[co-author: Ryan McGill]

Just as California’s employers and small businesses begin to recover financially from the COVID-19 pandemic, the state legislature is about to spring another tax increase on them. This time the money is needed to bail out the severely underfunded unemployment insurance (UI) fund (a program recently featured in the news for paying as much as $2 billion in fraudulent unemployment claims, which included sending checks to death row prisoners).

This comes as no surprise to many observers as the UI fund barely met its obligations in prior years. And as claims surged over the past year, California borrowed $21 billion from the federal government—nearly double the debt incurred by the UI fund during the Great Recession. Now, absent legislative action, employers will be on the hook for these loans through higher payroll taxes of $21 per employee per year starting in 2022. The tax will increase yearly by that same amount to a maximum of $420 per employee per year.

Remarkably, despite the UI debt, California has a $38 billion general fund surplus and $26 billion more is on the way from the federal government. But as tax hikes grow increasingly popular in Sacramento, legislators seem unlikely to offer relief by redirecting any of these funds toward the UI fund. In fact, even Governor Newsom’s proposal of providing $1.1 billion to the UI fund appears to have been eliminated in the latest round of budget negotiations.

This decision ignores a fact that employers and small businesses know well: every dollar paid to the government is a dollar less they can use towards hiring new employees or giving raises to their employees who endured this crisis with them. Yet, California employers are accustomed to the legislature ignoring the consequences of being one of the highest tax states in the nation.

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