As a result of Democrat Governors’ failure to pay back pandemic-era federal unemployment loans, employers face the threat of tax hikes that could drive inflation higher, Republican Leader of the Ways and Means Committee Rep. Kevin Brady (R-TX) and Ways and Means Rep. Darin LaHood (R-IL) warned in a recent letter, urging Governor Pritzker of Illinois to prioritize repayment of outstanding loans.
As reported by Wirepoints, “LaHood’s letter lays out the reasons Illinois should pay up. ‘Without repayment,’ he wrote, ‘Main Street businesses are at risk of facing higher taxes that will undercut job creation and drive prices higher just as families and small businesses are struggling with record-high inflation and a looming recession.’”
- “Pritzker outright fibbed on this matter earlier. Last July, Pritzker was asked directly why he wasn’t using ARPA money to pay off the unemployment loan. Pritzker claimed that ARPA money could not be used for that purpose, which was simply untrue…”
- “Illinois’ supposedly “balanced” 2022 budget entirely ignored the unemployment trust fund hole, which was over $5 billion at the time. That deceit is made possible because the trust fund is in an account separate from the General Fund, which is where the balance is claimed. Even for the General Fund, our foolish budget accounting simply ignores growing debts, as we’ve often explained.”
- “It’s also important to remember that Illinois must not only pay off the federal loan, but is obligated by federal rules to restore the unemployment trust fund to a positive balance reasonably projected to cover routine unemployment claims. That will cost at least another billion dollars.”
Reps. Brady and LaHood warn delaying repayment could mean tax hikes on job creators by as soon as early November – this couldn’t come at a worse time as we enter a recession.
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- If the states don’t repay these loans, employers are at risk of bearing the burden of the state’s inaction through higher taxes.
- Despite having access to generous federal Coronavirus Relief Funds and record budget surpluses, these states have failed to pay back their outstanding loans in a timely manner.
- The outstanding loan balances mean businesses in California,Connecticut, Illinois, and New York could face a Federal Unemployment Tax Act (FUTA) tax credit reduction – resulting in a FUTA tax increase.
- Employers in these states could see an increase in their net federal unemployment taxes in 2023, with the maximum rate going from $42 per covered employee up to $63 per employee.
How the Federal Unemployment Tax (FUTA) works:
- The first $7,000 paid annually by employers to each employee is taxed under FUTA (at a 6 percent gross tax rate). This can be a maximum federal tax of $420 per employee per year.
- However, generally few employers have to pay that much tax because employers in states with programs approved by the U.S. Department of Labor get credits that reduce the tax burden. (They may credit up to 5.4 percentage points of state unemployment taxes paid against the 6.0 percent tax rate, making the minimum net federal unemployment tax rate 0.6 percent.)
- Because most employees earn more than the $7,000 taxable wage ceiling in a calendar year, the FUTA tax typically is $42 per worker per year. However, these savings can be chipped away if the state doesn’t repay loans.
How states’ failure to repay loans results in higher taxes for businesses:
- Employers in states whose unemployment insurance funds have outstanding loans (or federal advances) for two or more consecutive years could have their FUTA credit reduced by 0.3 percent for each year of outstanding balances if they fail to make repayment by early November. These credit reductions incrementally ratchet up over time.
- For outstanding balances of more than 3 years, a second credit reduction applies, and after 5 years, a different FUTA credit reduction calculation kicks in.
- Additional federal taxes attributable to the credit reduction are applied against the state’s outstanding loan. Thus, the additional tax revenue from employers goes to paying off a state’s outstanding debt – essentially leaving businesses to foot the bill.
- This means higher taxes for employers at a time when they’re struggling to find workers and other costs are increasing.