With unemployment fund dry, taxes going up

Minnesota’s unemployment trust fund went from a $1.5 billion surplus before the pandemic hit to a $1.36 billion deficit today, which means payroll taxes will go up five-fold next year to replenish the fund.

The base unemployment tax rate is .1% on every paycheck for all taxpaying employers, and that’s expected to increase to .5% next year, according to Steve Grove, commissioner of the Department of Employment and Economic Development. An additional assessment on that base rate — a tax on a tax, essentially — will also go up next year by an estimated 14%.

The trust fund was depleted by the end of July, requiring the state to start borrowing from the U.S. Treasury to keep unemployment checks flowing to the record number of people put out of work. Employers ultimately pay back that federal loan — for which the interest has been waived — and replenish the trust fund through unemployment taxes.

Base rates didn’t change this year because they’re determined by the status of the trust fund on March 31 of the prior year, Grove said. In March 2020, the state was just shutting down and the trust fund had a good cushion.

“This pandemic has been one of the most unpredictable and challenging events that our economy has ever had to weather,” Grove said.

DEED moved quickly during the early days of the pandemic to get checks out to gig workers and the self-employed, who were newly eligible. 

Minnesota has paid out almost $13 billion in unemployment benefits since the pandemic began, Grove said. Much of that has been federal money to extend benefits, add federal payments and include more workers. The money helped Minnesotans pay rent and buy food and other necessities, and in the process helped prop up the entire economy as people highly likely to spend had the cash in their pocket to do it. 

Minnesota is among 22 states and territories that have borrowed money from the feds. The system is designed so states can borrow money to keep benefits flowing, and repay the money over time as the economy recovers, rather than when it’s in the tank. So, rates will go up next year and it will take a number of years to pay off, Grove said.

“The most important thing we can do is build the economy,” he said. “The system is designed to handle things like this.”

Lauryn Schothorst, director of workplace management and development policy for the Minnesota Chamber of Commerce, said the taxes are expected to steeply increase in coming years to replenish the fund, and any proposal that will impact the fund — and increase the tax burden on employers — shouldn’t be considered right now.

“The state’s unemployment insurance policy should be a partnership with, not only at the expense of, employers, and should not disincentivize a prompt return to work,” Schothorst said. “Penalizing employers with additional increased unemployment insurance taxes will disincentive hiring and slow economic recovery.”

Grove said Minnesota did not take an “uber-liberal” approach to the pandemic.

“We didn’t hear any complaints from employers on extending these benefits during times of COVID,” he said. 

He acknowledged some employers complained that paying the $300 “topoff” from the federal government to help workers after the extra $600 per week ran out made it harder to hire people back.

Benefits paid out during this downturn dwarfed the 2007-2009 Great Recession: The state was paying out about $140 million per week last June, compared to a peak of about $42 million per week during the Great Recession. That figure is now down to about $80 million, Grove said; about $70 million of that federal money.

Gov. Tim Walz told the state’s congressional delegation last June the unemployment program was being tested like never before, with more applications in the first 2.5 months than in the previous four years.

Before the pandemic, Minnesota’s trust fund was 94% solvent — or had 94% of the estimated amount needed to cover a year of benefits — but burned through more than that in the first six months of the pandemic, according to the Federal Reserve Bank of Minneapolis.  

Dozens of state unemployment systems crashed under the strain. In Florida, hundreds of people stood in lines during the pandemic just to get a paper application for unemployment benefits.

Rather than make it difficult for people to get benefits, Walz signed an executive order so unemployed people could begin getting benefits without having to wait a week.

“We have one of the best unemployment insurance systems in the country,” Grove said. “We’ve been able to get these benefits out the door effectively…. (even though) nobody’s perfect and not everybody’s experience is seamless.”