During the first few months of the COVID-19 pandemic, New York State lost almost 2 million jobs.  Almost 1.7 million New Yorkers were receiving unemployment benefits by June 2020, and the State’s unemployment payments totaled $14.7 billion for the year, $9.8 billion more than at the height of the Great Recession.¹ The State entered the 2020 recession with $2.7 billion in its Unemployment Insurance (UI) Trust Fund (Trust Fund) but had to borrow funds from the federal government to satisfy these claims. Now, the Trust Fund owes over $8 billion to the federal government, a balance not likely to be repaid fully until 2027.²

Financial challenges with New York’s UI Trust Fund are not new. The State has needed to borrow from the federal government in each recent recession, and its UI system has been considered insolvent by the U.S. Department of Labor (USDOL) for decades. While the State enacted reforms in 2013 to shore up the UI Trust Fund, the severe impact of the pandemic on employment far exceeded the Trust Fund’s resources.

In order to repay the debt, State UI tax rates already have increased, while the federal UI tax rate will increase annually starting this year. Depending on the length of the current recovery, it is reasonably probable that New York will enter the next recession with its Trust Fund still in debt or with a very low balance. 

The State has three options for addressing the Trust Fund’s current debt, each of which have trade-offs and implications that should be considered:

1. Pay off the debt over time with higher tax rates, which is the standard practice;
2. Partially accelerate repayment of the debt using State revenues; or
3. Rapidly pay off the debt using State revenues, which would provide immediate tax relief to employers.

Under Options 1 and 2, the State also could provide additional targeted relief to small- and mid-sized employers through business tax credits that offset higher UI tax payments. Accelerating the debt repayment or providing tax relief to some employers, however, would shift the burden of paying for the State’s UI system from New York employers to New York taxpayers more broadly. Furthermore, revenues would be diverted from other programs and public services.

To date, lawmakers have decided not to use higher-than-expected tax revenues and COVID-related federal aid to reduce the Trust Fund’s debt. Instead, these funds have been directed toward other recovery programs and elevated spending. If the State opted to provide some relief to employers and to build up a greater Trust Fund balance prior to the next recession, it would require reprogramming funds from other programs and services.

Any State intervention to address its existing UI debt would not fully address the system’s longstanding challenges. While the State took positive steps after the Great Recession to improve the UI system, the COVID shock presents another opportunity for lawmakers to explore further structural reforms that would place the UI system on sounder long-term fiscal footing.

The U.S. unemployment insurance system is a partnership between states and the federal government. The U.S. Department of the Treasury (Treasury) sets the minimum benefit level and duration, while state governments establish specific design parameters, such as income replacement rates, and administer the UI systems.³

The Treasury holds a UI account in trust for each state, funded by a combination of state and federal taxes on employers. Each state sets its own UI tax rates, with revenues deposited into its trust fund account. While the federal tax rate is technically 6 percent on the first $7,000 of annual wages per employee, it is usually lowered by a federal unemployment tax (FUTA) credit. States without outstanding debt owed to the federal government have a net effective federal tax rate 0.6 percent, while those with a balance face a higher rate.⁴

If a state’s UI trust fund is depleted during periods of high claims, the Treasury provides a loan to cover benefit payments. The federal government may charge interest on UI loans if they are not repaid by the end of the federal fiscal year in which they were obtained, though these rules may be suspended during recessions and emergencies. A negative balance in a state’s trust fund, however, generally increases state and federal tax UI rates until it is paid off.⁵

New York’s State UI tax rates are composed of three component rates: a normal, subsidiary, and re-employment service fund (RSF) rate. (See Table 1.) The normal and subsidiary rates vary across employers based on an experience rating system, in which a given employer’s rates are calculated based on factors such as payroll size, how often their former employees claim UI benefits, and the fiscal health of New York’s UI Trust Fund. The RSF rate is constant across all employers.⁶ The sum of these three rates is applied to the first $12,000 of an employee’s annual wages in 2022.⁷ New York’s taxable wage base is set to increase every year until 2026, when it will reach $13,000 and convert to 16 percent of the state’s annual average wage thereafter.⁸

As a result, an employer with many former employees who claimed UI benefits will be assessed a higher state UI tax rate than an employer with fewer claimants. Furthermore, all employers will pay higher rates when the Trust Fund’s balance is negative. In 2019, prior to the pandemic when New York’s Trust Fund balance was positive, New York UI tax rates ranged from 0.6 percent to 7.9 percent, with an average rate of 2.2 percent; in 2021, these rates ranged from 2.1 to 9.9 percent, with an average of rate of 3.6 percent.⁹

Prior to the pandemic in February 2020, New York’s UI Trust Fund had a balance of $2.65 billion.¹⁰ Despite being the highest balance in the State’s history, it was not close to being sufficient to handle the historic rise in unemployment brought on by the COVID-19 pandemic and recession. Total UI benefits paid out in New York grew from $530 million in the fourth quarter of 2019 to a staggering $6.5 billion in the second quarter of 2020, quickly depleting the Trust Fund and leading New York to borrow from the federal government. All told, 22 states, many of which were considered solvent by USDOL, borrowed from the federal government to cover UI payments¹¹ As of June 7, 2022, New York was one of six states with outstanding debt to the federal government. New York owes more than $8.1 billion; New York’s share represents about 27 percent of U.S. states’ total outstanding UI debt and is the second highest of any state behind only California, which has a balance of $17.6 billion. (See Figure 1.)

The COVID-19 labor shock was unprecedented in timing and size, and New York was among the earliest and hardest hit states, both in public health and economic impact. At the onset of the pandemic the national labor market declined 14 percent, while New York lost 20 percent of its jobs.¹² Few states would be prepared to handle such sudden and drastic labor market upheaval as in NY.

Even before the historic COVID shock, New York struggled for decades to build up a sufficient balance in its Trust Fund. The State has not met USDOL’s standard for solvency since 1974 and has borrowed from the federal government to meet UI claims during every recent recession.¹³

During the Great Recession, for example, New York began borrowing from the federal government to pay UI claims in 2008, and New York’s debt grew to roughly $4 billion by 2012—the highest level in history at the time.¹⁴ As a result, State tax rates increased to their highest range, and federal tax rates increased as New York received four FUTA tax credit reductions until the debt was fully paid off in 2015. (See Figure 2.)

In 2013, following the Great Recession, the State enacted changes to the UI tax rate schedules and a gradual increase in the taxable UI wage base to build a greater Trust Fund balance for future economic downturns.¹⁵

New York’s State UI tax rates have already increased, and federal rates will increase soon. In January 2021, the New York Department of Labor increased State UI tax rates to their highest possible levels, as required by State law. Specifically, in 2021, the minimum State rate increased from 0.6 percent to 2.1 percent (up to $247.80 per employee per year), and the maximum State rate increased from 7.9 percent to 9.9 percent (up to $1,168 per employee per year).¹⁶ As a result, the average State UI rate on employers increased from 2.2 percent in 2019 to 3.6 percent in 2021, an increase of 64 percent, from $292.80 to $466.80 per employee. (See Figure 3.) New York’s State UI tax rates will stay at these elevated levels until the State’s UI Trust Fund balance is positive.

The federal UI tax rate will increase if New York is in debt on November 10, 2022, with employers facing a FUTA credit reduction of 0.3 percentage points—retroactively raising the effective federal rate to 0.9 percent for 2022. Further annual 0.3 percentage point reductions will occur until the debt is paid off.¹⁷

Interest accrual on UI debt was temporarily suspended by the federal government through September 6, 2021. Interest was charged at an annual rate of 2.2777 percent in 2021 and 1.5909 percent in 2022. Interest accumulated for each federal fiscal year is paid in one lump sum by September 30.¹⁸ New York has accumulated $110 million in interest for the federal fiscal year 2022.¹⁹ As interest may not be paid directly from a state’s trust fund, starting in 2022, New York employers also will be subject to a once-a-year special interest assessment surcharge to cover the interest payments.²⁰

NYS UI taxes were already set to increase marginally due to growth of the wage base subject to the rate; however, the increases have been and will be significantly higher due to rate changes associated with the Trust Fund’s deficit. Though UI taxes represent a relatively small share of an employer’s total payroll tax obligations and overall costs, businesses that face tighter margins may find these additional burdens hard to manage in an already difficult labor market and business environment.

If the Trust Fund were not in deficit, per employee tax rates for employers at the lowest rates would have increased by 8 percent ($8.40 per employee) from 2019 to 2025, to $118 per year. Per employee UI bills at the highest rates would have gone up 12 percent from 2019 to 2025 ($110.60 per employee), to $1,053 per year.

However, due to the debt, UI taxes per worker are substantially higher. Since the state rate increase has already taken effect, employers are already paying higher taxes due to the Trust Fund deficit. In 2021, employers at the lowest rate paid $290, up from $110 in 2019, while those at the high end paid $1,210, up from $943 in 2019. These taxes will increase further as federal rate increases take effect. For employers at the low end, whose employees infrequently use UI, the per employee UI tax burden will reach $395 in 2025, a $276 increase since 2019. For employers whose employees file UI claims more frequently and have high experience ratings, the annual per employee tax will reach $1,393 by 2025, $340 higher than in 2019.  Total UI taxes for a small business with eight employees, for example, could increase between $2,275 and $3,605 from 2019 to 2025, depending on the company’s historic use of UI. (See Figure 4.)

New York’s UI Trust Fund likely will return to a positive balance in 2027, based on CBC’s analysis of past average UI tax rates and benefit payments, coupled with projected employment and personal income growth.²¹ (See Figure 5.) Since New York State’s average economic expansion has been just under six years since 1975, the State may well enter the next recession with either a negative or low balance in its Trust Fund. This would lead to another cycle of borrowing from the federal government to meet rising UI claims.²²

While current policy will result in New York employers facing higher tax burdens until the Trust Fund debt is repaid, State lawmakers could choose to accelerate repayment of the debt and/or provide relief to businesses facing cost burdens from higher rates.

Absent further federal action, the State has three options:

1. Take no action and let higher taxes replenish the Trust Fund over time: Employers will continue to face elevated tax rates as the State gradually pays down its debt.

2. Partially accelerate repayment of the debt: State resources could be used to reduce UI debt more quickly. This would require resources be diverted from other State programs and would not provide immediate tax relief to employers. However, this would reduce the time needed for New York to return to a UI positive balance, possibly allowing the Trust Fund to build up a stronger balance ahead of the next recession and reducing the risk associated with future borrowing from the federal government.

3. Completely pay off the debt immediately: Paying off the entire debt immediately would reduce State and federal UI taxes on employers and allow the Trust Fund’s balance to grow more quickly before the next recession. However, this would divert significant resources from other priorities to repay UI debt, as well as shifting responsibility for UI taxes from employers to taxpayers more generally.

The State could tap higher-than-expected tax receipts and unallocated federal aid to repay the debt more quickly. The Tax Foundation reports at least 31 states have used federal aid from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and American Rescue Plan (ARP) to pay down some or all of their outstanding federal UI loans.²³

Under Options 1 or 2, the State also could provide targeted tax relief to at-risk, presumably small employers. In January 2022, the State Senate passed legislation that would reduce the State’s normal UI tax rate for fiscal years 2022 and 2023, but the Assembly did not pass companion legislation. This measure would have attempted to provide short-term tax relief for employers, but also would have reduced revenue to the UI Trust Fund, drawing out the repayment timeline. The State also took action to help employers directly by providing more than $1.0 billion for business recovery programs, including $800 million for the Pandemic Small Business Recovery Grant Program and $200 million for a small business seed funding program for newer businesses affected by the pandemic.²⁴ Other approaches, such as providing relief for small businesses in the form of a tax credit, could serve as a complement to those small business aid programs included in the recently passed Fiscal Year 2023 Enacted Budget.²⁵ While such a tax credit program has the benefit of not reducing inflows to the Trust Fund, it would effectively shift some of the burden of paying down the Trust Fund balance on New York taxpayers generally, rather than employers.²⁶

New York State’s UI Trust Fund has long been insolvent, and the unprecedented needs during the COVID-19 pandemic sapped the Trust Fund’s balance, leaving the State $8.1 billion in debt. Employers in New York State, where business taxes are already the highest in the nation, are now facing higher and increasing tax burdens to pay down that debt.

Absent action from State or federal leaders, higher costs will persist on all employers for years to come, with the Trust Fund not projected to return to a positive balance again until 2027. The State has options to use federal aid or strong tax receipts to pay off some or all of the debt, or to provide targeted relief to small businesses who may struggle with a higher cost of doing business from UI taxes. Doing this, however, would come at the cost of reduced funding for other, potentially more impactful, public programs. State lawmakers should balance these tradeoffs when deciding whether to address the UI Trust Fund debt. Longer term, lawmakers should consider reforming the UI system to ensure it is better equipped to meet claims during economic downturns and not be forced to borrow from the federal government regularly when a recession occurs.