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 Illinois state leaders missed the Sept. 6 deadline to repay a
$4.2 billion federal loan to the state’s unemployment insurance fund, which
leaves Illinois taxpayers on the hook to pay $60 million in annual interest on
that loan.
The unemployment fund has been depleted during the COVID-19 economic downturn.
Between the loan and failure of state leaders to replenish the fund, potentially
by using federal COVID-19 bailout funds, the deficit stands at $5.8 billion.
Business leaders warn a failure to repay the debt would result in automatic tax
hikes on Illinois’ employers starting at $500 million, further waylaying the
state’s stagnant job recovery. There would also be automatic benefit cuts of the
same amount. Employers could be subjected to further, discretionary tax hikes by
the state legislature if those automatic solvency measures fail to fill the
hole.
Since the onset of the COVID-19 pandemic, the number of Americans filing jobless
claims nationally has soared to historic highs, placing unprecedented stress on
state unemployment systems. Illinois saw unemployment peak at 16.3% in April
2020 as Gov. J.B. Pritzker mandated business closures statewide.
Over 202,000 Illinoisans in a week filed for unemployment back then. That’s more
than 12 times the number of claims the Illinois Department of Employment
Security received in same period during the Great Recession.
All those claims led to the $5.8 billion deficit when more was paid to
out-of-work claimants than was in the fund.
The deficit amount includes $4.2 billion the state borrowed during the pandemic
in initially interest-free federal funds and the $1.6 billion change in the
trust fund balance since the beginning of the pandemic. The trust fund held
$1.85 billion as of February 2020 and had a balance of just $256 million as of
September 2021, according to the Treasury Department.
Illinois was originally one of 22 states that applied for these advanced federal
loans. But after the state missed the Sept. 6 loan repayment deadline, Illinois
finds itself among 10 states accruing interest on that debt.
Business groups have estimated these looming interest payments could cost
Illinoisans as much as $14 million in 2021 and up to $60 million annually
starting in 2022. The first of these installments to the U.S. Treasury are due
Sept. 30.
Illinois business leaders and labor groups have warned failing to address the
state’s growing unemployment insurance fund deficit for too long could also led
to “crippling” taxes on businesses and significant cuts to unemployment
benefits.
 Federal law mandates states maintain the solvency of unemployment funds to
protect vulnerable residents. Without outside funding, the two ways states can
fund their trusts are by either increasing employer payroll taxes or cutting
benefits for the unemployed.
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But if any state maintains an outstanding balance
of federal borrowing for the beginning of two consecutive calendar
years, federal law triggers a series of automatic tax hikes on
businesses in that state. The standard federal payroll tax rate of
0.6% could rise by 0.3% beginning Jan. 1, 2022, and then rise an
additional 0.3% each year the balance remains outstanding, up to a
maximum of 6%.
Rob Karr, CEO and president of the Illinois Retail
Merchants Association, estimated these unemployment credit
reductions would essentially raise taxes on businesses by $500
million and cut $500 million in unemployment benefits.
With Illinois’ unemployment rate stagnating at 7.1% since March
while national unemployment continues to trend downward, that hike
would further hurt the ability of Illinois businesses to hire and of
workers to find jobs.
Illinois’ struggles with its underfunded unemployment insurance
trust fund are nothing new. During the Great Recession, the state
had to borrow nearly $1.5 billion in federal money to backfill the
fund. To avoid automatic tax hikes on businesses triggerd by the
delayed repayment of that federal loan, the state then sold bond
debt to repay the federal government. Those bonds took five years to
repay, funded by a compromise with Illinois businesses that included
modest payroll tax increases and benefit cuts.
To cut already-struggling businesses some much-needed slack, both
Karr and the State Policy Networkrecommend Illinois use part of the
$5 billion in federal aid from the American Rescue Plan Act to fill
the unemployment trust deficit. The U.S. Treasury earlier this year
gave the green light for states to use those funds to restore
unemployment trust fund balances to January 2020 levels.
States such as Ohio have already acted, using $1.5 billion in
federal funds to repay their Title XII loans.
“By repaying this loan in full, we ensure that Ohio businesses won’t
see increases in their federal unemployment payroll taxes,” Ohio
Gov. Mike DeWine said in a statement. “Without this added tax
burden, our employers can invest more money into their businesses
and hire more staff.”
By prioritizing federal aid to be directed towards refilling the
trust fund, Illinois can prevent its small businesses from being hit
with further tax increases when they remain vulnerable. This would
help refuel the 69% of total new jobs that small businesses provide
for the state, which would drive down unemployment numbers.
Using recovery funds for the state’s unemployment insurance fund
should be prioritized over allocations such as paying off existing
debt, which are primarily caused by irresponsible budgeting and
rising pension costs. Those issues would be better resolved with
structural reforms, such as a constitutional amendment to bring
pension costs under control.
Illinois can make good use of stimulus funds with lasting change
that will rebuild the state’s economy |
