(The Center Square) – California’s Legislative Analyst’s Office now says unemployment insurance taxes on businesses must rise by 2117% nearly a year after declaring the state’s unemployment benefits program “structurally insolvent.”
The LAO’s new report explains that the state’s unemployment fund runs a structural deficit of $2 billion per year, beyond the $20 billion debt and $1 billion in annual interest payments to the federal government to help cover $55 billion in fraudulent COVID lockdown-era benefits payments.
These interest payments are paid by the state’s general fund, while the existence of unemployment benefits debt to the federal government triggers automatic tax increases of $21 per employee per year after two years of unpaid debt.
While a California business would normally pay $42 per employee (0.6% on the first $7,000 of wages paid) in payroll taxes, in 2025 each employee will cost businesses $105 in annual payroll taxes.
The LAO says the UI fund’s $2 billion annual deficit leaves no choice but to raise the threshold from $7,000 to $46,800, which it says would tie the “the taxable wage base to the amount of UI benefits a worker can actually receive ($450 per week)” for six months, or $11,700.
This would increase payroll taxes per employee making $46,800 or more per year from $42 to $280.80, but the LAO says “while necessary, this step alone would not be sufficient to address the state’s solvency problems.”
The LAO then recommended raising the payroll tax to a new 1.4% base rate and an additional 0.5% reserve-building rate, or 1.9% in total. This would raise income from $280.80 under the higher payroll tax threshold to $889.20, or over 21 times higher than the existing base payroll tax.
The LAO’s report also recommended exploiting a payroll tax system that has lower rates for companies with growing headcounts, and refinancing the state’s $20 billion federal unemployment benefits loan. Half of the loan would come from a new bond paid by employers, and the other half from the general fund, which would indirectly include employers.
The state’s $55 billion in fraudulent COVID-era unemployment benefits — more than NASA’s annual budget — was incurred from Gov. Gavin Newsom’s then California Labor Secretary Julie Su having decided to automatically approve benefits applications. Su was appointed as U.S. Deputy Labor Secretary under the Biden Administration in 2021, and has been acting U.S. Labor Secretary since 2023 due to her stalled nomination process in the Senate. Su has since used her position to seek to waive California’s $20 billion benefits debt to the federal government.
When asked whether California employers, California taxpayers, or federal taxpayers should pick up the tab, California Assembly Minority Leader James Gallagher, R-Yuba City, directed blame at Su.
“As California Labor Secretary she lost billions of dollars in fraudulent UI claims, leaving Californians to pay for that for years to come. Her record is such a mess, a Democrat-controlled Senate refused to confirm her as U.S. Labor Secretary,” said Gallagher to The Center Square. “Taxpayers deserve to have their money spent responsibility, and we’re looking forward to finally having a competent Labor Secretary under the incoming Trump administration.”
