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VIEW NEW YORK STATE'S UPDATED FEDERAL UNEMPLOYMENT DEBT

Legislative Options for UI Tax Relief

Pay Federal Interest – We are projecting that interest payments on New York’s outstanding federal advances could be as high as $132 million in 2023.  The state budget should include a General Fund appropriation to cover that cost and avoid another extra round of employer tax bills this fall.  Here’s our calculation.  The IRS has already set its 2023 interest rate on federal UI advances at 1.6776%.  Also, New York’s outstanding federal advance balance as of today is $7.99 billion.  Using those figures, 2023 interest would be about $132 million.  Since New York receive a significant share of its annual UI tax payments in the first quarter of the year, we expect the state Labor Department – as they did in 2022 – to  use some of that revenue to pay down the federal debt (even if we had to do subsequent addition federal borrowing), which would at least reduce the interest payment due, and the state’s interest assessment on businesses, due at the end of 2023.   With that expectation, we could see the $132 million figure go lower, provided we do not see another spike in unemployment rates.

Offset Federal Tax Increases – The federal unemployment insurance tax (or FUTA) is 6% of first $7,000 of payroll per covered employee, but most employers that pay the federal tax on time receive a credit that reduces it to 0.3% or $21 per employee.  However, the credit is reduced by 0.3% per year for employers in states with outstanding federal advances.  As result, in 2023, the FUTA tax for New York employers will be 0.9% or $63, adding an estimated $260 million in total tax levies in New York employers.  New York should include a General Fund appropriation to provide employers with an offset to this federal tax increase, which is a direct, additional cost due to our federal borrowing.

Improper Payments - The issue of unemployment insurance fraud has received significant attention given the apparent level of fraud and other overpayments during the pandemic.  While a significant share of fraudulent UI fraud seems related to the temporary, emergency, federally funded UI programs adopted to respond to the pandemic, the state Labor Department has estimated that fraudulent payments in New York’s regular, permanent, state-employer-financed UI program is up to $400 million.  Under New York State’s current Labor Law, the cost of improper unemployment insurance payments that are not recovered by the state (fraudulent or otherwise) are absorbed by the state UI system’s “general account,” and that cost is socialized across all employers through the “subsidiary” UI tax imposed under Labor Law §577.  General fund reimbursement of fraudulent payments would make sense as well, rather than having the cost of those state-approved fraudulent payments borne solely by employer through increased payroll taxes.

Paying Down the Federal Debt- Public funds can be devoted to paying down a share of the state’s now $7.9 billion federal UI advance.  We are not requesting full state repayment, but we recommend that the state make a material down payment on this federal debt in the FY 2024 budget, and that the budget include a multi-year commitment for additional payments at a level that can be accommodated in the state financial plan.  Given that the 2020 job losses that caused this borrowing were result of the state-imposed reduction in force, and not based on company actions, it makes sense for a private/public sharing of these repayment costs.

Avoid Increased Program Costs – At a time when the state’s UI system has record-levels of debt, and employers are paying record-levels of UI taxes, it makes no sense to impose additional costs on the system.  Organized labor has called for an increase in the maximum UI benefit to $700 per week.  While we do not yet have a formal estimate of the cost impact of a near $200 per week benefit hit, it would certainly add hundreds of millions in costs to a system still deeply in debt.