States face tough choices on repaying loans to Uncle Sam for pandemic unemployment benefits

States face tough choices on repaying loans to Uncle Sam for pandemic unemployment benefits
Daniel A. Varela/Miami Herald/Tribune News Service/Getty Images

The federal government picked up the cost of the unprecedented expansion of jobless benefits during the pandemic, but many states are still facing a hefty tab for their share of the program — and tough decisions about how to cover the bill.

To avoid hiking taxes on employers, some states have opted to use billions of federal dollars they received in two congressional rescue packages to replenish their unemployment trust funds or repay the federal loans they took out.

But others must decide whether to dip into the federal funds, hike taxes on employers or cut future benefits — as some did after the Great Recession, leaving their jobless residents with a thinner safety net.

At least one state is increasing the levy on employers. New Jersey announced in August that Garden State businesses will have to pay about $250 million more in unemployment taxes in the next fiscal year, the first of three years of expected hikes.

And businesses in other states could also face higher state and federal unemployment taxes unless officials utilize their coronavirus rescue funds or find another way to build back their trust funds.

“Without that federal relief to replenish their trust funds, states would have to rely on businesses to backfill those funds,” said Emily Maher, senior policy specialist at the National Conference of State Legislatures, which has tracked states’ usage of the relief money.

A crush of claims

Prior to the pandemic, state unemployment trust funds were in relatively good shape, with balances totaling $72.5 billion, according to the Tax Foundation, a right-leaning think tank.

The coronavirus outbreak sent the economy into a tailspin in the spring of 2020, leaving millions of people out of work. Congress stepped in to assist the jobless, providing a weekly federal boost to payments, extending the duration of benefits and creating a special program for freelancers, independent contractors, the self-employed and certain people affected by the virus. But states still had to pay their regular benefits.

States have shelled out about $175 billion since the start of the pandemic, about 3.5 times their typical payments for the period, according to Jared Walczak, the foundation’s vice president of state projects. (The federal government has distributed about $661 billion in benefits through its three pandemic programs, which ended last month.)

The flood of claims forced states to drain their trust funds, which now have a negative balance of $11 billion and need $115 billion to reach minimum adequate solvency levels, Walczak said.

Higher taxes, fewer benefits after the last major recession

The Great Recession also walloped unemployment trust funds, forcing an unprecedented 35 states and the Virgin Islands to borrow money from the federal government to pay claims.

The loans totaled a record $42 billion by the end of 2010. Some states needed years to eliminate their balances, which forced them to pay interest on the debt. It took California until 2018 to pay off its borrowing, which peaked at $10.2 billion in 2012 and accrued $1.4 billion in interest.

Employers in most of these states ended up paying higher taxes to cover the debt — even though state officials are typically reluctant to raise levies on businesses since it can slow hiring and economic recovery.

Also, 10 states cut back the duration of their unemployment programs to as little as 12 weeks — down from the typical 26 weeks — to reduce future obligations.

Federal government comes to the rescue during the pandemic

Congress provided states with a total of $500 billion in relief funds in two coronavirus rescue packages in 2020 and 2021.

Some 22 states utilized nearly $8.3 billion of their CARES Act allocations from 2020 to bolster their unemployment trust funds, according to an estimate last month by the National Conference of State Legislatures.

And 15 states allocated roughly $8 billion of their American Rescue Plan funds from March to replenish their trust funds or pay back federal loans

Ohio, for instance, opted to use $1.5 billion of its American Rescue Plan allotment to pay off its debt to the Treasury Department in early September, a few days before interest was set to start. (Congress deferred the accrual of interest on the loans until September 6 as part of a coronavirus relief package.)

“I’m not willing to let our employers bear the unemployment debt burden caused by the pandemic. By repaying this loan in full, we ensure that Ohio businesses won’t see increases in their federal unemployment payroll taxes,” said Republican Gov. Mike DeWine. “Without this added tax burden, our employers can invest more money into their businesses and hire more staff.”

Virginia directed $862 million of American Rescue Plan funds to replenish its trust fund over the summer. The state had paid $12.9 billion in benefits to more than 1.3 million residents between the start of the pandemic and May 2021.

“Shoring up the commonwealth’s unemployment insurance trust fund is a smart investment that will prevent Virginia businesses from paying higher taxes and allow our economy to continue surging,” said Democratic Gov. Ralph Northam.

Insolvent trust funds, outstanding loans

Even if they don’t owe money to the federal government, some states’ unemployment trust funds are in poor shape. Some 34 state accounts are currently considered insolvent by federal standards, meaning the balances are below the minimum level needed to get through a mild, year-long recession, Walczak said.

Georgia has 10% of the funds needed to meet minimum solvency standards, as of mid-September, according to a Tax Foundation analysis, while Nevada has only 14%. The federal infusions only brought Virginia to 12% of the necessary funds and Ohio to 18%.

States tend to increase unemployment taxes when fund balances are low, though many have tried to avoid doing so during the pandemic. Multiple states have modified their unemployment programs so businesses are not charged for workers laid off as a result of the pandemic, which can increase their levies.

“Many states have hit pause on those tax increases for now, which is good news for employers who may be struggling, but eventually the revenue has to come from somewhere,” Walczak said.

He argues that states should use the nearly $84 billion in American Rescue Plan funds available to them to help return their trust funds to pre-pandemic levels.

Meanwhile, businesses in the 11 states that have yet to repay their $45.4 billion in federal loans could face even steeper tax hikes, said Douglas Holmes, president of Strategic Services on Unemployment & Workers’ Compensation, which represents employers on public policy issues.

What’s more, businesses’ federal unemployment taxes could rise next year if the balances aren’t paid off. And some states levy surcharges on employers to pay the interest owed on the Treasury loans.

“Because it’s a payroll tax, that’s a tax you can’t avoid,” Holmes said. “Those drive up the cost of hiring people and discourage job creation.”

States are taking different approaches to deal with the debt and the nearly $62 million in interest, which was due at the end of September.

Colorado is using federal funds to pay its $1.4 million interest tab on its $1 billion loan, while Hawaii plans to completely extinguish its $7.43 million in debt by the end of the year by utilizing relief money. Pennsylvania said it was still reviewing its options to pay off its nearly $809 million balance.

Massachusetts lawmakers approved legislation to allow the issuance of bonds to repay the state’s $2.3 billion loan so that employers are not hit with federal tax increases and to replenish the trust fund.

Texas has already paid off $1 billion of its balance with tax revenue from employers, which will also cover the $8.2 interest due at the end of September. But the state did not increase its overall unemployment tax rate for 2021 and plans to limit the future impact on businesses through measures that include issuing bonds. The state’s balance now stands at nearly $6 billion.

Asked about plans to settle its tab, California’s unemployment agency said Democratic Gov. Gavin Newsom has urged Congress to waive interest payments, and New York’s agency said it is asking the federal government to forgive the loan entirely, or at least the interest.

California recently used state general funds to pay $29.3 million in interest on its nearly $20 billion balance, but New York declined to specify what money it utilized for a $3.4 million interest payment on its $9 billion loan.

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