Taxpayers, Not Employers, Should Pay Down EDD Debt

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In summary

With a record state budget surplus and $ 27 billion in additional federal stimulus, the legislature and governor are expected to commit to paying down the $ 22 billion unemployment insurance debt.

By Robert Gutierrez, special at CalMatters

Robert Gutierrez is president of the California Taxpayers Association, [email protected].

In response to the pandemic, Governor Gavin Newsom has taken a bold step to mitigate the spread of the coronavirus and save lives by ordering the shutdown of large sectors of the California economy. Millions of Californians suddenly hit the unemployment lines, and the state’s unemployment insurance fund began handing out unprecedented amounts of benefits.

In addition to the legitimate claims of unemployed Californians, there has been a successful large-scale fraud due to mismanagement within the Department of Employment Development. It is estimated that 10% of payments were confirmed as fraudulent and 17% as potentially fraudulent – $ 11.4 billion in confirmed fraud, with a potential of about $ 20 billion more.

Unless the state steps in to help California businesses, employers will have to reimburse costs caused by the pandemic and the department’s errors.

According to the last unemployment insurance fund in the department report, the fund had a surplus of $ 3.28 billion before going into deficit as of June 3, 2020. In total, California paid $ 26.8 billion in claims in 2020.

California was one of the 18 states who needed a federal loan to keep paying benefits because the huge overnight increase in jobless claims wiped out state funds. The Office of the Legislative Analyst noted that the amount California borrowed per worker ($ 1,070) “is higher than in other states due to a combination of state unemployment insurance benefits. relatively generous and higher than the state average unemployment rate throughout the pandemic ”.

To date, California has borrowed $ 21.8 billion from the federal government. If California doesn’t pay off those loans in full by September 6, interest will start to add up to over 2.27%.

The Department of Employment Development anticipates that the unemployment insurance fund will have a Deficit of $ 26.7 billion at the end of 2022. Employers pay maximum payroll tax (for the state’s largest employers, this is 6.2% on the first $ 7,000 of each employee’s salary, a taxable salary base fixed by the legislature).

Since California ended 2020 and is expected to end 2021, with an unemployment insurance fund deficit, the federal government will begin to reduce the Federal Unemployment Tax Act credit, resulting in even higher taxes for employers. The federal tax credit is 5.4%. For each year that California maintains a fund deficit, the federal government reduces the credit by 0.3% until all loans and interest have been repaid. The credit reduction will take place from tax year 2022, with higher taxes owed in 2023.

For every 0.3% reduction in credit, California employers pay an additional $ 21 per employee each year. Companies will pay $ 77 more per employee in 2023 and $ 98 more per employee in 2024.

If employers are held responsible for repaying the entire federal loan, California businesses will pay $ 34.2 billion in higher taxes and not fully repay loans until tax year 2032, when they are due. would pay $ 266 per employee in higher taxes. These numbers assume no further economic shutdowns or recessions, and no change in the state’s civilian workforce of 19.3 million.

The governor’s plan to reduce the principal by $ 1.1 billion would reduce the tax liability to $ 29 billion and result in a one-year tax savings.

As California continues to reopen, the legislature and governor are expected to enact policies that promote job growth and, just as important, maintain employment in a rapidly changing labor market. As the pandemic has highlighted, the increase in remote working could cause California businesses to move employees out of state.

With a record budget surplus of about $ 80 billion and about $ 27 billion in additional federal stimulus, the legislature and administration should commit to paying down unemployment insurance debt in order to avoid d ‘significant tax increases for employers and to ensure that businesses stay in the Golden State. Our national employers and working families deserve no less.

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Robert Gutierrez has already written about California’s economic future, tax increases and the budget surplus.


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