Taxpayers, not employers, should pay down EDD debt

In response to the pandemic, Gov. Gavin Newsom took a bold step to mitigate the spread of the coronavirus and save lives by ordering large sectors of California’s economy closed. Millions of Californians suddenly hit the unemployment lines, and the state’s unemployment insurance fund began distributing unprecedented sums of benefits.

In addition to legitimate claims from out-of-work Californians, there was large-scale fraud that was successful because of mismanagement at the Employment Development Department. An estimated 10% of payments were confirmed as fraudulent, and another 17% as potentially fraudulent — $11.4 billion in confirmed fraud, with a potential of approximately $20 billion more. 

Unless the state steps in to help California businesses, employers will be on the hook for repaying the costs caused by the pandemic and the department’s mistakes.

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

California was one of 18 states that needed a federal loan to continue paying benefits, as the enormous overnight increase in unemployment claims wiped out state funds. The Legislative Analyst’s Office noted that California’s amount borrowed per worker ($1,070) “is higher than in other states due to a combination of relatively generous state UI benefits and the state’s above-average unemployment rate throughout the pandemic.” 

To date, California has borrowed $21.8 billion from the federal government. If California doesn’t repay these loans in full by Sept. 6, interest will begin to accrue at more than 2.27%. 

The Employment Development Department forecasts that the unemployment insurance fund will have a $26.7 billion deficit at the end of 2022. Employers have been paying the maximum payroll tax (for the state’s largest employers, this is 6.2% on the first $7,000 of each employee’s wages, a taxable wage base set by the Legislature). 

Because California ended 2020, and is expected to end 2021, with an unemployment insurance fund deficit, the federal government will begin reducing the Federal Unemployment Tax Act credit, resulting in even higher taxes on employers. The federal tax credit stands at 5.4%. For each year that California maintains a fund deficit, the federal government reduces the credit 0.3% until all loans and interest have been repaid. The credit reduction will occur beginning with the 2022 tax year, with higher taxes due in 2023.

For every 0.3% reduction in the credit, California employers pay an additional $21 per employee annually. Businesses 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 will not fully pay off the loans until the 2032 tax year, at which point they would be paying $266 per employee in higher taxes. These figures assume no further economic closures or recessions, and no change in the state’s civilian labor force of 19.3 million.

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

As California continues reopening, the Legislature and governor should enact policies that promote job growth and, equally important, job retention in a rapidly changing labor market. As the pandemic highlighted, the rise of remote work could result in California companies shifting employees out of state. 

With a record state budget surplus of an estimated $80 billion and approximately $27 billion in additional federal stimulus dollars, the Legislature and administration should commit to paying down the unemployment insurance debt to avoid significant tax increases for employers and help ensure that businesses remain in the Golden State. Our home-state employers and working families deserve no less.

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