For businesses in the Golden State, California Dreamin’ becomes California Screamin’. The state Unemployment Insurance (UI) Trust has $18.7 billion in debt to the federal government, and Gov. Gavin Newsom’s plan to settle the debt has been filed.
In 2022, the state benefited from a $100 billion surplus and gave the green light to allocate $750 million to the trust fund. Now, however, the state’s outlook has changed to a $24 billion deficit, prompting Gov. Newsom to propose removing the contribution. Although the $750 million payment was a drop in the bucket compared to the total amount owed, it would have started the debt repayment process. Now companies are solely responsible for making these payments. This is essentially a tax increase under a different name.
This wasn’t the only chance officials had to damage the trust fund. California has received more than $40 billion in state tax refund funds since March 2021, and yet none of that has been allocated to the state’s UI Trust Fund.
As the state trust fund remains insolvent, the Federal Unemployment Tax Act (FUTA) tax credit was reduced, raising the effective federal unemployment insurance tax from 0.6% to 0.9%. The effective interest rate will continue to rise until the trust fund is replenished. This is nothing new for California employers — the state’s trust fund was in the $10 billion hole after the Great Recession. The employers continuously replenished the trust fund over the course of six years. This episode could last a lot longer.
California employers are not alone. Illinois, New York, and the Virgin Islands also have bankrupt trust funds, resulting in employers in those states also having to pay higher FUTA taxes. As usual, things are likely to get worse before they get better. On Jan. 30, the US Department of Labor released the updated interest rate that the Treasury Department will charge on state UI trust fund loans. The interest rate increases from 1.5909% in 2022 to 1.6776% in 2023. Interest payments are due September 30 and may not be paid out of the UI Trust. Typically, interest payments are allocated from the state’s general fund.
Despite the bankruptcy of California’s UI system, state lawmakers are proposing to create a new program that would make the situation worse by providing unemployment benefits to undocumented workers. The legislation does not include a funding mechanism for the proposed programme. No matter how you think about immigration, it makes little sense.
California lawmakers have previously attempted to pass similar legislation, but Gov. Newsom rejected the latest attempt due to budget constraints. Employers must hope he does the same again and eventually takes action to restore the UI trust fund.
About the AuthorsStephanie Ferguson
Director, Global Employment Policy and Special Initiatives, US Chamber of Commerce