The States That Still Owe Billions in Federal Unemployment Loans

As businesses closed and job losses spiked during the depths of the pandemic, 22 states took out billions of dollars in advances from the federal government to pay unemployment benefits.

Since then, all but five states and the Virgin Islands have paid back the loans, partly with the help of the billions in federal pandemic relief dollars Washington sent their way. 

Companies in the states with outstanding balances are now facing an increase in their unemployment taxes—albeit a moderate one—because their states continue to be in debt. This has exposed Democratic governors in these states to attacks from Rep. Kevin Brady, the top Republican on the House Ways and Means Committee, which handles tax and unemployment policy.

“This self-imposed pain is preventable,” Brady wrote California Gov. Gavin Newsom on Oct. 3, referring to the potential tax increase. 

“I urge you to address this delinquency promptly and responsibly by tapping your significant budget surplus or applying federal coronavirus aid to ensure California employers and workers across the state do not bear the burden of the state’s inaction,” he added.

Brady noted that the state owes around $18 billion, the largest debt of the five states. California has received billions in coronavirus aid and earlier this year reported a budget surplus of about $97 billion.

Brady wrote similar letters to New York Gov. Kathy Hochul, Connecticut Gov. Ned Lamont and Illinois Gov. JB Pritzker. 

The states have paid back billions of their debt since the beginning of the year. A spokesman for Illinois’ comptroller noted to Route Fifty that the state repaid $450 million last month alone. 

New York’s labor department said in a statement that the state has been “squarely focused on helping both workers and businesses not only survive but return even stronger.”

New York has lowered its debt by $1.3 billion since Jan. 3, according to Treasury Department data. California has paid back about $1.5 billion since then and Connecticut about $440 million. However, according to Treasury figures as of Tuesday, Illinois still owed roughly $1.3 billion, New York about $8 billion and Connecticut, $109.4 million. 

The Virgin Islands still owed $96 million, about what it owed on Jan. 3. Colorado owed $33 million, down from $1 billion at the start of the year. A Ways and Means spokesman didn’t respond when asked why Brady did not admonish them as well.

The states’ debt could soon mean tax hikes for businesses. Under federal policy, employers pay unemployment taxes of 6% for the first $7,000 paid annually to each of their employees. However, employers receive a tax credit of up to 5.4%, meaning they actually pay 0.6%.

The problem is that if their states are in debt for two or more consecutive years, employers will see their credit reduced by 0.3% for each year of outstanding balances. That will kick in for the businesses if the states don’t pay back what they owe by Nov. 10.

The credit will then continue to be reduced after the third year and then the fifth. 

“Without repayment, Main Street businesses are at risk of facing higher taxes that will undercut job creation and drive prices higher just as families and small businesses are struggling with record-high inflation and a looming recession,” Brady wrote the governors.

In reality, the reduction in the credit is “modest,” Wayne Vroman, associate fellow at the Urban Institute’s Center on Labor, Human Services, and Population said in an interview. 

Still, Vroman wondered why the states with debts have not used their federal relief dollars to replenish their unemployment accounts.

“I’m not sure why states like California and New York have not done that when the money is available,” Vroman said. “It’s still available if the states want to use it.”

Indeed, an analysis last month by the left-leaning Center on Budget and Policy Priorities found that 24 states have spent almost $18 billion of their American Rescue Plan Act aid in this way, with about 11% of the recovery dollars going to bolster unemployment funds.

In states still carrying loan balances, officials say they’ve had other priorities to spend on. 

New York’s labor department said, for example, that Hochul has announced more than $1 billion in aid for businesses in her state, including the Pandemic Small Business Recovery Grant Program. In addition, the department said Hochul has exempted employers from paying unemployment taxes for benefits paid as a result of the pandemic. The department said that saved employers an average of  $173 per employee in 2021 and $139 per employee in 2022.

Spokespeople for the governors of California, Connecticut and Illinois did not return requests for comment. 

Even with the federal aid they’ve received, states have asked for more relief in paying back the advances they’ve taken out for unemployment.

Illinois Comptroller Susana Mendoza, for instance, has been pushing for a bill sponsored by two Democratic senators from her state, Majority Whip Dick Durbin and Tammy Duckworth, which would retroactively wipe out millions in interest costs for the advances that have piled up. Illinois has seen its debt rise by about $1 million thus far this fiscal year because of the 1.6% interest they have to pay, according to Treasury figures.

Mendoza, in March, told Route Fifty that despite having a $1.7 billion surplus, the state could use the money that would otherwise go to paying tens of millions in interest. California has racked up nearly $15 million in interest this fiscal year because it has not paid back its debt.

The Center on Budget and Policy Priorities has argued that states should not be spending ARPA dollars to shore up unemployment funds. Instead, the group urged states to spend their remaining aid to deal with the pandemic’s persisting effects, like the strains on health care, household finances, local economies and school students.

However, Jared Walczak, vice president of state projects at the Tax Foundation, noted that the additional federal taxes businesses are facing would come on top of the fact that many states automatically increase their unemployment taxes when unemployment insurance funds are depleted. 

“State taxes go up dramatically when funds are low,” he said in an interview.

The idea of businesses having to pay more because their states haven’t paid off their loans is making some business groups unhappy.

“California’s business community is very concerned about the prospect of paying increased per-employee taxes because of our Unemployment Insurance Fund’s insolvency over the next six-to-ten years,” California Chamber of Commerce policy advocate, Rob Moutrie, said in a statement. “After the Great Recession, we paid increased taxes for almost a decade—and the insolvency now is much larger.”

Moutrie said the state hasn’t spent enough on aid to businesses during the pandemic as the group would have liked. “Which means California businesses are likely to bear the bill for the Covid-19 shutdown and related unemployment,” he said.