Minnesota has a billion dollars in unemployment insurance debt. Lawmakers will have to decide how they want to pay for it.
Of all the relief provided to Americans during the recession triggered by COVID-19 and its aftermath, only one major benefit has not been paid with the increase in federal borrowing: the state share in unemployment insurance payments.
At least not in Minnesota. And at least not yet.
To deal with the surge in jobless check claims after the economic shock of the pandemic hit in March 2020, the state spent its excess unemployment. He also borrowed heavily from the federal government to cover these payments.
But unlike most states, Minnesota did not dip into the US federal bailout money to help pay off the debt. Now lawmakers and Gov. Tim Walz will have to decide whether to follow current law and practice, which assesses employers for these costs, or seek other ways to reduce the expected hike in payroll taxes.
There will be an increase in unemployment insurance taxes regardless of how policymakers act, as new rates are already programmed into the system for next year. These tax hikes, however, will be much larger if they are used to repay federal loans, replenish the trust fund, and pay interest charged by the federal government.
These rates could go up to 14% just to pay off the loan. Rate notices for 2022 will be sent out this month, and it is up to the governor and lawmakers to determine whether those are the rates that will apply when employers send in their first quarter 2022 payments on April 1.
“It will be a shock at the end of the year for many businesses in Minnesota,” said Lauryn Schothorst, director of workforce management and workforce development for the Chamber of Commerce. Minnesota trade.
The legislator has time to act
Business leaders and some lawmakers believe there are better ways to tackle the problem than raising taxes on businesses still struggling with a litany of challenges, including difficulty in recruiting and retaining workers and disruption. of the supply chain.
Minnesota could follow other states in dipping into unspent US bailout money, or it could use up some of the state’s expected excess revenue. Coincidentally, the debt to the federal government for unemployment insurance coverage ($ 1.07 billion) is almost identical to the ARP funds left on the table when the 2021 session adjourned (1.15 billion dollars).
“The most important thing to take away from this is that this is an avoidable tax increase,” Schothorst said. While tax rates will be sent to employers this month, payments are not due until the end of March 2022. “It is time for lawmakers to act. “
“Nearly 30 states have used federal pandemic relief funds to avoid or reduce unemployment insurance tax increases for employers who may have survived the past two years,” wrote seven members of the GOP leadership from the House to Governor Tim Walz. “Minnesota has not used any to help reduce Unemployment Insurance debt to date, placing the whole burden on struggling businesses.”
In response, seven members of the DFL Senate caucus issued a statement calling the GOP’s request “unreasonable.”
“These funds are intended for our recovery, not to increase corporate profits”, wrote the seven. “As COVID-19 rates reach alarming highs in our state, and with the discovery of the new Omicron variant, it is too likely that we will encounter other COVID-19 related expenses in the near future. “
But these two groups of lawmakers are in the minority and will not make decisions on how to manage UI debt. Although they show the two all-or-nothing options available, the end result could be something different.
Walz’s press secretary Claire Lancaster said the governor had yet to decide how to approach the question of how and when to pay the unemployment insurance debt. “The governor is looking at all options,” Lancaster said. “Our administration is listening to business leaders, lawmakers and workers to determine the best way forward.”
Representative Mohamud Noor, the DFLer of Minneapolis who chairs the House Workforce and Business Development committee, said he wanted to consult with business leaders, union leaders and workers before a decision is made. And he said he wanted to prevent the issue from becoming more politicized than it already is.
“We have to have a consensus,” Noor said.
He said he was prepared to use surplus money or unspent federal dollars to ease payroll tax increases, but there are competing uses of those dollars as well. “We have a new variant right now in the state of Minnesota and we’re trying to figure out where we’re at,” Noor said.
There also remains a hope to spend $ 250 million in ARP money on bonus checks to essential workers and a desire to invest more in affordable housing. “The question is how, who and how much,” Noor said of the competing priorities.
The unemployment tax issue “is one of the many things included in what we are looking at,” he said. “It’s about time. We will be in session.
Noor also said the state and federal governments have already done a lot to help Minnesota businesses, by not penalizing sectors of the economy like the hospitality industry that have been unevenly affected by layoffs with taxes. higher unemployment insurance to provide large and small businesses with grants and forgivable loans. .
Senate Jobs and Economic Growth Committee Chairman Eric Pratt R-Prior Lake said in September he supported the use of other funds like ARP to reduce the impact of increases in social charges on employers.
“Removing a significant portion of the trust fund deficit would be good for the Minnesota economy,” Pratt said at the time. “It would help employers feel good about going out and hiring people and it would help them with their cash flow.”
Minnesota, one of 10 states that still owe the federal government
The federal government has launched many additional unemployment benefits offered during the pandemic, such as the $ 600 per week supplement to regular benefits as well as checks for contract workers and contract workers, and several extensions of entitlement beyond that. of the normal 26 weeks.
According to a report from the Tax Foundation, the federal government spent $ 660 billion in the United States on these benefits. In Minnesota alone, they totaled over $ 7 billion and are credited with helping thousands of families and allowing the state get out of the recession in record time.
But regular benefits paid to the wave of laid-off workers have undermined the state trust fund and triggered borrowing from the federal government. Such borrowing is normally part of the safety net through which states should generate UI surpluses during good economic times, but can borrow from the federal government when a recession is deep enough to drain their own accounts. Minnesota reduced its surplus by $ 1.5 billion and began borrowing; it is this debt that must be repaid now, including interest at the rate of 2.27 per cent. Minnesota is one of 10 states still in debt.
The federal system allows progressive repayments over several years. And the state could use other funds to reduce the scale of any payroll tax hikes, as House GOP members have proposed. In the last legislative session, the Minnesota Chamber of Commerce called for $ 600 million in unspent ARP funds to be used to reduce the need for payroll tax increases.
In addition to unspent ARP funds, Minnesota is expected to post a projected multibillion-dollar revenue surplus when the state releases its economic and revenue forecast on Tuesday. His rainy day savings account is $ 2.4 billion.