California employers are about to get hit with a massive tax increase — one they never voted on, one lawmakers and the governor never debated, but one Sacramento knew was coming.
At the very moment families and employers should be seeing relief from the Working Families Tax Cuts, which are in effect this year, California is moving in the opposite direction by raising taxes on employees and worsening the cost-of-living crisis already plaguing the state.
California’s unemployment insurance (UI) trust fund—a lifeline for unemployed workers— is drowning in debt, now exceeding $21 billion. The debt was incurred during COVID, when the UI fund social safety net helped countless families. But in the years since, Sacramento has failed to act to address the massive debt incurred during the pandemic, despite having a $100 billion surplus in recent years. As a result of that inaction, California businesses will continue facing automatic payroll tax hikes to repay that debt.
That debt was not driven by legitimate claims alone. California’s unemployment system was riddled with pandemic-era fraud, with billions lost due to outdated systems and weak safeguards—costs the state ultimately shifted onto employers and workers.
Under federal law, states that fail to repay unemployment loans to the federal government lose a portion of the federal unemployment tax credit each year. For California businesses, that means higher payroll taxes and higher costs for everyone.
If California politicians had paid off the debt like every other state in the union has, employers would be paying up to $434 per employee into the state’s fund. But because the state failed to act, employers will be paying $84 more per employee this year, and this all goes to pay off the federal debt. The increases will grow every year until the balance is paid off.
Those costs don’t stay on paper. They show up as slower hiring, delayed raises, reduced benefits, and higher prices for consumers. In a state already struggling with affordability, this hidden tax makes everything worse.
This is not a surprise. It’s the inevitable result of years of policy decisions that ignored the needs of workers and employers struggling to recover from the pandemic recession.
Economists, legislative analysts, and the business community all sounded the alarm for years that California was setting itself up for exactly this outcome. Even President Biden recognized the risk, providing states with additional federal aid and explicitly directing them to use those funds to pay down unemployment insurance debt. Nearly every state did just that, eliminating their debt years ago. California did not.
In California, the governor and legislative leaders heard those same warnings and chose to ignore them. And now the cost is being passed directly — and quietly — to employers.
But we cannot ignore this crisis any longer. It’s time for action to shore up the fund and rebuild the safety net.
If California refuses to pay its unemployment insurance debt, Congress has tools to respond. Lawmakers could credit a portion of that debt against federal funds California would otherwise receive. They could also impose reasonable caps on how much states may borrow for unemployment benefits, while providing a transition period to bring systems back into balance.
Those steps would restore transparency and accountability—two qualities sorely lacking today. But California must act as well. Governor Newsom should make paying off this debt a priority in his upcoming budget. Simply raising payroll taxes would send exactly the wrong message to employers persevering and deciding whether to grow jobs or invest in California.
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Vince Fong represents the 20th congressional district, which includes parts of Fresno, Kern, Kings, and Tulare counties. Rob Lapsley is president of the California Business Roundtable, a nonpartisan business advocacy association.
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