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If not for a persistent mail carrier, Lance Hastings might not have discovered all of the fake unemployment claims.

Last September, the head of the California Manufacturers & Technology Association got the first jobless claim from a worker he’d never employed. Mistakes happen, he thought, and reported the letter sent to the group’s boarded-up former Sacramento office as suspected fraud.

“They even used our old CEO’s name and address,” said Hastings, the association’s current CEO. “When we got that one, our spidey sense really got activated.”

But in recent months, as the mail carrier delivered more than a dozen other bogus letters with unfamiliar names and Social Security numbers, Hastings’ skepticism has given way to frustration — especially now that taxpayers like his organization will likely have to help pick up the tab for California’s $21 billion and counting in unemployment debt.

Now, he worries that higher unemployment taxes could make it harder for businesses in California’s already expensive manufacturing sector to recover from the shock of the year-long pandemic. “I think it’s unprincipled,” Hastings said. “These are just nails in the coffin that concern me greatly.”

Hellish waits on jammed customer service lines and brazen fraud have dominated the headlines about California’s unemployment system in the age of COVID-19. On Friday, officials at the state’s Employment Development Department unveiled new online tools to track unemployment data after the backlog of unpaid claims again mushroomed to more than 1 million in recent weeks, including more suspected fraudulent applications.

Amid the chaos, another big problem has largely been overlooked: The state is out of unemployment money, and nobody is doing much about it. California has a history of going deep into the red to pay for jobless benefits during recessions, but the stakes are especially high this time as businesses hit hard by unprecedented pandemic shutdowns look to restart hiring. California’s unemployment rate fell in February to a pandemic-low 8.5% as employers added 141,000 jobs, but the rate is still twice as high as in February 2020.

The state’s unemployment trust fund financed by employer taxes ran out last spring, which economists attribute to an outdated tax system that has gone largely untouched for the last four decades. So far, California has borrowed $21.2 billion from the federal government to keep benefits flowing to the jobless. Employment Development Department officials expect the deficit to balloon to $48 billion by the end of the year.

In response to a question from CalMatters about how the state plans to address that debt, department officials said Friday that the next forecast for the unemployment fund is due around late May. “Information will be further forthcoming as developments occur,” spokesperson Loree Levy said.

In the meantime, employers have been required to keep paying a 15% emergency surcharge on unemployment taxes due to the fund’s insolvency. Even before the coronavirus shut down much of the economy, California’s unemployment fund was the most unstable of any U.S. state, well behind financially repressed Puerto Rico and the District of Columbia.

California’s unemployment rate fell in February to a pandemic-low 8.5% as employers added 141,000 jobs, but the rate is still twice as high as in February 2020.

The state’s descent during the pandemic to poster-child status for unemployment dysfunction could make this year a prime opportunity for reform. One option favored by economists at Stanford is to cut unemployment taxes for employers in lower-wage sectors while raising taxes on higher-paying businesses to reduce the state’s debt.

But so far, lawmakers from both parties are proposing much more limited reforms: new oversight boards, a direct deposit payment option, better language access and stronger checks on inmates filing for benefits. Some measures call for the Employment Development Department to develop a new recession plan or to keep paying expanded benefits as the pandemic drags on, but they don’t address the underlying debt or tax system at the agency ultimately controlled by the governor.

The cumulative effect, political analysts say, is that unemployment is poised to lose out to competing priorities such as vaccines, adding to a long history of neglecting safety-net programs in a year further complicated by messy recall politics.

“If the governor and the legislative leadership wanted to make this a top priority, the timing could be perfect,” said Dan Schnur, a Republican campaign veteran and a professor at the University of Southern California and UC Berkeley. “This could end up being the single worst financial scandal in the history of California government. But the irony is it’s so big and so sprawling, it’s difficult for voters to understand.”

Who really pays for unemployment?

Unemployment is what Stanford economist Mark Duggan calls an “invisible tax.” While Social Security is run by the federal government and deducted directly from workers’ paychecks, each state oversees its own unemployment system funded by employer taxes.

Despite California’s reputation for a progressive tax system, the state’s unemployment taxes hit businesses with lower-paid workers harder. That’s because businesses are taxed on only the first $7,000 a worker makes — the lowest amount allowed by federal law, and a figure that hasn’t been updated in 39 years, said Duggan, who studies unemployment at the Stanford Institute for Economic Policy Research.

“It’s the worst… And it’s not some stupid little narrow program. As we just saw in the pandemic, this was the most important part of the social safety net.”
— Mark Duggan, Stanford Institute for Economic Policy Research

Each business then pays a payroll tax rate ranging from 1.5% to 6.2%, depending on how many of its workers have filed for unemployment benefits in past years. That often penalizes hotels, restaurants and other high-turnover industries slammed by the pandemic. Unemployment taxes max out at $434 per employee, per year, or up to about $4,340 for a 10-person company paying the highest rate, before any emergency fees.

Since the state partially insures wages up to a much higher limit, $46,800 a year, the result is that businesses pay very similar unemployment taxes for a worker who makes $8,000 a year and another who earns $40,000. But the higher-paid worker gets $400 a week in state jobless benefits if laid off, compared to $80 for the lower-paid worker.

While the costs of those benefits add up for the state, it’s often not enough for out-of-work Californians to pay for housing, food and other necessities. That’s made extra federally funded unemployment payments during the pandemic — $600 a week last spring, $300 under more recent stimulus measures — a lifeline for many.

“It’s the worst. The most regressive. Appalling. I don’t know what adjective to use,” Duggan said of the state’s current unemployment financing system. “And it’s not some stupid little narrow program. As we just saw in the pandemic, this was the most important part of the social safety net.”

What happens when that safety net breaks down is all too clear for Lauren Taylor-Mayweather. The 41-year-old mother of four lost her job as a home health aide in the Inland Empire in January, and she’s still out $490 after reporting a string of fraudulent charges on her state-issued Bank of America unemployment debit card in February.

All payments stopped for more than a month after her unemployment account was frozen, she said. Her husband was able to cover rent for the family, but they fell a month behind on their car payment, their auto insurance lapsed and groceries were sparse as she waited hours to plead her case to customer service workers.

“I was pretty much down to my last dollar,” Taylor-Mayweather said, and yet, “I’m being made the criminal.”

One silver lining of the past few months is that she’s been able to attend online classes for a bachelor’s degree in health care administration, giving her hope of moving up in her next job. But it’s fast-growing jobs including home health aides and other service industry positions that Duggan says would benefit most if California took on more ambitious unemployment reform.

He favors raising the $7,000-per-worker base on which employers are taxed to align with the $46,800 insurance limit. This would likely raise taxes on high-paying employers, but lower them for employers who hire more lower-wage workers. States including Utah, North Dakota and Washington have changed the rules and required employers to pay taxes on $36,000 in wages or more, and they’ve so far avoided unemployment debt during the pandemic.

“That would, overnight, lower the cost of hiring part-time and low-wage workers, and it would act as a powerful stimulus,” Duggan said. “Yeah, it would raise a little bit the cost of hiring engineers and accountants. But it would rationalize it, because right now the accountants and the engineers are getting free insurance.”

Debt deja vu

This wouldn’t be the first time California policymakers have passed on overhauling unemployment during a crisis. After the Great Recession ended in 2009, it took until 2018 for the state to pay back billions borrowed from the federal government through business taxes and interest payments from the state general fund.

Duggan argues that such a drawn-out approach again risks creating a “a drag” on economic recovery after the COVID recession. Other policy researchers contend that the explosion of unemployment fraud in many states during the pandemic should also be a wake-up call to rethink who runs benefit programs, since most other countries administer similar programs at a national level.

“Are we long past due for moving this to a federal system?” asks Jody Heymann, a UCLA professor of health policy. “I don’t actually think it’s realistic that all 50 states will be good at preventing fraud. And if they are, why would you set up that much redundancy?”

Still, such prospects seem far removed from proposals favored by business groups including the Tax Foundation, which are pushing states to steer clear of tax hikes and “avoid penalizing hiring.”

“This could end up being the single worst financial scandal in the history of California government. But the irony is it’s so big and so sprawling, it’s difficult for voters to understand.”
— Dan Schnur, Republican campaign veteran

Gov. Gavin Newsom has said he won’t raise taxes this year, but the alternatives are limited. EDD officials have stressed that upwards of 90% of fraud appears to have targeted federal emergency programs, so it’s unclear how much the state would get to keep of any money clawed back from fraudsters.

There’s also the possibility that the federal government could forgive some loans, though bailing out California and other insolvent states might not go over well in places that have kept their programs in order. California could also follow more conservative states and tighten eligibility or cut unemployment benefits for workers to save money.

The most likely scenario politically may be doing very little, given the hyper-polarized climate surrounding the recall. After assembling and disbanding an unemployment “strike team” last year, Newsom and his surrogates have largely avoided the issue since installing new leadership at the Employment Development Department, often referring questions to labor and employment officials as he navigates the pandemic and other turmoil.

“Newsom has probably been hurt politically much more by one silly birthday dinner than by a multibillion-dollar employment benefit scandal,” Schnur said. “That’s probably because he’s kept himself at such a distance from it. The problem is that may have created a disincentive for him to engage more forcefully on a solution.”

For Taylor-Mayweather, it all seems like a matter of will, or lack thereof. She blames both the state and Bank of America for failing to make sure unemployment money was safe in the first place, overlooking details such as secure chips in debit cards for recipients.

“You knew we were vulnerable,” Taylor-Mayweather said. “We weren’t worth the extra step.”

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CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.