States across the country are draining their unemployment benefit trust funds and borrowing billions from the federal government in order to continue to pay out unemployment benefits during the ongoing COVID-19 pandemic. However the loaned money will have to be paid back eventually — and states may do so by raising taxes on employers and cutting jobless benefits for workers.
State unemployment trust funds are running dry
The COVID-19 pandemic has placed unprecedented strains on state unemployment trust funds, emptying them in a matter of months and forcing states to take out billions in loans from the federal government in order to keep unemployment benefits flowing to millions of newly unemployed workers.
It’s a trend that rings true across the country. In Washington, the state’s unemployment trust fund had nearly $5 billion before the COVID-19 pandemic. It’s expected to be entirely depleted by late 2020. Meanwhile, Texas’ $2 billion trust fund was depleted on June 9, just three months into the pandemic.
“Prior to the Great Recession, a lot of states had large amounts of money in their state [unemployment benefit] trust funds. Other states will see the recession came and basically wiped out a good portion of those,” said Doug Adams, Director of UI Solutions at 501(c) Services.
(Additional reading: Pandemic-related unemployment claims force states to raise taxes in 2021, click here to read more.)
What are Title XII loans?
Under Title XII of the Social Security Act, state governments can request loans from the federal government when the state’s unemployment insurance trust funds — built through payroll taxes — have been depleted. The borrowed money is then used to continue paying out unemployment benefits. States then have two years to pay back the loans without penalty.
As of October 1, 21 states have borrowed more than $34 billion in Title XII loans. The biggest borrowers include states that are highly populated and have been hit hard by the COVID-19 pandemic. As of October 1, California has borrowed upwards of $13 billion while New York is nearing $8 billion, and Texas is closing in on $5 billion.
The repayment question
After receiving the federal loans, states are faced with the question of how to pay back the debt and replenish their own trust funds. Many states will do so by increasing unemployment taxes.
Unemployment tax rates fluctuate based on industry and an individual employer’s history of layoffs. Each state has a varying tax rate schedule that changes year by year based on the amount of money in their unemployment benefit trust funds.
“States have their own mechanism, either by legislation or by automatic tie-ins to the average weekly wage, that control that taxable wage base,” Adams said. “As the funds deplete the schedule changes, and that normally means that it goes up.”
Some employers will see tax increases beginning in 2021 as states work to repay loans and replenish their trust funds, and employers will see automatic scheduled increases in federal unemployment taxes in November 2022 if states haven’t repaid their 2020 Treasury loans by the 2-year deadline.
Some states however are using other means to avoid an eventual tax raise.
In Iowa for example, Gov. Kim Reynolds (R) said using CARES cash for the unemployment trust fund would keep the tax rates steady for 2021 and save employers $400 million, according to Bloomberg Law.
At least 8 other states including Alabama, South Carolina, Maine, Mississippi, Nebraska, North Dakota, Tennessee and West Virginia have also committed to using CARES act funds to mitigate future tax increases.
Experts say that increasing tax rates should be avoided during a pandemic in order to prevent further impact on already struggling businesses.
“At this particular time, when we’ve had massive job losses in our state, trying to put more taxes on employers is an approach we want to avoid,” Michael Bernick, a former director of the California Employment Development Department, told the Wall Street Journal.
States are expected to announce any plans to increase taxes in the coming weeks.
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.