Unemployment taxes in Washington likely will rise next year as trust fund depletes

Six months of economic fallout from the pandemic has led to unprecedented levels of payment of benefits to more than 1 million laid off Washington workers and drained nearly half of the state’s once healthy Unemployment Trust Fund.

Businesses that may still be fighting for their survival are bracing for higher unemployment taxes in 2021, and the state could ask the federal government for an interest-free loan before year’s end to shore up the fund, officials from the state Employment Security Division told a legislative committee this week.

“We are going to be crawling out of this for many more years to come,” Julia Gorton of the Washington Hospitality Association told the House Labor and Workforce Standards Committee.

The hospitality industry is among the hardest hit, Gorton said, with as many as 185,000 unemployed workers over the course of the pandemic and as many as 6,000 closed restaurants that may never reopen.

To help shore up the fund, and possibly lower the tax increases businesses will take, the state should tap into some of its Coronavirus Aid, Relief, and Economic Security, or CARES Act, money to “backfill” the fund, she said.

Gov. Jay Inslee said Thursday he “hadn’t thought seriously about” putting CARES money into the trust fund, but doubted it would be used for that purpose.

“We are very healthy, relative to other states we have a very large trust fund,” he said during a news conference.

Borrowing money from the federal government for the trust fund is not an extraordinary event, Inslee said. Many states have already done it, so asking for the loan wouldn’t “adversely affect” Washington, he added.

“We have so many other claims on the CARES funding, from homelessness, to provide mental health services for people, to help small businesses stay open,” he said. “So I doubt that would be an appropriate use or a necessary use of those funds at the moment.”

Before the pandemic hit the state and nonessential businesses were ordered to close, the trust fund had $4.7 billion and was one of the strongest in the nation.

Since March, unemployed workers in Washington have received some $9.5 billion in benefits, although about two-thirds of that, or $6.7 billion, has come from the federal government, which boosted payments across the country to offset massive job losses. About $3.2 billion has been paid from the state trust fund, and tax revenues coming in have only replaced a portion of that.

As of this week, the trust fund stands at $2.4 billion and shrinking.

Later this month the department will issue its quarterly report on the trust fund that will project when it might run so low the state will be required to borrow from the federal government, Daniel Zeitlin, Employment System policy director, told the committee.

Because the actual amount isn’t known and because the unemployment insurance tax, or UI, has several factors that affect a businesses rate, it’s not possible yet to say how much of those taxes will rise. But the department is projecting a UI increase for 2021, Zeitlin said.

A business’s UI rate, levied on each employee’s wages up to a maximum set at the state’s average wage, is comprised of several factors.

The first is that business’s experience rate, derived from the number of its employees who have received unemployment benefits over the last four years.

The second is called a social cost rate, which spreads the costs over an industry that can’t be recovered from individual businesses. There are about 40 different industry ratings, ranging this year between 0.13% to 5.72%, with an average of 1.03%. That’s the lowest the average has been since before the Great Recession.

The average state wage also rises most years. Since 2005 it has risen from $30,500 to $52,700 this year.

If the state receives a federal loan at the beginning of next year, it will have until November 2023 to pay it off without interest. If the loan is not repaid by then, the federal government will add a 0.6% assessment on the UI rate levied by the state until the loan is paid off.

Just as most of the money paid out to unemployed Washington workers during the pandemic has been from the federal government, so was most of the money that was siphoned off by a massive internet fraud operation that struck in mid-May, Suzi LeVine, employment security commissioner, said.

The state was hit by sophisticated criminals who apparently had gathered information on Washington residents from years of data breaches, some of them at major national companies, LeViine said. Between $550 million and $650 million in fraudulent claims were filed and initially paid out before the state took steps to shut down the attack. Of those initial losses, $342 million has been recovered, she said.

Of the estimated $234 million still lost, about $78 million came from the trust fund, LeVine said, the rest was from additional federal programs. The department has since taken steps to thwart further attacks, including expanded verification, instituting a two-day delay to look at any unusual trends in filings and strengthening its data infrastructure, she said.

Rep. Larry Hoff, R-Vancouver, said it’s critical the state learn from the cyber attack, and it seems that the department has.

“This was real money that we lost, $234 million. Regardless of whether it’s a federal component or not, it’s still significant,” Hoff said.

The department is undergoing a series of five audits that will include examinations of its handling of the fraudulent claims, questions about delays in benefits to unemployed workers as the pandemic caused demand to skyrocket, and questions about a lack of responsiveness to workers. Some are scheduled to be complete by the end of the year, while others should be finished by next spring.