You may have heard how phony pandemic jobless claims swamped California, or how frantic callers jammed phone lines with questions that the state鈥檚 employment agency struggled to answer.
But there鈥檚 yet another problem with the Golden State鈥檚 unemployment system that鈥檚 been brewing quietly during the pandemic: California now bears the unhappy distinction of having about as much unemployment debt as all other states combined.
When California pays out unemployment benefits, the money has to come from somewhere.
That somewhere is the state鈥檚 unemployment insurance trust fund, a pool of cash funded by a tax on employers. have used unemployment benefits during the pandemic, draining existing reserves, and now the state is in debt to the tune of nearly $20 billion. Most states have no debt.
The debt will get paid off. But how soon will it get paid off, and how many taxpayer dollars will go toward that?
Under the current system, it鈥檚 going to take years of higher taxes on employers, who fund the benefits, to pay it back. Gov. Gavin Newsom proposed using $3 billion of the state鈥檚 projected $21 billion surplus to take a bite out of that debt, in addition to hundreds of millions to cover the loan鈥檚 interest payment, when he . While that proposal is intended primarily to help businesses, there鈥檚 no guarantee businesses will reap a benefit directly, especially in the short term.
California鈥檚 unemployment system was on dicey footing even before the pandemic, rated as the in February of 2020 by the U.S. Department of Labor.
The sharp economic shock of a pandemic was hard to predict. But California鈥檚 unemployment system, it now appears, is having a uniquely hard time clawing its way back to normal. If the way California funds unemployment 诲辞别蝉苍鈥檛 change, economists say, we could see the unemployment system go into debt again and again.
How did we get here?
California鈥檚 unemployment system has an important piggy bank: the unemployment insurance trust fund. Employers put money into it on a regular basis via taxes. Workers receive money from it when they get unemployment benefits.
The federal government loaned money to many states early in the pandemic to shore up their unemployment funds. But two years later, several states have paid off their federal loans, while California鈥檚 balance remains the highest of any state.
One key problem is that while California lawmakers have increased unemployment benefits over past decades, in part to keep up with inflation, the money flowing into the system from employers has not kept pace, said Audrey Guo, an economist at Santa Clara University who studies unemployment insurance.
On top of that, more Californians have been out of work throughout the pandemic compared to the national average. The national unemployment rate surged to 14.7% in April of 2020, and had come down to 8.4% by August of 2020, according to data from the Bureau of Labor Statistics.
But California鈥檚 jobless rate shot higher and didn鈥檛 fall back as quickly. It reached 15.9% in April of 2020, and was still at 11.9% by August. In December 2021, California still had one of in the nation.
In addition, many to pay off some or all of their unemployment insurance debt, but California hasn鈥檛 done that.
One reason the money from employers hasn鈥檛 kept up is that California taxes employers only on the first $7,000 a worker earns each year. For example, a business that employs a part-time sanitation worker making $8,000 per year and an accountant making $100,000 per year would pay the same amount into the unemployment piggy bank for both workers each year.
But unemployment benefits cover 50% of a worker鈥檚 wages, up to . The average weekly benefit paid out in California in 2021 was less than $320, according to federal Labor Department . About 28% of Californians working full time earned less than $35,000 in 2019, according to .
So, if those two workers both got laid off and started receiving unemployment benefits, the accountant would get much larger checks than the sanitation worker.
The $7,000 figure 鈥� called a taxable wage base 鈥� is 鈥減reposterous,鈥� said Mark Duggan, an economist at Stanford who studies unemployment insurance. It鈥檚 the lowest amount allowed by federal law, , and it hasn鈥檛 changed since at least 1984. Since then, the internet has become widely available, mom jeans have gone out of style and come back again, and, importantly, wages and unemployment benefits have increased.
Other states have made adjustments. Washington taxes employers on the first $56,500 a worker makes, while Oregon鈥檚 taxable wage base is $43,800. And it鈥檚 not just blue states: North Dakota and Utah both have tax bases over $38,000.
This 诲辞别蝉苍鈥檛 mean California employers are necessarily cheapskates by comparison. In fact, the taxes California employers pay as a share of total wages workers make is close to the national average: They鈥檙e paying a higher tax rate on a smaller amount of wages. But, that setup has a drawback.
If employers wind up passing the tax on to employees in the form of reduced wages, hours or fewer jobs, it鈥檚 a regressive system, Duggan points out. The lowest wage workers 鈥� especially seasonal, part-time, and student workers 鈥� end up subsidizing the cost of higher unemployment benefits for higher-wage workers. A sanitation worker with two part-time jobs that each pay $8,000 would have twice as much put into the system by her two employers compared to the accountant making $100,000 at his one, full-time job.
鈥淥ur system works terribly for the most disadvantaged workers in the economy,鈥� said Duggan. 鈥淚t works great for people who earn six-figure incomes.鈥�
This isn鈥檛 the first time California鈥檚 unemployment piggy bank has had to turn to the federal government for loans. In the wake of the Great Recession, the fund went into about $10 billion of debt, and it took California employers . Taxpayers wound up footing a roughly on that loan. In fact, in 2016, when California employers were still paying down the Great Recession debt, analysts at the nonpartisan Legislative Analyst鈥檚 Office that the fund could go into debt again during the next recession.
So what happens next?
To start chipping away at the debt, federal law will automatically increase the federal taxes California employers pay in 2023 by 0.3%, or . The tax will continue to go up by an additional $21 per employee each year until the debt is repaid, which assuming there鈥檚 not another recession before then.
Whether that鈥檚 a small or large increase depends on where you stand.
The tax increase coming for California businesses each year is so small that economists would likely have a hard time measuring its impact with statistical research methods.
It鈥檚 a small increase relative to the salaries employers are already paying their workers annually, according to a California Budget and Policy Center analysis shared with CalMatters. For companies paying workers minimum wage full time, the tax increase would amount to less than a .5% increase in annual payroll costs in 2029, after the tax has ratcheted up for several years. For companies paying workers higher than minimum wage, the proportional increase would be smaller.
But a cohort of nearly 20 business groups argued in a to Newsom last December that the tax increase is large enough to negatively impact hiring in the coming years.
Economic research does bear out that when the cost of employing people goes up, employment goes down, said Andrew Johnston, an economist at UC Merced who studies unemployment insurance. The usual estimate, he said, is that if you increase labor costs by 10%, companies will reduce employment by about 5%.
The tax increase coming for California businesses each year is so small that economists would likely have a hard time measuring its impact with statistical research methods, but that 诲辞别蝉苍鈥檛 mean it will have no effect, he said. Johnston that unemployment tax increases of as little as 1 percentage point had a measurable effect on already cash-strapped firms when it came to hiring. In other words, California companies that are already barely scraping by might be more likely to change hiring decisions in reaction to a small tax increase.
Business groups also pointed out that many other states used federal COVID relief funds to help pay off their unemployment debt. They cited California鈥檚 for the coming year. And they made a request: that the state chip in $10 billion dollars to help pay down the debt.
鈥淭his was not a recession that was created by the business community,鈥� said Brooke Armour Spiegel, vice president of California Business Roundtable, a business group that signed the letter. 鈥淭his was a recession that was created by state policies in response to a global pandemic.鈥�
Employers are also paying a on their state unemployment tax bill, levied by the state when the unemployment fund is in rough shape. The surcharge has been in place , according to the Legislative Analyst鈥檚 Office.
Newsom鈥檚 $3 billion proposal 鈥� if it gets approved by legislators 鈥� wouldn鈥檛 preempt a tax increase on employers or provide any relief to businesses in the short term.
A group of moderate Democrats in the Assembly proposed another sum in a February : $7.25 billion state dollars to bring down the debt.
Newsom $1 billion in state funds to reduce the debt, followed by another $2 billion next year in his opening budget proposal, as well as $470 million to pay off the interest that the loan will have accrued by September.
During a state Senate budget hearing in March, Sen. Mar铆a Elena Durazo, a Democrat representing Los Angeles and chair of the subcommittee, asked whether the state鈥檚 low taxable wage base contributed to California鈥檚 high debt.
If the state had increased the tax base prior to the pandemic, the state would likely have less debt now, said Chas Alamo of the Legislative Analyst鈥檚 Office.
Newsom鈥檚 $3 billion proposal 鈥� if it gets approved by legislators 鈥� wouldn鈥檛 preempt a tax increase on employers or provide any relief to businesses in the short term, according to a by the Legislative Analyst鈥檚 Office. Instead, it would potentially shorten the number of years businesses wind up paying higher taxes.
The state Department of Finance estimates that $3 billion would shorten the duration of the loan by a year, said department spokesperson H.D. Palmer in an email. But that timeline estimate, like many estimates in the budget, can change as factors like the size of California鈥檚 workforce and unemployment rate change, Palmer said.
If the $3 billion 诲辞别蝉苍鈥檛 wind up shaving a whole year off the loan period, businesses won鈥檛 see earlier tax relief, according to Alamo.
鈥淓mployers may see no direct benefit if the payment is too small to reduce the repayment schedule by a full year,鈥� Alamo wrote in the .
If less than a year is shaved off, the higher taxes employers pay beyond what鈥檚 needed to pay back the loan would be put in the unemployment fund for future use.
The proposed $3 billion would also reduce the amount of interest that the state has to pay over the course of the loan鈥檚 lifetime, potentially by $550 million to $1.1 billion, according to the Legislative Analyst鈥檚 Office.
The analysis also pointed out that the debt employers are set to pay off is largely separate from the issue of potentially fraudulent unemployment claims the state paid out during the pandemic. The vast majority of suspected fraud occurred via temporary federal unemployment programs, which were paid for by the federal government and did not contribute to California鈥檚 unemployment debt.
鈥淓mployers may see no direct benefit if the payment is too small to reduce the repayment schedule by a full year.鈥�CHAS ALAMO, ANALYST, CALIFORNIA LEGISLATIVE ANALYST鈥橲 OFFICE
Not all business owners share the same level of concern about the debt, or the tax increase that鈥檚 coming.
鈥淭his is not something that we hear from small business owners about at all. I mean, at all,鈥� said Bianca Blomquist, California policy director for Small Business Majority, which advocates for small business interests.
The governor鈥檚 proposal, she said, felt like a missed opportunity to give small businesses relief targeted to their needs, like helping with commercial rent or with covering the cost of offering .
It鈥檚 also $3 billion that could be spent elsewhere. Families face high prices for food and gas 鈥� and have long been struggling with high rent costs, said Alissa Anderson, a senior policy analyst at California Budget and Policy Center. 鈥淭hree billion could go a long way to helping those families,鈥� she said.
Is broader reform needed?
The way California funds unemployment benefits manages to be both the least progressive and most fiscally irresponsible in the nation, by Duggan鈥檚 estimation.
Duggan, as well as economists Guo and Johnston, have a : Triple the amount of wages that are taxable in California. Then, policymakers could also decrease the tax rate.
This would mean employers of high-wage workers would pay more into the system, which would help offset the higher benefits their workers are paid if they get laid off. Employers of low-wage workers would pay less. Done correctly, it would restore the health of California鈥檚 unemployment piggy bank, making it less likely to go into debt during future recessions, and less likely that the state winds up using taxpayer money to make large interest payments.
The Legislative Analyst鈥檚 Office has also in the past for getting the fund into better shape, including increasing the taxable wage base to $12,000 while reducing benefits.
Fixing how we fund unemployment should have bipartisan appeal, Duggan argues. Those who preach progressive values should be on board with fixing a regressive system. Those who prioritize fiscal responsibility should want to reform policy that drives California into debt.
But, then there鈥檚 how actual politics works. This issue is not 鈥渟exy,鈥� to use Duggan鈥檚 phrase. It鈥檚 hard to explain and harder still to campaign on. And while his proposal is a tax redistribution, anyone who champions it could potentially be labeled a tax raiser.
鈥淚t鈥檚 frustrating when you study economic policy to see really idiotic policies persist,鈥� Duggan said, 鈥渂ecause of the nature of the political process.鈥�
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