Unemployment Insurance

UI Fund’s Debt Projected to Grow, Extending Multibillion-Dollar Tax Hike on Employers

Unemployment Insurance

California’s Unemployment Insurance Fund will end the year with a $21.7 billion debt to the federal government that will continue growing through 2025, according to the latest Unemployment Insurance Fund forecast from the Employment Development Department.

The debt triggers an automatic tax increase on employers. The EDD’s report stated that the debt triggered a $396 million tax increase on employers in 2023, projected to increase to $812 million this year – a cumulative $1.2 billion tax hike for just those two years.

California’s UI Fund, responsible for providing financial assistance to unemployed residents, has faced financial challenges since the onset of the COVID-19 pandemic. The fund ended 2019 with a $3.3 billion surplus, but that reserve was quickly depleted due to a sharp rise in unemployment associated with the pandemic and government-mandated business closures.

The fund was declared insolvent, prompting a federal loan that allowed the state to continue providing benefits to out-of-work Californians.

The fund has ended each year since 2020 in debt – reaching $20.5 billion in 2023, climbing to a projected $21.7 billion this year, and projected to increase to $22 billion by the end of 2025.

Employers will be forced to pay higher employment taxes to repay the loans. The Federal Unemployment Tax Act (FUTA) credit typically allows employers to deduct 5.4 percent of their tax liability. However, when a state’s UI fund owes the federal government, the credit is reduced at a rate of 0.3 percent annually and employers pay higher taxes.

Business payroll taxes increased January 1 and will continue to increase an additional $21 per employee for every year the debt to the federal government remains.

Benefits to unemployed Californians have continued to grow as California’s unemployment rate has reached the highest in the nation. UI benefits increased from $5 billion in 2022 to $6.7 billion in 2023, and are projected to reach $6.8 billion for this year.

California’s unemployment rate was 4.2 percent in 2022, 4.6 percent in 2023, and is projected to reach 5 percent in the fourth quarter of 2024.

Governor Gavin Newsom and the Legislature approved a “guaranteed” $500 million payment toward the UI debt as part of the 2022-23 state budget but canceled the payment as part of the 2023-24 budget. No debt payments were included in any subsequent budget agreements.

The state has continued to pay interest on the federal loans, costing taxpayers $333.5 million in 2022 and $301.6 million in 2023.

Despite the fund’s problems, a proposal to expand benefits to striking workers is active in the Legislature. SB 1116, by Senator Anthony Portantino, passed the Senate on a 22-12 vote last month and was referred to the Assembly Insurance Committee this week.

During the pandemic, 22 states accepted federal loans to cover UI benefits. By the end of 2022, all but four had repaid their federal loans. Governing magazine reported last month that the number of states that owe the federal government is now down to two: California and New York.