CA Legislature and Gov. Newsom Should Reject Raising Taxes to Subsidize Strikers | Citizens Against Government Waste

CA Legislature and Gov. Newsom Should Reject Raising Taxes to Subsidize Strikers

The WasteWatcher

Legislation that would make unionized employees who choose to remain on strike for more than two weeks eligible to receive unemployment insurance (UI) benefits for up to 26 weeks is being moved through the California legislature.  The bill, SB 799, will lead to increased taxes on businesses throughout California and delay repayment of the state’s debt to the federal government.    

The chance to veto SB 799 presents Governor Gavin Newsom (D), who claims to be concerned with excessive debt and spending, with one of his last opportunities to display fiscal responsibility before the end of California’s legislative calendar.  Failing to do so will present an easy target for questions about his lack of credibility on fiscal responsibility during either his proposed one-on-one debate with Florida Governor Ron DeSantis (R) or other debates over California’s excessive taxation, spending, and regulation.  But the legislature should do what’s right for businesses and taxpayers by rejecting the bill and killing it in this session before Gov. Newsom has to decide on a veto.

UI is funded entirely by a payroll tax paid by employers, known as the “UI tax,” of up to 6.2 percent for most California businesses on the first $7,000 of each employee’s wages.  By expanding eligibility for UI benefits, SB 799 will drive the state’s Unemployment Insurance Fund (UIF) further into debt and will result in a higher effective payroll tax rate for the California businesses that have not yet left the state due to its high tax burden and regulatory compliance costs.   

While California, like 47 other states, has a balanced budget requirement, this rule does not apply to specific funds like the UIF.  In 2020, California’s UIF borrowed $20 billion from the federal government to deal with the flood of unemployment claims during the height of the pandemic shutdowns.  Despite enormous budget surpluses in the last two fiscal years, the state has paid off less than 10 percent of this loan.  California’s General Fund budget surplus masks the $18 billion debt owed to the federal government, which is larger than the amount owed by every other state’s UI funds to the federal government - combined.  The longer this debt goes unpaid, the longer the state must continue to devote $300 million to interest payments, which is paid for by a surtax on employers that will collect $900 million next year and continue until the loan is repaid.  That will take about 10 years based on the current repayment plan.  Expanding benefits will dig the UI fund deeper into a hole. 

The UIF’s $20 billion federal loan specifies that an additional payroll tax surcharge on all California employers, known as the Federal Unemployment Tax Act (FUTA) tax, will continue to rise automatically by 0.3 percentage points per year until the fund repays its entire debt.  By increasing the fund’s deficit and thereby delaying full repayment, SB 799 would therefore raise taxes on all businesses, including those whose employees have chosen not to strike, in the name of subsidizing strikers. These taxes would fall particularly hard on businesses with no involvement in this year’s strikes, which would still have to pay higher UI taxes to fund benefits for striking workers.  As always, raising the cost of doing business will destroy jobs and raise prices for consumers, who are already feeling pinched by inflation. 

California had a $47 billion budget surplus in fiscal year (FY) 2021-22 and a $55 billion surplus in FY 2022-23.  The Tax Foundation reported that 25 states reduced their individual income tax rates between 2021 and 2022, while 13 states have cut their corporate income tax rate since 2020.  California, however, has continued to raise taxes and spending.  California’s businesses will already face an additional 0.6 percent FUTA tax surcharge if the state fails to pay off its debt by November 10 of this year, and if Governor Newsom decides to allow this debt to roll over into 2024, the state’s businesses could face a 0.9 percent payroll surcharge on next year’s taxes.

Raising payroll taxes on employers to cover SB 799’s expanded UI liability would further discourage businesses from deciding to move to or expand in California.  California already offers one of the most generous UI payments in the country.  The state’s jobless benefits cover an average of 45 percent of lost wages up to a maximum of $450 per week, far surpassing, for example, neighboring Arizona’s $240 weekly benefit cap.

SB 799 would allow striking workers to collect UI benefits even if they refuse to work for a different employer.  This means California taxpayers would effectively pay strikers to stay on strike, even if they could find other work.  Unemployment insurance exists to shield workers from the worst effects of economic downturns outside of their personal control, not to give them a leg up in labor relations negotiations.

Funding a UI expansion by raising payroll taxes kills jobs and may even reduce worker compensation.  Though on paper the law makes employers liable for the full cost of payroll taxes, in practice, employers already buried in high operating expenses routinely have to shift some of this added cost onto workers in the form of lower compensation and onto consumers as higher prices.

Unemployment insurance systems ought to remain solvent to help all workers during unforeseen economic calamities like a financial crisis or pandemic.  To return to solvency, California’s UI fund should remain neutral in labor disputes, not fall victim to capture by the special interests of union organizers.  Beyond that, Californians should implore their governor to invest the state’s much-vaunted budget surplus into paying down its considerable debt and avoid further raising UI payroll taxes borne by employers and workers alike.  While New Jersey also treats striking employees as eligible for unemployment benefits, the state has not borrowed money from the federal government and driven its unemployment fund into billions of dollars of debt.

Despite opposition from businesses, community leaders, and taxpayers who would have to bear the costs of labor disputes, the bill was approved in the Senate and the Assembly Insurance Committee.  It was then sent to the Appropriations Committee before it heads to the floor of the Assembly for a final vote.  

As noted in a September 5, 2023, coalition letter opposing SB 799 that was led by the California Chamber of Commerce, “forcing employers to pay unemployment insurance (UI) payments to striking workers … would also raise taxes on employers across California, overturn more than 70 years of precedent, and put California’s UI program at risk of violating federal law.”  The letter added that the legislation, “is a profound departure from UI’s history, and a significant tax increase on California’s employers, including those who have no involvement in any labor disputes. Moreover, with a recession potentially in our future, SB 799 risks compounding UI’s insolvency – which will weigh heavily on the State, California’s employers, and California’s truly unemployed.”

Governor Newsom has not explicitly stated whether he would veto the bill if it arrives at his desk before California’s legislature adjourns on September 14. However, “the governor has suggested,” reported Sacramento NBC affiliate KCRA, “that proposals that land on his desk this fall that have a significant financial impact on the state are likely to be vetoed as the state faces a $30 billion budget shortfall.”  Time will tell whether the governor’s rhetoric about fiscal responsibility will translate into action or if SB 799 will become another example of how California has become one of the most wasteful and expensive states in history.