Sep 13, 2021 Business Loan — Eric Giguere

Texas is Underfunding Unemployment to Keep Business Taxes Low. Now, it owes $7 billion and counting. Texas Standard

Texas Public Radio

Texas leaders know for decades that they don’t charge enough unemployment taxes to businesses to prevent a severe recession and job-killing.

The state received two years' worth of unemployment claims within the first two months following the COVID-19 pandemic. The state's Unemployment Insurance Trust Fund was quickly depleted by the surge.

The federal government provided financial assistance to Texas and 22 other states. The federal government paid $7 billion to cover some of the cost for out-of-work Texans over the past 10 months.

The funding was not given as a gift. It was a loan to pay for the 9.5 million worker claims filed since March. Now, the interest is building up and Texas will start paying it back.

State officials expect that the first payment, up to $12.6million, will be made by Sept. 30, according to their estimates.

To pay off the debt, businesses will see their tax rates rise over time. There is still time for automatic federal tax increases by the state until November. To avoid this, it will likely sell bonds backed by the government.

During the pandemic, interest on these loans from U.S. Treasury Program Title XII -- which was authorized under Title XIIof Social Security Act in 1935 -- was suspended. This changed on Labor Day when the floating rate of 2.27% started to accrue. It's not yet clear if taxpayers and businesses will feel the true costs of chronic underfunding.

Texas may need to borrow additional Title XII Title XII funds for September.

James Bernsen stated that the Texas Workforce Commission (also known as TWC) anticipates borrowing again during September. He spoke on behalf of June's spokesperson for the agency.

Due to the recovery, the state was able to pay its own unemployment benefits. However, interest is due so the state wants to reduce its September tax burden.

Bernsen explained this week via email that Title XII would likely be drawn again once all cash has been used for Title XII reduction.

Texas is, in essence paying down its credit card balance (Title XII), to lower its monthly payments. It will still require the federal credit card to use later in the month. It seems to be quick to pay off the Title XII debt.

Texas is not the only place

The U.S. Department of Labor ranked the Lone Star state 50th among 53 states and territories in 2020 for funding unemployment. This was lower than Puerto Rico but slightly higher than New York City and California, as well as the Virgin Islands.

The federal government will start charging Texas and 12 other states and districts interest for an excess $54 billion of loans it took out to pay for unemployment insurance.

"This is both red and white, both. California, Texas, and New York underfund UI funds," stated William Glasgall, senior vice president of state initiatives at Volcker Alliance. This non-profit focuses on fiscal policy. They will continue to hold the money for normal-type recessions. It's not stigmatizing, and there's no penalty for running an efficient operation.

Texas ranks third in the list of states that received the most money from the Treasury after New York's $9Billion, and California's 223Billion.

Most of the taxes used to fund unemployment insurance (UI), are collected from spring businesses. Although the state's unemployment rate has fallen to 6.2% in July, it is still three times higher than before the coronavirus pandemic, The recent COVID spike may be slowing down hiring and putting at risk future Title XII loan applications.

The pandemic caused high unemployment rates in the state, as well as other states. The state's unemployment rate was actually close to 13%. The state's $2 billion saved in the Unemployment Trust fund was quickly exhausted.

TWC was asked why it isn't collecting as much as the federal government believes it should. TWC replied that it was up to the legislature to determine the maximum and minimum amount to be collected.

For the unemployed, the state is collecting less money this year than it did last. TWC lowered the rates that go towards the UI Trust Fund in order to help it begin saving for debt repayment.

TWC released a press release in June stating that Texas employers could have seen a significant increase in their tax obligations by 2021 if there was no action from the Commission today.

Texas's legislature also decreased the amount businesses would have to pay for unemployment taxes this year.

Many businesses faced a huge bill due to unemployment taxes. These taxes are calculated on the number of people who were let go during the previous year. TWC and legislative representatives believed it would have been a significant burden on businesses in this fragile recovery.

House Bill 7 changed the formula to these bills. If a disaster declaration is in effect for more than 50% of the state, employers could be exempted.

According to the HB 7 fiscal note, "no significant fiscal implication was expected for the State." "However, the State Treasury does not own any accounts of Unemployment Trust Fund. Accordingly, there would be a $5.4 billion deficit in 2021-2022.

Many in the business community rejoiced the changes even though it was difficult to stay afloat.

Glenn Hamer, Texas Association of Business, stated that it is important to ensure there are policies to assist people in getting back to work. "And business taxes play an important role in how many people will be in our labor force."

Wayne Vroman is an economist at Urban Institute and a senior researcher. He stated that this argument -- that money is better in the employer’s hands than it in the trust fund -- was what kept Texas’ unemployment trust unfunded.

Vroman stated that "that assertion has never really been tested to see if it holds water or not."

He stated that Texas was the only state to have embraced this philosophy. He said that Texas was the only state that has been so passionate about this idea.

Employers can afford unemployment insurance at a low cost. It is only 6-10% to 1 percent of the payroll. It is far more than Social Security and other payroll expenses.

Unemployment insurance can be costly. It isn't expensive. He stated that Texas has a low number of unemployed people who receive benefits, so the costs are lower than the national average.

The $7 billion bills, which is the result of an underinvested unemployment program, is due in any case.

The cost will be paid by companies. But, the interest and other fees paid towards service debt will be more than those going to the unemployed. This perpetuates underfunding.

In June, Texas borrowed $1.3 billion from the U.S. Treasury. The state will owe interest of 2.27% on $6.9 million. These numbers will remain the same, and the state will owe $12.6million in minimum payments by September 2021. TWC believes they can reduce the balance with existing UI Trust funds enough to only need to pay $10 million.

It is important to understand the terms and acronyms of the Texas Workforce Commission in order to be eligible for unemployment benefits in Texas. Credit:

If Texas has outstanding debts as of November 2022, the federal government will reduce the Federal Unemployment Credits for Texas businesses. Each year that Texas has a balance of debt with the Treasury, this rises exponentially.

While an ongoing recession may not be the best time for tax increases, it is one that Texas has created in many ways. Title XII was not required for 28 states that also experienced the pandemic.

What can Texas do to help? These are only a few of the options.

CARES Act

First, Texas could be eligible for money from the Coronavirus Aid, Relief and Economic Security Act, which is an estimated $2 trillion pot. The money was approved by Congress in March 2020. The money from CARES cannot be used for debt repayment. However, it did have a Coronavirus Relief Fund of $150 billion for the state, local, and tribal governments. This fund could be used for workforce development and support of unemployment trust funds.

According to The Associated Press in May, 29 states indicated that they may tap the fund to aid their UI Trust funds. It's not clear if Title XII loan recipients in 22 states used the fund to repay the Treasury.

The Urban Institute reports that 20 states have used $6 million already from the fund to support workforce and unemployment development. It was not clear if Title XII debt was repaid.

Vroman stated that "I expect Texas to seriously investigate that."

$8 billion was received by Texas from The Coronavirus Relief Fund. Staffers claimed that none of the money went to TWC and it was not clear if any Title XII debt will be paid back.

Federal relief funds, which are required to be paid to business owners by law, would be used by UI Trust funds. This would suggest that taxpayers were bailing out businesses.

It could also set a bad precedent. States like Vermont and Oregon might wonder why they bother when California or Texas pay down their debts without any money. Vroman said that trust money can be more dangerous than building money. If people think they will get money for free, they might be less cautious.

How about Vermont cheesemakers and Oregon fisherman? They pay seven times as much in state trust fees for Texas business owners.

This precedent could lead to other states expecting federal bailout money and underfunding their unemployment trusts. This would shift the burden of unemployment insurance taxes from business owners to everyday taxpayers.

Initiate Government Bonds

It is not the first time Texas has had to pay its citizens in federal dollars. Texas has twice before taken out Title XII Loans. It has also issued bonds to repay them twice. The TWC paid back bonds issued during the Great Recession in 2011 and 2017.

Contrary to the previous two instances, the federal government did not offer any money for repayment.

A report by the Urban Institute shows that the state took longer to pay federal taxes under Title XII than if they had allowed them to rise. However, the state was able to keep annual payments lower. The state was able to keep annual payments lower because they are so in high demand that they could sell at a premium. This financial decision was better than allowing federal collection.

These bonds that are government-backed are still highly sought after. They may be available at a premium if/when states decide to sell them again. However, it isn't clear if they will save money.

Texas owes more than it has ever before.

In 2010, the state bought bonds in the amount of $1.9 billion to pay Title XII debt. The state now owes almost 3.5 times that amount. TWC is not yet sure if it will follow this path.

Chris Nelson, TWC finance, stated that it was premature to make such a decision until...you'll know when all the dust settles." He made these remarks at an earlier year commission meeting.

Municipal bonds are complicated and require a lot technical work. These bonds are not issued by any other state unemployment departments. They were issued in Texas after the dot-com bust recession of 2000. According to a survey, this encouraged them to make the leap.

Texas also had greater control over how it was paid back. This federally mandated scheme causes taxes to rise across the board. To target the companies with the highest number of layoffs, they can use a bond. The workers who used the unemployment program most. They used their bonds issued after the Great Recession to do this.

In its efforts to increase employer funding, the state has fallen into a financial rut. It owes billions of dollars to the federal government. This will set the stage for future recessions. Texas will likely continue to underfund its unemployment system to reduce debt.

State officials and elected leaders will continue to hope that the state does not experience another major recession.

Consider making a donation if you found this information helpful. Your donation will pay for everything at texasstandard.org and KUT.org. Thank you for your donation today.

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