For businesses in the Golden State, “California Dreamin’” is becoming “California Screamin’.” The state’s unemployment insurance (UI) trust fund is $18.7 billion in debt to the federal government, and Governor Gavin Newsom’s plan to pay down the debt has been tabled.
In 2022, the state was benefiting from a $100 billion surplus, greenlighting the appropriation of $750 million to go toward the trust fund. Now, however, the state’s outlook has reversed into a $24 billion deficit, resulting in Governor Newsom proposing to cancel the contribution. While just a drop in the bucket compared to the total sum owed, the $750 million payment would have kickstarted the debt repayment. Now, businesses are solely responsible for making these payments. This is essentially a tax increase by another name.
This was not the only chance officials had to make a dent in the trust fund. California received more than $40 billion in state fiscal recovery funds since March 2021, and yet none of it was applied to the state’s UI trust fund.
Because the state’s trust fund remains insolvent, the Federal Unemployment Tax Act (FUTA) tax credit has been reduced, raising the effective federal UI tax from 0.6% to 0.9%. The effective rate will continue to climb until the trust fund is replenished. This isn’t new for California employers – the state’s trust fund was $10 billion in the hole following the Great Recession. Employers steadily replenished the trust fund over the course of six years. This episode...
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