Battle brewing over how to repay the feds $1 billion for unemployment

GOP wants to use surplus funds, not payroll taxes

By: - December 7, 2021 1:13 pm

Activists marched in a mock funeral procession in Denver to protest the expiration of a federal unemployment benefit. (Chase Woodruff/Colorado Newsline)

A political fight is brewing over how Minnesota should repay the federal government more than $1 billion it borrowed to keep unemployment checks flowing when the pandemic put record numbers of people out of work. 

Payroll taxes are slated to automatically go up five-fold in the spring to replenish Minnesota’s unemployment trust fund, but Republican lawmakers have begun lobbying Gov. Tim Walz and Democrats to instead repay the debt by tapping into the state’s projected $7.7 billion surplus or unspent federal pandemic relief dollars.

Before the COVID-19 pandemic hit, the state’s unemployment trust fund had a $1.5 billion surplus. But then businesses paused or closed, employees lost jobs and unemployment applications went through the roof, with more applications in the first two-and-a-half months of the pandemic than in the previous four years.

The state burned through its surplus, depleted the fund by July 2020, and had a $1.4 billion deficit by spring of this year, the Reformer reported in May.

Minnesota moved quickly during the early days of the pandemic to get checks out to gig workers and newly eligible self-employed workers, with much of the unemployment money coming from the feds to extend benefits, add federal payments and include more workers. 

Dozens of other states’ unemployment systems crashed under the strain. In Florida, hundreds of people stood in lines 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 quickly and not have to wait a week.

Minnesota is one of 22 states that borrowed money from the feds to keep benefits flowing, and is among 10 states with debt left to pay, with the fifth-largest debt remaining as of Tuesday, according to U.S. Treasury data

The system is designed so states repay the money over time as the economy recovers. The loans were interest-free until September, when a 2.3% interest rate kicked in. 

By law, the money is repaid by employers through payroll taxes, unless lawmakers take action. Ohio and Nevada officials used federal pandemic relief dollars to pay off their loans before interest began accruing. Ohio Republican Gov. Mike DeWine said the move would help avoid an increase in payroll taxes.

The base unemployment tax rate is .1% on every paycheck for all taxpaying employers, but that’s expected to increase to .5% next year. An additional assessment on that base rate — a tax on a tax, essentially — is also expected to go up by 14% next year.

House Republican leaders sent a letter to Walz on Nov. 23 urging him to use the state’s surplus or more than $1 billion in unspent American Rescue Plan funds to cover the debt, saying almost 30 states have used federal relief funds to avoid or reduce payroll tax hikes.

“Having survived prolonged closures and nearly two years of uncertainty, Minnesota’s small businesses continue to face new challenges as we struggle to move past the pandemic,” they wrote. “This is the rainy day for which our state has diligently prepared.” 

Walz on Tuesday would not say if he would use federal money to repay the debt, saying only “we’ll fix it.”

The Minnesota Chamber of Commerce is also pushing for the state to use its own funds to pay off the loan.

“An enormous budget surplus and overflowing government coffers is not the time to ask the public for more money,” Chamber President Doug Loon said in a press release. 

Senate Democrats responded with a statement saying the fiscally responsible approach is to have employers pay their fair share, rather than have workers sacrifice to give profitable corporations a tax break — including some that have posted record-breaking profits during the pandemic. 

“These funds are meant for our recovery, not to enhance corporate profits,” they wrote. “As COVID-19 rates reach alarming heights in our state, and with the discovery of the new omicron variant, it is all too likely that we will encounter further COVID-19 related expenses in the near future.” 

Republicans also said the state should beef up its unemployment fraud prevention in the Department of Employment and Economic Development, which Democrats called a cynical suggestion. 

“Rather than making it even harder for workers to claim their earned benefits, we should prioritize closing the tax gap in our state and asking our most profitable companies to pay their fair share,” Democrats wrote.

The state’s legislative auditor is reviewing the unemployment program, with results expected in the spring.

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Deena Winter
Deena Winter

Deena Winter has covered local and state government in four states over the past three decades, with stints at the Bismarck Tribune in North Dakota, as a correspondent for the Denver Post, city hall reporter in Lincoln, Nebraska, and regional editor for Southwest News in the western Minneapolis suburbs.