Raise taxes or use COVID-19 relief funds? That’s the choice for NJ unemployment fund

Time is running out on an interest-free loan that kept the unemployment insurance fund afloat. Some want NJ to use federal relief money to avoid a tax increase
Credit: (AP Photo/Steven Senne)
File photo

To keep unemployment benefits flowing while it faced a historic demand for help, New Jersey has relied on an interest-free loan of more than $1 billion from the federal government.

But the zero-interest part is due to change later this year, unless action is taken in Washington, D.C., providing some urgency to come up with a plan to pay down the unemployment debt before the interest charges come due.

Now some lawmakers and business-lobbying groups are making the case for using a portion of the more than $6 billion that New Jersey is waiting to receive from the federal government’s recently enacted American Rescue Plan Act.

Otherwise, they argue, the burden of both repaying that federal loan and restoring the unemployment fund’s balance will eventually need to come from payroll taxes levied on businesses and workers typically used to replenish the state Unemployment Insurance fund.

A new law enacted by Gov. Phil Murphy and lawmakers is phasing in the expected tax increases for businesses that are needed to replenish the fund since many are still facing hardships themselves during the ongoing health crisis.

“It’s not a tax increase on income or assets or wealth . . . it’s a tax on jobs,” said Chris Emigholz, vice president of government affairs for the New Jersey Business & Industry Association, a group that has recently called for using federal relief dollars to shore up the unemployment fund.

Awaiting Murphy administration’s decision

But it remains to be seen whether the Murphy administration will agree to tap the funds coming to New Jersey as part of the $1.9 trillion federal-aid package to further blunt looming payroll-tax increases.

And even though other states are starting to announce plans to use their share of the relief money to pay down unemployment debt, Murphy administration officials, at least for now, are saying it’s too early to decide.

Credit: (Rich Hundley III, The Trentonian)
File photo: Robert Asaro-Angelo, commissioner at the Department of Labor and Workforce Development

“To be clear, we do not have any guidance from the feds on what ARP funds can be used for,” state labor commissioner Robert Asaro-Angelo told lawmakers during a recent budget hearing when the unemployment fund and the federal loan were both discussed.

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The economic downturn triggered by the coronavirus health crisis set off a historic crush on the state unemployment system, and more than 2 million applications for unemployment benefits have been filed in New Jersey since the pandemic’s onset last year, according to the latest figures from the state Department of Labor and Workforce Development.

$28B paid in unemployment benefits

In response to those hardships, nearly $28 billion in state and federal unemployment benefits have been paid out so far through the state labor department, officials said.

Meanwhile, business groups have estimated about 30% of the state’s small businesses have gone under during the pandemic despite numerous state and federal relief efforts launched in the wake of Murphy’s stay-at-home orders and other emergency restrictions to slow the rate of COVID-19 infections.

Still, New Jersey has started to see some recovery since the worst months of the pandemic and many of the economic restrictions are now being eased back. More than 50% of the jobs lost in March and April last year have now been added back, and in March the state unemployment rate ticked down slightly, to 7.7%, the labor department announced last month.

The state Unemployment Insurance fund was established decades ago to ensure jobless benefits can be provided to laid-off workers even during recessions by setting aside money collected through payroll taxes levied on both employers and employees. The fund is separate from the state budget, and its revenues are constitutionally dedicated to covering unemployment benefits.

The payroll tax charged to workers is fixed, but for businesses, it can go up or down based on several factors. These include the overall condition of the unemployment fund, and how many of their own employees have been on unemployment.

Without the enactment of a new law in January, the replenishment of the fund balance with revenue from the payroll taxes would have begun in full on July 1, even though many businesses are still struggling. Instead, payroll-tax increases will be phased in over three fiscal years, and businesses will also be provided other forms of relief to ease the blow.

“This new law will help reduce further hardship on employers, while protecting the vital lifeline of unemployment for the future,” Asaro-Angelo said in January.

What happened during 2007-2009 recession

It’s not unusual for New Jersey and other states to rely on loans from the federal government to ensure unemployment benefits can be paid during the worst economic downturns. It last occurred in New Jersey during the 2007-2009 Great Recession, when the state borrowed billions from the federal government to sustain the unemployment fund. Those funds were paid back over time as the state economy recovered.

The Murphy administration estimates it will take until mid-2023 to pay down the $1.1 billion loan used to sustain unemployment benefits during the pandemic, according to written responses provided to the Office of Legislative Service for its annual departmental budget analyses.

During the recent Senate Budget and Appropriations Committee hearing, chair Paul Sarlo (D-Bergen) told Asaro-Angelo some other states that have received federal loans to sustain unemployment benefits during the pandemic have announced repayment plans, including by earmarking relief funding from the American Rescue Plan Act.

“Both Maryland and Ohio just did that in a bipartisan manner,” Sarlo said during the hearing.

In response, the labor commissioner suggested those are just announcements until the final clearance comes from the federal government.

“But I guarantee you, and this committee, that the front office and every other decision-maker will have all the resources they need from us to help make those decisions,” added Asaro-Angelo.

What GOP, business groups want

Meanwhile, Republicans who serve on the budget committee have already been calling for $2.5 billion in funding from the federal relief package to be used for the unemployment system.

In a broader proposal released last month, the GOP senators said $1 billion should be used to pay down the federal loan before interest charges hit in September. Another $1.5 billion should go toward offsetting any remaining payroll charges that businesses may face over the next three years, starting this July, they said.

“We’ve put together a proposal and, hopefully, we can use some of the American Rescue Plan monies to shore up the unemployment (fund),” said Sen. Steve Oroho (R-Sussex) during the recent hearing. “Hopefully, we’ll all be looking to do that.”

In its own plan for using the federal aid dollars, the New Jersey Business & Industry Association has called for earmarking at least $400 million to help delay the looming payroll-tax increases for businesses.

The NJBIA plan also called for using the federal money to fund more grants and loans for businesses; to boost workforce development initiatives; and to help pay debt service on bonds the Murphy administration issued last year without voter approval to support the state budget during the pandemic.

“As New Jersey continues to be one of the hardest-hit states in the nation in terms of unemployment and shuttered businesses, it is paramount that we move from the approach of tactical, block-and-tackle remedies and work toward an overall recovery strategy with the foundation of this critical federal funding,” said Michele Siekerka, the association’s president and chief executive officer.

READ: Murphy looking to borrow nearly $2B from feds to keep unemployment fund solvent  

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