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

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By Tami Luhby, CNN

The federal government has borne the cost of the unprecedented expansion of unemployment benefits during the pandemic, but many states still face a heavy bill for their part of the program – and tough decisions on how to cover the bill.

To avoid raising employers’ taxes, some states have chosen to use the billions of federal dollars they received in two congressional bailouts to replenish their unemployment trust funds or to pay off federal loans they have received. they contracted.

But others must decide whether to dip into federal funds, raise employer taxes, or cut future benefits – as some did after the Great Recession, leaving their unemployed residents with a thinner safety net. .

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

And businesses in other states could face higher federal and state unemployment taxes as well, unless officials use their coronavirus relief funds or find another way to replenish their trust funds.

“Without this federal relief to replenish their trust funds, states would have to rely on businesses to replenish those funds,” said Emily Maher, senior policy specialist at the National Conference of State Legislatures, which monitored the State use of aid money.

A crushing of claims

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

The coronavirus epidemic brought down the economy in the spring of 2020, leaving millions of people unemployed. Congress stepped in to help the unemployed, giving a weekly federal boost to payments, extending the duration of benefits and creating a special program for freelancers, independent contractors, self-employed people and some people affected by the virus . But states still had to pay their regular benefits.

States have disbursed 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 distributed about $ 661 billion in benefits under its three pandemic programs, which ended last month.)

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

Higher taxes, fewer benefits after the last great recession

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

Loans totaled a record $ 42 billion at the end of 2010. Some states took several years to clear their balances, forcing them to pay interest on the debt. It took California until 2018 to repay its loans, which peaked at $ 10.2 billion in 2012 and generated $ 1.4 billion in interest.

Employers in most of these states ended up paying higher taxes to cover the debt, although state officials are generally reluctant to increase corporate levies as it can slow hiring and economic recovery. .

In addition, 10 states have reduced the length of their unemployment programs to as little as 12 weeks – compared to a typical 26 weeks – to reduce future obligations.

Federal government comes to the rescue during pandemic

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

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

And 15 states allocated about $ 8 billion of their US bailout funds as of March to replenish their trust funds or repay federal loans.

Ohio, for example, chose to use $ 1.5 billion of its US bailout allocation to pay off its debt to the Treasury Department in early September, days before interest began. (Congress has postponed the accumulation of interest on loans until September 6 as part of a coronavirus relief program.)

“I am not prepared to let our employers shoulder the burden of the unemployment debt caused by the pandemic. By repaying this loan in full, we are ensuring that Ohio businesses do not see an increase in their federal payroll taxes on unemployment, ”said Republican Gov. Mike DeWine. “Without this additional tax burden, our employers can invest more money in their businesses and hire more people.”

Virginia earmarked $ 862 million in US bailout funds to replenish its trust fund over the summer. The state had paid $ 12.9 billion in benefits to more than 1.3 million people between the start of the pandemic and May 2021.

“Strengthening the Commonwealth Unemployment Insurance Trust Fund is a smart investment that will prevent Virginia businesses from paying higher taxes and allow our economy to continue to grow,” Democratic Gov. Ralph Northam said.

Insolvent trust funds, outstanding loans

Even though they don’t owe the federal government money, some state unemployment trust funds are in bad 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 one-year recession, Walczak said.

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

States tend to raise unemployment taxes when fund balances are low, although many have tried to avoid doing so during the pandemic. Several states have changed their unemployment programs so that companies are not billed for workers made redundant due to the pandemic, which may increase their levies.

“Many states have suspended these tax increases for now, which is good news for employers who may be struggling, but the income eventually has to come from somewhere,” Walczak said.

He argues that states should use the nearly $ 84 billion US bailout funds at their disposal to help bring their trust funds back 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 bigger tax hikes, said Douglas Holmes, president of Strategic Services on Unemployment. & Workers’ Compensation, which represents employers on public policy issues.

In addition, federal taxes on business unemployment could increase next year if balances are not repaid. And some states levy surcharges on employers to pay interest owed on treasury loans.

“Because it’s a payroll tax, it’s a tax you can’t avoid,” Holmes said. “These increase the cost of hiring and discourage job creation. “

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

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

Massachusetts lawmakers approved legislation allowing the issuance of bonds to repay the state’s $ 2.3 billion loan so employers are not affected by federal tax increases and to replenish the fund in trust.

Texas has already paid off $ 1 billion of its balance through employer tax receipts, which will also cover the $ 8.2 interest owed in late September. But the state has not raised its overall unemployment tax rate for 2021 and plans to limit the future impact on businesses through measures such as issuing bonds. The state’s balance now stands at nearly $ 6 billion.

When asked about plans to settle his bill, the California unemployment agency said Democratic Gov. Gavin Newsom urged Congress to forgo interest payments, and the New York agency said it was asking the federal government to write off the loan entirely, or at least the interest.

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

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