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States now owe interest on money borrowed for unemployment benefits

By September 13, 2021No Comments

A handful of states that borrowed money from the federal government to cover unemployment benefits during the COVID-19 pandemic are now accruing interest on those loans, according to the Treasury Department.

While some states are using federal coronavirus aid to bail out unemployment trust funds and pay back their loans, others are raising unemployment taxes — which are levied on business owners — to repay their debt. 

As jobless claims surged in 2020 and 2021, many state leaders were forced to take on federal loans in order to restore decimated unemployment trust funds. By February 2021, more than 22 states had unemployment trusts at levels below the recommended minimum. 

Now, a handful of those states — including California, Colorado, Illinois, Minnesota, New Jersey, New York, Pennsylvania, Texas, and the Virgin Islands — have outstanding loan balances totaling more than $44 billion, according to the U.S. Treasury. While the loans were initially interest-free, a 2.3% interest rate kicked in on September 6, which means states now owe interest on their remaining sums on top of the original amount borrowed. 

To use federal aid, or to raise unemployment taxes — that is the question

State leaders have four options to repay their loans and replenish their state’s UI trusts: 

  1. Reduce unemployment benefits
  2. Increase payroll taxes
  3. Borrow money from the Federal government to boost fund balances 
  4. Use American Rescue Plan money (Title XII advances) to restore rust fund balances 

In the weeks leading up to September 6, officials in Hawaii, Nevada, Ohio, and West Virginia paid off what they owed in order to mitigate interest costs and prevent increased unemployment tax rates, which could negatively affect businesses. 

In Ohio, officials utilized federal dollars from the American Rescue Plan, known as Title XII advances, in order to pay off their loans and avoid interest accrual. 

“By repaying this loan in full, we ensure that Ohio businesses won’t see increases in their federal unemployment payroll taxes,” Ohio Gov. Mike DeWine said in a news release announcing a payment to the U.S. Treasury of nearly $1.5 billion. “Without this added tax burden, our employers can invest more money into their businesses and hire more staff.”

Business leaders are applauding the decision, which will save them from automatic unemployment insurance tax increases.

“There is an economic development benefit to using federal dollars to pay back unemployment borrowing. By doing this it shows Ohio cares about the small business community by preventing them from paying an unfair penalty on their unemployment insurance premiums that they had no control over. This will give Ohio an advantage over states that chose not to do so,” said Roger Geiger, Ohio executive director of the National Federation of Independent Business.

More than 30 other states have done the same — Georgia committed to using $1.5 billion of federal aid to help replenish the state’s UI fund, while Maryland will use $1.1 billion. 

On the contrary, businesses in New Jersey will now pay an extra $252M in UI taxes in the Fiscal Year 2022 and could be responsible for paying up to $1.7 billion over the next three years in order to replenish the state’s UI fund. 

“Gov. Murphy signed legislation to spread the increase over three years, rather than impact businesses in a single year while they continue to recover from the impacts of COVID-19,” said Angela Delli-Santi, a spokesperson for the Department of Labor. 

Minnesota, too, will raise taxes in order to replenish their UI fund. Before the pandemic, the state’s UI trust was in a great position, with 94% of the estimated amount needed to cover a year of unemployment benefits. But after just six months of the pandemic, the state had burned through all of its reserves. Now, the state will increase payroll taxes dramatically in 2022 to help pay off the $1.1 billion loan.  

Some states, including New York, have requested partial deferrals of interest to reduce or eliminate the balance due on loans. 

Officials encourage states to use federal stimulus funds

State leaders in Minnesota as well as members of The U.S. Chamber of Commerce and the National Association of State Workforce Agencies have called for Congress to waive interest payments on federal loans or enact loan forgiveness. But lawmakers on Capitol Hill have yet to take action, and federal officials have encouraged states to use federal stimulus funds to repay loans and restore UI funds. In doing so, states could “break-even” and be able to refill UI funds to their pre-pandemic levels. 

New Mexico, for example, used federal recovery dollars to pay back its $206 million federal loan and restore its UI fund to the $460 million it held before the pandemic. 

“The federal government is providing states a mulligan that they’ve never had before,” said Jared Walczak of the Tax Foundation, a D.C.-based conservative-leaning nonprofit focused on tax policy. “It will be almost as if, for purposes of the trust fund, that the pandemic never happened, that the benefits never went out.”


ABOUT THE AUTHOR

Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others. She writes weekly nonprofit-specific content for 501c.com.

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