20 States Borrow From Feds to Pay Unemployment Benefits

At least 20 states are running out of money to pay unemployment benefits and plan to borrow from the federal government, creating fears that higher business taxes could hit vulnerable employers still reeling from shutdowns.

Unemployment insurance trust funds are funded by business taxes and pay out benefits to laid-off workers. If the funds start to run out of money — as they now are in many states — state and federal law triggers tax increases to replenish the accounts.

The nonpartisan New Jersey Office of Legislative Services estimated last week it would cost businesses $919 million in new unemployment payroll taxes next year to rebalance the books. News reports quoted some New Jersey lawmakers saying they could pass legislation to spread out the impact over several years, as the state did after the Great Recession.

Some states have used federal coronavirus relief dollars to supplement unemployment trust funds and avoid some of the increases to business taxes.

The U.S. Treasury Department lists 20 states that have applied for loans to cover unemployment benefits as of Sept. 18. Borrowing already is in the billions of dollars for California, Illinois, Massachusetts, New York and Texas.

Many states had only recently replenished their unemployment funds after the Great Recession. Some states passed laws after that downturn to allow business tax increases to spread out over several years to lessen the impact.

Pennsylvania had just this year finished paying off $2.8 billion in bond funds borrowed for unemployment benefits in the Great Recession. Last week the state announced plans to borrow $2.8 billion in three months to get through October. 

Nationally, as funds were replenished, the average tax on state unemployment insurance went down from 3.8% to 1.8% between 2012 and 2020, according to an Equifax report.

Tax calculations for the following year are often made in June, so while 2021 unemployment taxes will be higher, 2022 will see the greatest impact, since more months of the pandemic will be reflected in state coffers, the report concluded.