California’s Unemployment Insurance Program Faces Significant Issues Beyond Fraud

The COVID-19 pandemic, and resulting economic downturn, strained the financial systems at the federal, state, and local level as record numbers of people filed for unemployment insurance. While some states fared better than others, according to an annual report from the US Department of Labor, none ranked worse than California. Unemployment fraud is a billion-dollar problem in the state, so it’s surprising to learn that fraud isn’t the root cause of trouble within the UI system. Instead, issues have plagued the program at a fundamental level for decades, and could continue to do so indefinitely without targeted reforms.

California’s Unemployment Insurance Program

California’s Unemployment Insurance (UI) Program has operated with the same basic design since 1982. California employers pay an annual maximum of $7,000 in UI taxes for any employee. A taxable wage base of $7,000 is the federal minimum.

The tax rate is experience-rated. Employers with no recent layoffs pay $105 per worker each year, which is a rate of 1.5%. As layoffs within a company increase, so do taxes, eventually hitting a cap of $434 per worker, or 6.2%.

During the past 40 years, while the California UI tax base has remained unchanged, the average wages in the state quadrupled. Employees don’t see these taxes directly, but they do impact the employer’s ability to hire.

Today, someone laid off from their job receives 50% of their most recent earnings, for up to 26 weeks, with a maximum of $450 a week. Essentially, insurance earnings can reach $46,800 a year, with only $7,000 taxable.

The Effects of the Current System

Currently, California owes the federal government $19 billion, mainly due to the massive increase in unemployment benefits from last year. It has essentially wiped out the so-called rainy day fund previously touted by state administrators in early 2020.

“Unfortunately, the current system is disproportionally hard on part-time and low-income employees,” said Attorney Jo-Anna Nieves from The Nieves Law Firm. “Someone earning a low-hourly wage with less than 20 hours of work a week could potentially earn up to six times less in unemployment benefits than someone laid off who worked 40 hours a week.”

Comparing California to Neighboring States

When considering California’s current UI predicament, as well as potential solutions, neighboring states can provide data for comparison purposes. For example, Arizona also has a tax base of $7,000. However, their maximum weekly benefit is $240 per week, a 50 percent reduction compared to California’s maximum of $450.

Other neighboring states have significantly higher tax bases. Nevada’s base is $31,200, and Oregon’s is $40,600. The larger the tax base, the lower the tax rate for employers which provides more money for longer periods to low-wage and part-time workers. 

On a larger scale, consider the state’s $19 billion debt to the federal government. Thirty-two out of 50 states did not borrow money during the pandemic recession. Of neighboring states, neither Oregon nor Arizona borrowed money, although Nevada did. Nevada, however, borrowed 91% less per resident than California.

What are the Possible Solutions?

The current situation seems untenable in the long run, but opinions are divided on the best path forward. Increasing the tax base beyond $7,000 is the most popular potential solution. An increase would allow for a lower tax rate on employers, which opponents argue then lets employers hire more low-income workers, in turn financing the program.

Opponents argue this plan amounts to a targeted tax raise, which they say could impede economic recovery and encourage jobs to leave the site. The counterargument is that the tax burden would shift away from low-income Californians. Instead, high-wage workers would pay the increase because they already don’t pay for insurance on annual wages beyond $7,000.

Final Thoughts

Under the rules of California’s current unemployment insurance system, part-time and low-wage workers pay the same taxes as high-income workers. However, the two groups do not receive the same level of benefits. High-income workers can qualify for benefits up to six times larger.

As a leading progressive state, California’s Unemployment Insurance Program strikes many as unfair. Plus, politics aside, the current policies are often considered fiscally inefficient and irresponsible.

While the Unemployment Insurance Program’s future is uncertain, all parties involved agree reform is needed – and soon.