I sincerely hope that readers aren’t turned off by the title of this column. While most taxpayers aren’t directly responsible for paying unemployment insurance taxes, the truth is we all pay and, in California, we pay a great deal more than we should.
Last week I received an email from a dentist who operates a small dental office and is required to pay the unemployment insurance tax and, sadly, is paying much more than he should because our unemployment insurance program is insolvent. Like so many other measurements of California’s performance relative to other states, our businesses – both large and small – are paying a penalty for the incompetence of our elected officials and bureaucrats.
Here’s what taxpayers should know about unemployment insurance.
California’s unemployment insurance program (UI) is funded by a tax imposed on employers. The proceeds are deposited in the Unemployment Trust Fund of the U.S. Treasury Department. States may withdraw funds from their accounts to pay unemployment benefits.
Here’s the kicker: If a state’s trust fund does not have adequate funds to pay benefits, it must borrow money from the federal fund to satisfy unemployment claims. But if a state’s UI Fund is insolvent for more than two years, that tax rate increases each year. The tax can be hefty, as much as $420 per employee per year.
Like other states, California was slammed by the pandemic. Low unemployment quickly became unprecedented levels of high unemployment. While few dispute the need for workplace closures early in the pandemic, California was much slower in reopening than more freedom-oriented states like Texas and Florida. This had a direct impact on the further decimation of the UI fund.
That’s just one reason why, by the spring of 2020, California’s UI Fund was depleted and continued to fall further behind. This required even more borrowing from the federal government.
Even worse, California was suffering from a second epidemic: an epidemic of massive fraud in the administration of unemployment insurance claims. On Gov. Gavin Newsom’s watch, the Employment Development Department (EDD) failed to process a backlog of claims for hundreds of thousands of unemployed Californians while sending out as much as $30 billion in unemployment benefits for phony claims, including fraudulent claims paid to death row inmates.
Much too late, after several legislative hearings on the lack of oversight of EDD, there were modest corrective actions taken. But this was the epitome of closing the barn door after the horses bolted.
If anyone believes that the massive EDD fraud didn’t impact ordinary taxpayers, they couldn’t be more wrong. California’s employers are directly responsible for the cost of EDD providing benefits on fraudulent claims, which means that all of us must absorb the cost of this inexcusable lack of oversight.
Perhaps the most important thing for taxpayers to know about California’s unemployment insurance program is how insolvent it is. EDD itself projects that at year’s end the UI Fund’s total debt will exceed $19 billion. Moreover, the U.S. Department of Labor confirms that California’s debt problem is the worst of any state, with an accumulated debt that exceeds the debt of all other states combined.
Again, in the competition between states, it is notable that most other states have no outstanding debt because they used Covid relief funds from Washington to pay down their Ul loans. For example, Texas approved a $7.2 billion payment and has eliminated its UI debt entirely.
What about California? Because of its insolvency, it must pay $470 million in interest payments alone to the federal government. That’s nearly half a billion that could otherwise go to education, transportation, or public safety. Worse yet, this is an annually recurring expense.
Remember just last June when California had a $95 billion surplus? That would have been the time to increase the payments to the federal government to reduce our UI debt. But now, the LAO tells us we have a $25 billion deficit “problem.”
