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LETTER: Democrat Governors’ Inaction Risks Higher Unemployment Taxes on Main Street Businesses

October 5, 2022 — Blog    — Correspondence    — Press Releases    — Work and Welfare   

Employers in states that are failing to pay back federal loans are now facing even more potential tax increases, which could further undercut job creation and drive prices higher just as families and small businesses are struggling with record-high inflation and a looming recession. 

In a new letter, Ways and Means Republican Leader Rep. Kevin Brady (R-TX) urges Democrat-led states to responsibly pay back unemployment trust fund loans to avoid raising taxes on these businesses.

Twenty-two states were forced to take federal loans during the pandemic and most used COVID relief funds to pay back those loans to responsibly restore their trust funds and avoid raising taxes on Main Street businesses. Yet, California, Connecticut, Illinois, and New York continue to be in debt, despite having record budget surpluses and receiving generous federal coronavirus aid. 

Read the full letters here

Key Points:

  • 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 November 10th. 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.