Rich Pedroncelli/AP Photo
A runner passes the office of the California Employment Development Department in Sacramento. California’s Chamber of Commerce has pressured the state to use federal relief funds to pay off unemployment insurance debt.
The $350 billion in federal fiscal relief to state and local governments in the American Rescue Plan (ARP) gave states an unprecedented opportunity to provide emergency housing, nutrition, health services, and other programs and benefits designed to help workers and communities deal with the pandemic’s economic shocks. But some states chose a different route—a tax break for employers at the expense of workers.
As unemployment rates spiked during the pandemic, states turned to federal loans to fund their unemployment insurance programs. Researchers at the Economic Policy Institute (EPI) have found that 16 states have used ARP funds to pay off these debts, after 23 states had already used CARES Act funds to bolster their unemployment insurance trust funds. Overall, 33 states from Texas to Connecticut have used federal COVID relief funds to pay off unemployment insurance trust fund debts.
When state revenues are insufficient to cover unemployment insurance demand, states can borrow from the federal Unemployment Trust Fund, but they must repay these debts within a few years. Historically, states have paid off these debts by increasing the state unemployment insurance tax rate on employers, so using COVID relief funds to pay off these debts effectively gives businesses a tax break.
“The spirit of this legislation was to be as broad as possible to really allow states to directly spend on people in a variety of ways,” says Asha Banerjee, an EPI economic analyst who worked on the findings. “This is not even direct aid to small businesses or something that businesses could use to invest in physical capital or hiring: This is just a future tax cut.” Banerjee also noted that some states with solvent trust funds instead cut benefits severely to avoid federal borrowing.
States have now spent a combined $15.7 billion of ARP funds that could have been used to make unemployment insurance more sustainable before the next crisis.
The unemployment insurance system was designed to be supported by state and federal taxes on employers. But in many states, these employer taxes are extremely low. In 2020, employers paid an average of just $267 per employee (down 4 percent from 2019), and 75 percent of employers paid no more than 50 cents for every $100 paid in employee wages.
The federal unemployment tax rate is 6 percent on the first $7,000 of wages per employee, but many employers do not even pay that full amount. Employers can get a tax cut of up to 5.4 percentage points, leaving them with a federal unemployment tax rate of just 0.6 percent. But employers cannot receive this tax cut if their state has outstanding debts to the federal government for their unemployment insurance programs, giving employers another incentive to push state officials to pay back these loans.
Chambers of commerce have been lobbying state governments to use COVID relief funds to pay off unemployment insurance debts. For instance, even after California pledged $1.1 billion of its federal relief funding package to pay off unemployment insurance loans, the California Chamber of Commerce pressured the state to use even more funds to pay off the entire debt. Business groups argue that unemployment taxes burden employers, especially small businesses, but the report’s authors pointed to the extremely low existing tax rates. “One could assume that money going towards unemployment insurance must be to the benefit of workers, but that unfortunately is not the case,” says Marokey Sawo, an EPI state economic analyst who also contributed to the research.
There are a number of other ways states could use these relief funds to help workers weather the pandemic. Firstly, states could use the funds to expand unemployment insurance benefits. (Some states did exactly the opposite earlier this year and returned federal unemployment benefits months before the end of the program in a misguided effort to force people to find jobs.) The federal unemployment expansion expired at the beginning of September, immediately cutting off benefits for 7.5 million people. Research from the Century Foundation and the University of Minnesota’s Aaron Sojourner estimates that 5.75 million workers whose benefits expired remain unemployed.
COVID relief funds also could be used to update antiquated state unemployment insurance administration operations. Many states rely on older computer systems and other outdated technologies that keep people waiting months for their benefits. These monies could be used to modernize and streamline unemployment application processes that are often complex and burdensome. Rehiring state government workers to fill the nearly one million jobs cut from state and local agencies would go a long way to help departments still trying to deal with unemployment application backlogs.
States have now spent a combined $15.7 billion of ARP funds to pay off unemployment insurance debts that could have been used to make unemployment insurance more sustainable before the next crisis and make substantial investments in social programs to help the most vulnerable workers. The researchers propose a number of alternative uses for the pandemic relief funds including improving access to broadband, education, housing, and workforce development. “This is a chance for states to really look at long-term investments,” Banerjee says, “But paying off unemployment insurance debt is not one of them.”
