California employers have paid $5.97 billion in higher taxes because the state hasn’t repaid its Unemployment Insurance Fund debt to the federal government – and there is no end in sight – according to a new Unemployment Insurance Fund forecast from the California Employment Development Department (EDD).
The California Unemployment Insurance Fund’s debt to the federal government, which triggers tax increases on employers, is growing as interest accrues and the Legislature and Governor Gavin Newsom choose not to make debt repayments.
In 2020, California began borrowing from the federal government to pay regular UI benefits and ended the year with a federal loan balance of $17.8 billion. The balance – $21.6 billion at the end of 2024 and $21.7 billion at the end of 2025 – is projected to grow to $22 billion by the end of this year and then drop to $21.4 billion by the end of 2027, the EDD reported.
Of the 22 states that received federal loans to keep UI benefits flowing during the pandemic, California is the only one that has not repaid its debt.
Federal law imposes a tax increase on employers, through the Federal Unemployment Tax Act (FUTA) credit reduction, when a state UI Fund is in deficit for two consecutive years. When this happens, the FUTA tax credit is reduced 0.3 percentage points each year, which is the equivalent of an increase in employer-paid federal taxes of $21 per worker per year.
“The FUTA credit reductions started occurring for tax year 2022, with the higher federal taxes due in January 2023,” the EDD reported. “The federal tax increase generated $396 million in 2023, $775 million in 2024, and $1.2 billion in 2025 in contributions, and the FUTA tax collections are projected to increase to $1.6 billion in 2026 and $2.0 billion in 2027.”
California’s business community has repeatedly asked the Legislature and governor to address the debt, but the state’s elected officials have chosen not to approve repayments.
On May 27, Republican state Senator Suzette Martinez Valladares attempted to amend a Democratic colleague’s transportation-related bill (SB 1166, Arreguin) with provisions requiring the state to repay at least $5 billion per year in UI debt from the general fund, but the amendments were tabled with a party-line vote.
U.S. Representative Vince Fong introduced federal legislation May 19 that would require states with outstanding federal UI debt to repay the debt before spending specified federal funds on any other purpose.
Fong dubbed his legislation the “Creating Accountability in Loan Repayment Act,” or “CAL Repayment Act.”