California, New York, and Illinois have amassed large pandemic-era debts.
California, New York, and Illinois have amassed large pandemic-era debts.
O ne of the many criticisms of the Biden administration’s proposal to waive college debt is that it creates the moral hazard of encouraging increased student borrowing in anticipation of future debt relief. But such moral risk isn’t exclusive to students. Some of the nation’s largest — and bluest — states now appear to be holding out for similar relief from tens of billions of dollars in federal unemployment loans that they accepted during the pandemic. If granted, this would only encourage greater state dependence on federal loans — and ultimately on federal taxpayers.
A long-standing federal practice regarding the nation’s unemployment-insurance (UI) system is to offer loans to states that can’t make good on their unemployment-benefit promises. During the depths of the Great Recession, 36 of 53 states and territories that operate UI programs (including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) exhausted their UI trust funds and took out a combined $47 billion in federal loans.
During the pandemic, 22 states received federal loans that in January 2021 totaled over $45 billion. The Department of Labor reports that five blue states still owe the federal government over $27 billion today, nearly all of which is owed by California, New York, and Illinois.
Most states never took out such loans during the pandemic, and 16 of the 22 states that did have already repaid them in full — some by using the $350 billion in state and local recovery funds provided under the American Rescue Plan Act (ARPA). Texas (using $7.2 billion from those federal funds) and Ohio ($1.5 billion) led dozens of states by replenishing their trust funds and paying back federal loans that way in the past 18 months. Those actions prevented payroll-tax hikes that would have otherwise been required to shore up trust-fund solvency and repay those loans.
As Representative Kevin Brady (R., Texas), the lead Republican on the tax-writing House Committee on Ways and Means, recently noted, the handful of remaining states with outstanding loan balances can’t hope for the same. There, as he described in letters to their governors, “Main Street businesses are at risk of facing higher taxes that will undercut job creation and drive prices higher just as families and small businesses are struggling with record-high inflation and a looming recession.”
Consider New York, whose loan balance of $8 billion is the equivalent of $839 per person in the state’s labor force. New York could have used $12.7 billion in ARPA recovery funds to eliminate that debt, as other states did. But “New York State has not applied any of its allocation of federal pandemic fiscal relief funds to its advance,” the state comptroller said in June 2022. Instead, New York created a one-time $2.1 billion program offering extraordinary unemployment benefits to those in the U.S. illegally. As a consequence, and as Brady’s letter to Governor Kathy Hochul notes, New York employers are poised to see federal unemployment taxes rise by 50 percent — from $42 to $63 per covered worker. Those payroll taxes — which ultimately mean reduced worker wages — will continue rising until the state’s massive balance is fully repaid.
That is, unless those state debts are waived by federal lawmakers. Illinois lawmakers, earlier this year, proposed extending interest-free treatment on federal unemployment loans. While no formal proposal has yet been released, it’s not hard to imagine California, New York, and Illinois prodding their powerful federal patrons — House Speaker Nancy Pelosi (D., Calif.), Senate Majority Leader Chuck Schumer (D., N.Y.), and Senate Majority Whip Dick Durbin (D., Ill.) — to waive repayment of their states’ unemployment debts in an end-of-year spending deal.
The answer to any such effort should be a resounding “no” — especially since states with remaining balances have already been handed billions in federal funds that they could have used to repay these loans. Just like waiving college debts, providing such “relief” would punish taxpayers in states that never took out any loans or have already repaid theirs. Even worse, it would encourage more state borrowing in expectation of future loan forgiveness. That moral hazard jeopardizes a longtime stated goal of liberal policy-makers: that states should maintain sufficient trust-fund balances to weather future recessions. It’s hard to imagine such an irresponsible policy — then again, when it comes to being munificent with taxpayer dollars, the federal government has recently proven to be exceptionally creative.