The federal tax that California employers pay to support the unemployment insurance (UI) program increased again January 1 due to the continuing insolvency of the UI Trust Fund, and will continue to increase every year until the debt is paid.
The state administration projects that without corrective action, the federal loan will not be fully repaid until sometime after 2020.
California employers have been paying higher taxes since the beginning of 2011 because the state has not repaid money it borrowed from the federal government to pay UI benefits. California’s outstanding federal loan was $10.3 billion at the start of this year, more than $6.5 billion greater than the next highest state loan, New York.
California has the third highest unemployment rate in the nation, behind Rhode Island and Nevada, according to the U.S. Bureau of Labor Statistics.
Stakeholder Meetings
The Governor has acknowledged the need for action to deal with the plight of the UI fund and has directed the Labor and Workforce Development Agency to bring key business and labor stakeholders together this year to identify alternatives to meet the state’s annual federal interest obligations, repay the federal loan and return the state’s UI fund to solvency.
California’s UI program is funded exclusively from taxes on employers, with the exception of federal grants for administration and certain extended benefits. Since 2001, California’s total benefit costs have exceeded its revenue in all but two years.
Insolvency Factor
California’s current UI fund insolvency is caused not only by significant unemployment, but also can be traced back to the UI benefit increases imposed in 2001. The California Chamber of Commerce opposed this increase in benefits because it was not coupled with cost savings.
Further exacerbating the situation, as unemployment and duration of benefits increase, the state is collecting fewer tax revenues and paying more benefits to unemployed Californians.
With annual UI benefit obligations projected to be around $6.5 billion in 2013, California can expect its UI Trust Fund to be in debt about $10.2 billion to the Federal Unemployment Account (FUA) by the end of 2013. The state Employment Development Department (EDD) projects the fund balance to be at a $9.2 billion deficit by the end of 2014.
If California does not have sufficient UI tax receipts to both pay ongoing benefits and repay the FUA loan, the principal debt will remain outstanding, the state will continue to pay interest on the balance, and the federal tax on employers will continue to rise by about $21 per employee per year.
The first annual interest payment on the FUA loan was slightly more than $303.4 million, which was paid in September 2011. The second interest payment, made on September 30, 2012, was $308.2 million. An additional $291.2 million is estimated due in 2013, and $278.8 million in 2014.
Federal law prohibits paying interest from the UI Trust Fund. Therefore, given California’s budget woes, the interest payments in 2011 and 2012 were loaned from the State Disability Insurance account, and will be paid back with interest from the General Fund.
Reduced Tax Offsets
Federal law requires the federal government to incrementally reduce the tax offsets to employers in states that do not timely repay their FUA loans—essentially a tax increase. A federal tax is levied on employers at a current rate of 6% on wages up to $7,000 a year.
Employers will lose 0.3% of their federal tax credit each year, which translates into approximately $21 per year for any employee who makes $7,000 or more a year. (California employers pay UI taxes on the first $7,000 of wages per employee.)
Statewide, the tax increase totaled an estimated $289.8 million in 2012 and $615.7 million in 2013, according to the EDD. This represents a loss of 0.6% of the tax credit this past year. The additional taxes paid will help offset California’s federal loan balance.
The table above illustrates the Federal Unemployment Tax Act (FUTA) tax increase to employers over the years. The tax will continue to increase 0.3% per year until such time as the offset credit is exhausted, or the fund becomes solvent. The offset credit will be fully restored once the trust fund is solvent.
A report of the state Legislative Analyst’s Office suggested that options involving UI tax increases on employers would quickly improve the fund’s condition, but also concluded that tax increases could hurt California’s competitiveness.
CalChamber Position
The CalChamber believes that for California to combat rising unemployment, and therefore improve the stability of the UI Trust Fund, the state must improve the business climate in California.
The California Legislature has made a series of public policy choices that has led to California having a high cost of wages, a high tax burden, excessive power costs and expensive commercial property. Any “fix” for the UI fund must address the trust fund insolvency, ensure further debt is not incurred going forward and include a consideration of all options to streamline the system. Furthermore, any solution must include a series of policy changes that will improve California’s business climate and spur investment and job creation.
By: Marti Fisher, Policy Advocate, CalChamber