Texas Prepares For Federal Loan For Unemployment, Will Likely Raise Business Taxes
The State of Texas has nearly exhausted its $1.9 billion Unemployment Trust Fund. The Texas Workforce Commission expects it to run out of money in the next three weeks.
The Fund has been hammered by soaring unemployment, with 2.5 million Texans filing claims since March 14.
“By 2019 numbers, that's over three years of claims in just two months time,” said Francisco Gamez, TWC spokesman, in a recent Twitter video.
The latest weekly jobs report showed 141,000 new unemployment claims, which while high is still more than 103,000 less than the week before. Despite the good news, the state’s weekly payout on claims has exploded.
Since mid-March, the Fund has paid claims at an average of $170 million per week. That’s more than most entire months in 2019. In recent weeks it has rose to more than $360 million a week.
When it runs out, Texas will tap the federal government for what are called Title XII loans, so people will still be able to collect. This is exactly what it and dozens of other states did in 2009.
Texas took out billions in unemployment trust loans during the Great Recession. According to TWC data, between July of 2009 and May of 2011, Texas needed nearly $3.8 billion.
Texas and more than 30 other states were pushed into insolvency. It spent much of the intervening years paying down.
“Long-standing UI (unemployment insurance) tax policies and practices in many states over 3 decades have eroded trust fund reserves, leaving states in a weak position prior to the recent recession,” said a 2010 report from the Government Accountability Office.
In short, states like Texas were offering more benefits than their unemployment insurance taxes on businesses were collecting. The UI program was designed to be self-funded even in a recession. Clearly, it wasn’t.
The Center on Budget and Policy Priorities pointed out at the time (2010) that without major reforms most states would be back in insolvency, using Title XII loans, if another recession hit in the next decade.
Calls for reform date back to at least the mid 1990s. Then, as in the Great Recession, those calls often went unheeded.
“You sort of have to pick one or the other,” said Jared Walczak of Texas' predicament. Walczak is the director of State Tax Policy at the Tax Policy Center.
“It’s a state with relatively generous benefits, but relatively low taxes,” he said.
Texas’ Unemployment Trust Fund was ill prepared for a downturn, despite having nearly $2 billion. A Feb. 2020 analysis of state trust fund solvency conducted by the U.S. Dept. of Labor found Texas far below the recommended minimum levels. Out of 53 states and districts ranked by the analysis, Texas was 50.
The last time Texas achieved that minimum metric was 1974.
Now the state will need to raise those UI tax rates to pay down the debt it will take on or cut unemployment benefits.
During the Great Recession the state Walczak said the state raised taxes and then issued bonds to pay back the loans before an automatic federal tax kicked in on them.
“And that's really important, because it takes years to pay these things back, and you end up hurting businesses at the exactly wrong time. You raise their taxes as they're trying to recover,” Walczak said.
Walczak, like the warnings of the GAO and CBPP a decade prior, said states like Texas should have been raising UI taxes during the good times and socking them away for a day like today, the not good times.
“But Texas unfortunately didn’t make that choice. They just stayed on autopilot. And now we’re seeing what happens,” he said.
Texas’ 1.7 million small businesses have gone two months with dramatically reduced or no revenue as a result of the ongoing pandemic and mandatory closures. Many will go out of business because of a lack of capital. The ones that survive will have to pay higher taxes on their employees, unless the federal government changes its rules.
The federal Title XII loan is interest free until December. If it wasn't, the loan’s interest rate currently sits at 2.4%.
Another option is for the state to start using CARES Act money to pay unemployment claims.
“Almost every state has transitioned to that since the guidance came out a few weeks ago,” Walczak explained..
This would be on top of the $3.7 billion the federal government has already paid out in Federal Pandemic Unemployment Compensation and Pandemic Unemployment Assistance.
TWC said in an email it had not used CARES money for unemployment, and it still predicts the Fund will need Title XII loans in early June.