By LAUREN HEPLER, CalMatters
If not for a persistent mail carrier, Lance Hastings might not have discovered all of the fake unemployment claims.
Last September, the head of the California Manufacturers & Technology Association got the first jobless claim from a worker he’d never employed. Mistakes happen, he thought, and reported the letter sent to the group’s boarded-up former Sacramento office as suspected fraud.
“They even used our old CEO’s name and address,” said Hastings, the association’s current CEO. “When we got that one, our spidey sense really got activated.”
But in recent months, as the mail carrier delivered more than a dozen other bogus letters with unfamiliar names and Social Security numbers, Hastings’ skepticism has given way to frustration — especially now that taxpayers like his organization will likely have to help pick up the tab for California’s $21 billion and counting in unemployment debt.
Now, he worries that higher unemployment taxes could make it harder for businesses in California’s already expensive manufacturing sector to recover from the shock of the year-long pandemic. “I think it’s unprincipled,” Hastings said. “These are just nails in the coffin that concern me greatly.”
Hellish waits on jammed customer service lines and brazen fraud have dominated the headlines about California’s unemployment system in the age of COVID-19. On Friday, officials at the state’s Employment Development Department unveiled new online tools to track unemployment data after the backlog of unpaid claims again mushroomed to more than 1 million in recent weeks, including 152,000 claims awaiting action by the state and more than 900,000 cases in need of certification by the person filing the claim.
Amid the chaos, another big problem has largely been overlooked: The state is out of unemployment money, and nobody is doing much about it. California has a history of going deep into the red to pay for jobless benefits during recessions, but the stakes are especially high this time as businesses hit hard by unprecedented pandemic shutdowns look to restart hiring. California’s unemployment rate fell in February to a pandemic-low 8.5% as employers added 141,000 jobs, but the rate is still twice as high as in February 2020.
The state’s unemployment trust fund financed by employer taxes ran out last spring, which economists attribute to an outdated tax system that has gone largely untouched for the last four decades. So far, California has borrowed $21.2 billion from the federal government to keep benefits flowing to the jobless. Employment Development Department officials expect the deficit to balloon to $48 billion by the end of the year.
In response to a question from CalMatters about how the state plans to address that debt, department officials said Friday that the next forecast for the unemployment fund is due around late May. “Information will be further forthcoming as developments occur,” spokesperson Loree Levy said.
In the meantime, employers have been required to keep paying a 15% emergency surcharge on unemployment taxes due to the fund’s insolvency. Even before the coronavirus shut down much of the economy, California’s unemployment fund was the most unstable of any U.S. state, well behind financially repressed Puerto Rico and the District of Columbia.
The state’s descent during the pandemic to poster-child status for unemployment dysfunction could make this year a prime opportunity for reform. One option favored by economists at Stanford is to cut unemployment taxes for employers in lower-wage sectors while raising taxes on higher-paying businesses to reduce the state’s debt.
But so far, lawmakers from both parties are proposing much more limited reforms: new oversight boards, a direct deposit payment option, better language access and stronger checks on inmates filing for benefits. Some measures call for the Employment Development Department to develop a new recession plan or to keep paying expanded benefits as the pandemic drags on, but they don’t address the underlying debt or tax system at the agency ultimately controlled by the governor.
The cumulative effect, political analysts say, is that unemployment is poised to lose out to competing priorities such as vaccines, adding to a long history of neglecting safety-net programs in a year further complicated by messy recall politics.
“If the governor and the legislative leadership wanted to make this a top priority, the timing could be perfect,” said Dan Schnur, a Republican campaign veteran and a professor at the University of Southern California and UC Berkeley. “This could end up being the single worst financial scandal in the history of California government. But the irony is it’s so big and so sprawling, it’s difficult for voters to understand.”
Who really pays for unemployment?
Unemployment is what Stanford economist Mark Duggan calls an “invisible tax.” While Social Security is run by the federal government and deducted directly from workers’ paychecks, each state oversees its own unemployment system funded by employer taxes.
Despite California’s reputation for a progressive tax system, the state’s unemployment taxes hit businesses with lower-paid workers harder. That’s because businesses are taxed on only the first $7,000 a worker makes — the lowest amount allowed by federal law, and a figure that hasn’t been updated in 39 years, said Duggan, who studies unemployment at the Stanford Institute for Economic Policy Research.
Each business then pays a payroll tax rate ranging from 1.5% to 6.2%, depending on how many of its workers have filed for unemployment benefits in past years. That often penalizes hotels, restaurants and other high-turnover industries slammed by the pandemic. Unemployment taxes max out at $434 per employee, per year, or up to about $4,340 for a 10-person company paying the highest rate, before any emergency fees.
Since the state partially insures wages up to a much higher limit, $46,800 a year, the result is that businesses pay very similar unemployment taxes for a worker who makes $8,000 a year and another who earns $40,000. But the higher-paid worker gets $400 a week in state jobless benefits if laid off, compared to $80 for the lower-paid worker.
While the costs of those benefits add up for the state, it’s often not enough for out-of-work Californians to pay for housing, food and other necessities. That’s made extra federally funded unemployment payments during the pandemic — $600 a week last spring, $300 under more recent stimulus measures — a lifeline for many.
“It’s the worst. The most regressive. Appalling. I don’t know what adjective to use,” Duggan said of the state’s current unemployment financing system. “And it’s not some stupid little narrow program. As we just saw in the pandemic, this was the most important part of the social safety net.”
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