Illinois missed the September deadline to repay a $ 4.2 billion federal unemployment loan. Employers warn that inaction by state lawmakers could “cripple” businesses and economic recovery from COVID-19.
Illinois state officials missed the September 6 deadline to repay a $ 4.2 billion federal loan to state unemployment insurance fund, leaving Illinois taxpayers obligated to pay $ 60 million annual interest on that loan.
The unemployment fund was depleted during the economic downturn from COVID-19. Between the loan and the failure of heads of state to replenish the fund, potentially using federal COVID-19 bailout funds, the deficit stands at $ 5.8 billion.
Business leaders warn that defaulting on debt would result in automatic tax hikes for Illinois employers starting at $ 500 million, further hampering the country’s stagnant employment recovery ‘State. There would also be automatic reductions in benefits of the same amount. Employers could be subject to further discretionary tax hikes from the state legislature if these automatic solvency measures fail to fill the void.
Since the start of the COVID-19 pandemic, the number of Americans filing unemployment claims nationwide has reached historic highs, putting unprecedented pressure on state unemployment systems. Illinois has experienced a spike in unemployment at 16.3% in April 2020 as Governor JB Pritzker imposed statewide business closures.
More than 202,000 Illinois in one week filed for unemployment at the time. It is more than 12 times the number of claims the Illinois Department of Job Security received during the same period during the Great Recession.
All of these claims led to a deficit of $ 5.8 billion, with more job seekers being paid out than in the fund.
The amount of the deficit includes $ 4.2 billion the state borrowed during the pandemic from initially interest-free federal funds and the $ 1.6 billion change in the trust fund balance since the start of the pandemic. The trust fund held $ 1.85 billion in February 2020 and had a balance of only $ 256 million in September 2021, according to the treasury department.
Illinois was originally one of 22 states that requested these advanced federal loans. But after the state missed the September 6 loan repayment deadline, Illinois found itself among 10 states to accumulate interest on that debt.
Business groups estimated that these impending interest payments could cost Illinois residents up to $ 14 million in 2021 and up to $ 60 million per year from 2022. The first of these payments to the US Treasury is due September 30.
Illinois business leaders and labor groups have warned that failure to address the state’s growing unemployment insurance fund deficit for too long could also result in ‘crippling’ business taxes and major cuts in unemployment benefits.
Federal law mandates states maintain the solvency of unemployment funds to protect vulnerable residents. Without external funding, the two ways states can fund their trusts are to either increase employers’ payroll taxes or reduce benefits for the unemployed.
But if a state maintains an unpaid federal loan balance at the start of two consecutive calendar years, federal law triggers a series of automatic tax increases on companies in that state. The standard federal tax rate of 0.6% could increase by 0.3% from January 1, 2022, and then increase by 0.3% each year, with the balance owed, to a maximum of 6%.
Rob Karr, CEO and president of the Illinois Retail Merchants Association, estimated that these reductions in unemployment credits would essentially raise business taxes by $ 500 million and cut unemployment benefits by $ 500 million.
With Illinois unemployment rate stagnating at 7.1% since March as national unemployment continues to decline, the rise would further hurt the ability of Illinois businesses to hire and workers to find jobs.
Illinois’ struggles with its underfunded unemployment insurance trust fund are not new. During the Great Recession, the state had to borrow almost $ 1.5 billion in federal money to fill the fund. To avoid the automatic corporate tax hikes triggered by the deferred repayment of this federal loan, the state then sold the bond debt to pay off the federal government. These obligations have taken five years to repay, funded by a compromise with Illinois businesses that included modest increases in payroll taxes and reductions in employee benefits.
To reduce already struggling businesses, Karr and the State Policy Networkrecommend that Illinois use part of the US $ 5 billion in federal aid from the American Rescue Plan Act to cover the unemployment trust deficit. The US Treasury Earlier this year, he gave the green light for states to use those funds to restore unemployment trust fund balances to January 2020 levels.
States like Ohio have already acted by using $ 1.5 billion in federal funds to repay their Title XII loans.
“By paying off this loan in full, we are ensuring that Ohio businesses do not see an increase in their federal payroll taxes on unemployment,” Ohio Governor Mike DeWine said in A declaration. “Without this additional tax burden, our employers can invest more money in their businesses and hire more people.”
By prioritizing federal assistance to fuel the trust fund, Illinois can prevent its small businesses from facing further tax increases when they remain vulnerable. This would help supply the 69% of total new jobs that small businesses provide to the state, which would reduce the number of unemployed.
The use of clawback funds for the state unemployment insurance fund should be given priority over allowances such as the repayment of existing debt, which are mainly caused by irresponsible budgeting and increasing costs of pensions. These problems would be best resolved with structural reforms, such as a constitutional amendment aimed at controlling pension costs.
Illinois can put the stimulus funds to good use with lasting change that will rebuild the state’s economy.