California stands alone as the only state yet to repay its federal unemployment insurance (UI) loans, a mounting debt that has ballooned to nearly $600 million this year in interest payments alone, threatening substantial annual payroll tax increases for businesses across the Golden State.
The genesis of this colossal debt traces back to the COVID-19 pandemic era, when the state, particularly under then-California Labor Secretary Julie Su, controversially approved an estimated $55 billion in “ineligible” or fraudulent UI benefit claims, an amount exceeding NASA’s annual budget. This widespread fraud ranged from organized criminal schemes to inmates receiving benefits, fundamentally undermining the integrity of the state’s system.
Despite the state’s role in disbursing these fraudulent payments, the financial burden is primarily being shifted onto California businesses. They face automatic federal payroll UI tax increases, with the effective federal UI tax rate on the first $7,000 of wages per employee rising significantly from a pre-pandemic 0.6% to a potential 6%, a tenfold increase that will cost businesses hundreds of dollars per worker annually.
These escalating federal surcharges are compounded by anticipated increases in state UI taxes, which are expected to climb from an average of 3.5% to over 5%. Combined, these hikes could push employers’ total UI payroll taxes to 11% on the first $7,000 of each employee’s wages, more than double the rate seen in the early 2020s, translating to an increase from approximately $287 to $770 per employee per year.
The state’s unemployment insurance benefits program is projected to run annual deficits of $2 billion for the foreseeable future, exacerbating the debt. Interest costs on the federal loan, currently at $593 million for the 2025-2026 fiscal year, are forecast to soar to $1 billion annually, indicating the severity of the financial quagmire and the continued need for further borrowing.
Industry leaders and advocacy groups, such as the National Federation of Independent Business, express grave concerns over the lack of accountability from the California Employment Development Department (EDD) regarding the fraudulent claims. They argue that struggling small businesses are unfairly burdened with the state’s “maxed-out credit card,” likening the situation to an unsustainable household budget.
The structural imbalance within California’s UI system is a key contributor to the ongoing insolvency. While average weekly wages and benefits for unemployed individuals have increased, the revenue generated from employers has remained capped, creating a persistent deficit that, according to the EDD, necessitates legislative changes to rectify the long-term problem.
Adding to the economic pressures, California’s unemployment rate is currently tied for the highest in the nation. Business leaders warn that the substantial payroll tax increases could disincentivize hiring, particularly for entry-level and part-time positions, potentially harming youth employment opportunities and their access to the economic ladder.
The state has also seen a significant loss of private-sector jobs, while government and government-funded employment has grown, with many of these public sector jobs exempt from UI payroll taxes. This disparity places even greater strain on the private sector, which bears the brunt of the state’s mounting unemployment debt and the resulting tax burden.
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