This baffling mismanagement of our state's finances is totally unacceptable, and our small businesses and employers should not be forced to pay the price. I am leading eleven members of the California congressional delegation in sounding the alarm on this issue and calling on Gov. Gavin Newsom and the California Legislature to act immediately and repay California's outstanding federal unemployment insurance loans to prevent this burden from unfairly falling on California employers. It is the state's duty to take fiscal responsibility for its actions. Failure to do so could jeopardize the financial stability of millions of California's small employers.