Unemployment Tax Increases

Some of you have asked why they are paying more on their unemployment Taxes. Let me try to explain. I posed this question to Greg Riggs at EDD and here is his response when I asked him why California with its budget surplus, didn’t just  pay the debt off.

California’s Unemployment Trust Fund first became insolvent in January 2009 due to the great recession.  California like many other states received a loan to pay our benefits obligations during the recession.  The loan balance currently stands at $6.5 billion as of January 13, 2016.  This loan is being repaid primarily from the reduce credit reductions that employers obtain when filing their Federal Unemployment taxes.  It should be noted that three other states and one territory still have outstanding loans.  Some states secured a bond to pay off the loan, but had to raise state taxes to help pay the bond.  In the e-mail below it cites that California has a surplus.  I believe that is a reference to other state funds or the State’s General Fund.  It does not apply to California’s Unemployment Trust Fund which includes revenue from employers who pay State Unemployment Insurance taxes that are collected by the Employment Development Department and are used to pay benefits.  In recent years, California’s General Fund has covered the costs to pay the interests on the outstanding federal loan.  Below is a more detailed explanation at the credit reduction.         

As a result of the ongoing Unemployment Trust Fund insolvency for California, employers have been subject to a reduction in the credit received on Federal Unemployment taxes.  The standard Federal Unemployment Tax Act (FUTA) rate is 6.0 percent on the first $7,000 of earnings by an employee.  However, this is typically reduced to a rate of only 0.6 percent as a result of a 5.4 percent credit employers receive.  When a state has an outstanding Unemployment Trust Fund loan for more than two years, this credit begins to be reduced annually by increments of 0.3 percent until such time as the outstanding loan balance is repaid or the full FUTA credit is wiped out and employers are left to pay the 6.0 percent tax rate.  So in essence, employers Federal Unemployment taxes have been going up by an additional 0.3 percent or $21 per employee each year to help pay down the loan.  The first year employers began to have their FUTA credit reduced was in tax year 2011.  I hope this helps.         

  

           

GREGORY M. RIGGS

Deputy Director

Policy, Accountability & Compliance Branch

Employment Development Department

800 Capitol Mall, MIC 76

Sacramento, CA 95814

(916) 654- 7014

It is not clear when the loan will be repaid to the Federal government, but it is expected sometime in 2018 or 2019, so these taxes should increase until it is repaid. Keep in mind, that while there is a surplus of about $200 million in the collections of taxes, this is  razor thin and based on a good economy.

If the economy  should  turn sour,  we could be back in a deficit. Does this remind you of Governor Brown's comments in his State of the State speech about the state’s budget?

Note the state is picking up the  interest cost on the loan from the Federal government and at this time it is not expected that the state will pass this on to employers.                                   

Scott Hauge
President
Small Business California
2311 Taraval Street
San Francisco, CA  94116
shauge@cal-insure.com
415-680-2188