Unemployment Insurance Fund Debt Could Decimate Struggling Businesses

The unemployment insurance (UI) fund in California saved millions of workers from COVID job losses, but the devastating impact of the pandemic completely wiped the fund out, warns Tom Sheehy, Principal and Founder of Sheehy Strategy Group.

In order to continue providing unemployment benefits after the UI fund was emptied, California borrowed over $21 billion from the federal government. Now, California is faced with a dilemma: pay back the debt or steeply raise taxes on employers.                                               

Employers currently pay $42 per year for each employee. If California does not pay off its loan from the federal government, the tax will automatically increase—potentially by as much as 900%, explains Sheehy. This would raise the tax per employee to $420 a year.

Governor Newsom has proposed using $1.1 billion of California’s estimated $38 billion budget surplus to pay down the $21 billion debt. However, this is not nearly enough to stop the automatic tax increase on employers.

These increased taxes would cripple businesses struggling to recover from the impact of the COVID-19 pandemic.

Dan Walters, writing for CalMatters, echoes this warning:

It’s likely that the feds will once again hike payroll taxes on employers to repay California’s new and much-larger debt, which will make them even less willing to pay more state taxes to rebuild the UIF for the next recession. If it sounds like a never-ending circular crisis, that’s because it is. It’s akin to consumers taking out credit card loans to make their credit card payments.

Governor Newsom and the Legislature must avoid this “circular crisis” and must work together to come up with a solution to this dilemma before it decimates California businesses.

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