COVID Casualty: Unemployment Insurance System

The rise and fall of Virginia’s unemployment insurance tax, per worker, in response to the 2008-2009 recession. The COVID-19 recession, just starting, is likely to set new records for amount of tax and the length of time those elevated taxes are imposed. This chart includes the average (not maximum) base tax, an additional $16 fund builder tax, and a pool tax imposed on everybody who pays to compensate for employers who default. Source: Virginia Employment Commission.

By Steve Haner

This first appeared in today’s Richmond Times-Dispatch and has also been distributed by the Thomas Jefferson Institute for Public Policy.  

America’s and Virginia’s unemployment insurance program – born of the Great Depression and the Social Security Act of 1935 – may be another casualty of the COVID-19 pandemic. The virus has mutated unemployment insurance into a form not financially sustainable.

Each state has its own unemployment insurance trust fund, financed by taxes on employers and steadily growing in good times. The last time the Virginia Employment Commission publicly reported on our fund’s status, almost a year ago, it projected a balance of $1.3 billion by the end of 2019. 

Confidence was so high the legislative commission charged with oversight did not even hold its scheduled December meeting. The most recent federal report pegged Virginia’s fund at just slightly over (101%) the minimum balance the federal government considers solvency, ranking Virginia in the middle among the various states. It assumed Virginia had money for 12 or 13 weeks of benefits.

We do not. More Virginians have applied for unemployment insurance in three weeks (415,000) than normally apply over two to three years. The run on that particular bank (a perfect metaphor) is only starting.

When state trust funds run dry, federal loans (not grants) pick up the slack, and Virginia needed federal loans to pay benefits in the last recession. The loans this time will be the largest ever. When this deeper crisis passes, those loans must be repaid by the higher employer taxes which kick in automatically.

How deep will the financial hole be? Partly that depends on how Congress has changed the program.

First, Congress authorized (and apparently did pay for) a massive increase in the weekly benefit amount. Congress apparently added a flat $600 per week across the board, more than doubling Virginia’s existing maximum benefit of $378 per week in 2019. Some recipients will receive as much or more in benefits as they did in pay.

Congress will not let that increase expire until this crisis passes. Returning to the lower benefits which have been standard for almost a century will be politically unpopular. Unless Congress wants to make unemployment insurance into another entitlement program based on borrowed dollars (and it should not) future employer taxes will explode.

Second, Congress expanded benefits to cover self-employed workers, clearly a growing element of our economy. Not being employees, none of them have had taxes paid into the state or federal unemployment insurance funds on their behalf. There was no trust fund for them. They have never collected UI checks in previous recessions.

Right now, they are being paid benefits with federal money under a new and separate program, Pandemic Unemployment Assistance. When the smoke clears Congress is likely to decide that income replacement benefits for those workers should continue going forward.

A government-managed unemployment pool for self-employed workers is possible. Actuaries would need to determine the proper level of taxation. Traditional employers will be highly resistant to letting their taxes be used to protect this new, less stable group of workers. The self-employed may resent and resist a new tax. The political battle could be fierce.

The basic federal unemployment tax (FUTA) is 8 tenths of one percent of payroll. The state’s basic tax (SUTA) ranges from one tenth of one percent on the first $8,000 paid ($8 per worker) for established firms with no claims up to 6.2% on a company with a history of major layoffs. The tax for them on the first $8,000 in wages works out to $496 per worker and coming out of this crisis more companies than ever before will face maximum or near maximum UI taxes.

Virginia’s employers face two other taxes which will be higher. When the trust fund falls below 50% of solvency, a “fund builder” tax of $16 per worker is added for everybody. Virginia businesses paid that from 2010 through 2015 after the last, much shallower, recession.

Finally, there is a pool tax applied to all employers to cover deficits created by companies that go bankrupt and default, or who create such massive drains on the fund that even their maximum taxes do not repay their debt. The pool tax peaked at $42.30 after the last recession and is likely to be larger than ever before after this crisis.

Even if the benefit structure is rolled back to pre-COVID levels, the trust fund deficit will be so deep a future General Assembly will face choices. To rebuild the fund, it may have to raise the state tax schedule beyond the current maximums or accept that the maximum tax under the current schedule will be applied for the foreseeable future.

The consequence is simple:  If it costs more to hire people, fewer people will be hired.

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25 responses to “COVID Casualty: Unemployment Insurance System

  1. James Wyatt Whitehead V

    What can be done? It seems like a no win situation for workers and owners.

    • Not in the column, but I’ll mention it here. I asked the Northam Administration for more current information on the Trust Fund’s status, perhaps as of Jan. 1, and was met with The Usual Silence. Step one would be data. They are, of course, not known for that.

      If the desire is to sustain the system as it was, maintained by employer taxes that feed the trust fund and repay any federal loans, political will must be found to 1) quickly retreat from the far more generous benefits and 2) fund any new self-employed fund with a self-employed tax. If the political will does not materialize, this becomes another federal entitlement funded with borrowed money, hot air and empty promises (see yesterday’s report on Social Security and Medicare.)

      • The balance of the Unemployment Insurance Trust fund is publicly available data, as it is held by the U.S. Treasury and managed by the Bureau of the Fiscal Service. You can run reports for all of the various unemployment programs for all states and territories.

        The trust fund was at $1,430,207,042.14 as of April 1. The balance was $1,285,543,989.64 as of April 16, and will likely be updated at some point to include the past week.

        See here:

        https://www.treasurydirect.gov/govt/reports/tfmp/tfmp_utf.htm

  2. Great reporting, Steve. I’ve been wondering what kind of catastrophic hole the COVID-19 torpedo would blow in the hull of Virginia’s unemployment fund, and now we know. Whatever happens, the unemployment fund will need restructuring and a bailout. Protecting the solvency of the fund is another reason for Virginia to get back to business and get people back to work.

  3. I’m sorta wondering when the Federal helicopter money stops raining down. They stopped short of aid to State and Local govt and some, not all, in Washington said that they will be in the next dollop, then McConnell said it’s time to think about deficits/debt so maybe this is the end of it?

    Dollars to donuts, it’s not the end of it and the unemployment thing gets addressed in some fashion – probably wack-a-mole.

    Don’t know where they’re getting all that money… I fear they are printing it and conventional wisdom in past years was that if you do that, inflation comes to visit as it has done in some other countries where stuff ended up 5, 10, times more costly than originally.

    One thing can be counted on, no matter what happens, and that is the folks in the bottom tier of the economic pile are not going to come out good even with the unemployment dollars. We may well see long lines of people for basic food and necessities before this is over.

    • I have an idea where they are getting the money, so much our Pandemic Payout went into the 529 accounts for the grand kids. The rest will be donated in recognition of your final very correct statement.

  4. Summer tourism and recreation in this state are huge industries and unemployment has just begun to spike. Great reporting and I agree with Larry and Steve, we may well see long lines of people for basic food and necessities — Bristol and Martinsville Raceways, Kings Dominion, Williamsburg, Virginia Beach, etc.

    • “we may well see long lines of people for basic food and necessities — Bristol and Martinsville Raceways, Kings Dominion, Williamsburg, Virginia Beach, etc.”

      I suspect the damage potentially may be far wider and deeper, akin to Argentina where people rise into the middle class, only to fall back into poorest class, again and again,decade after decade. That has not happened in America since the great depression. The potential is now here in America. Remember numerous big states are clearly broke now, after being almost broke before the crisis. There could be a massive unraveling. America has to stop its chronic self destructive politician bickering, and get its people back to work soon.

  5. We know the restaurant industry, the hospitality industry, sports and entertainment are savaged but one essential industries are affected?

    Is all of this economic disaster basically the industries that are discretionary spending?

  6. Generally Speaking – Great resource. Need to bookmark….

    Larry — those industries (entertainment, dining, travel) are in true depression, and some retail operations are of course hopping, but you will see the economic malaise far beyond just those closed operations. And as you have noted, fear will keep customers away long after the restrictions are lifted. The state has done no layoffs but local governments are starting to.

    • I don’t doubt for a minute the depth of the economic damage to industries that rely on discretionary spending.

      I’m asking – is our economy that reliant on industries that are not necessities?

      And I’m also asking – what industries that ARE necessities are also now being harmed?

      do we know?

      I know one – meat packing – and that don’t sound good.

      what else? The airlines are still flying for business travelers.. right?

      mom/pop/independent restaurants and some chains are getting killed but Dominion’s is actual doing better than before and companies like Sonic should be killing it.

      Some industries like retail were already “rotting” – their fate is hastened – those jobs were already lost.

      So – the Federal and State workers are still good. The phone and internet companies are good. “Streaming” is killing it.

      I just got a load of topsoil delivered – they’re backed up … had to wait my turn.

      Dump trucks are all over the roads -they look good.

      The trades – the plumbers and electricians look good.

      so who is not good?

      • I have been surprised at how widespread the economic damage has been. I got some gas yesterday at my local mechanic’s shop. He told me that business was off about 75%. A lot of his customer base is commercial–various businesses bringing their vehicles in for repair, etc. Those businesses are either closed or reluctant to spend any money. He has not laid off any employees (doesn’t want to risk losing good people, he says), but he has cut their hours.

        Other businesses hurting–barber shops, hair salons, doctors and dentists (I know of one medical practice in which everyone’s salary has been cut 20 percent), clothing stores, retail generally. Some of these stores may be open, but the parking lots are empty.

        • “reluctant to spend any money.”

          This reluctance for many has morphed into rampant hoarding of money. Who can blame the hoarders, having no idea when they can go back to work, pay their bills, or what’s next.

      • The economy is so much more complicated than what you can see. It may will be that the asnwers to your questions are unknown, at least in the short term. But a lot of the turmoil has to do with fear of the unknown and anxiety.

        No doubt, lots of economists are going to be busy for a long time studying this event. It will be interesting to read those studies, and fun debating them. But, not even our Government has omnipotent knowledge of the myriad facets of our economy. To have that knowledge would create such an administraive burden as to kill any benefit it might theoritically create. Somewhat like shroedinger’s cat.

        Maybe we just need mass government handouts of anti-anxiety meds, rather the cheese.

        • Do businesses want the govt to hold them harmless on liability for infections? If the govt did that, would they then open?

          re: “necessities” – not retail clothing.. not personal grooming… maybe barbers.. but that’s going to be a tough business anyhow.. I never had good confidence in how they’d keep one patron from passing disease to another…

          Dick said car repair is off a lot. Well yeah… because people are driving a lot less and if they don’t have jobs there’s that also.

          But so far… this looks like the service sector – no?

          Our local govt budgets and the state budget is dependent on service sector jobs?

          • Dick Hall-Sizemore

            Since the service sector makes up a large sector of the economy, the governments depend a great deal on them. We’ll get an idea how much in a couple of weeks when the Secretary of Finance reports the April revenues to the Governor.

          • Reed Fawell 3rd

            Then the governor will have some explaining to do about where the economy went along with mystery of where all early testing went.

  7. Much of the negativity in both consumers and the markets is the result of uncertainty and anxiety… uncertainty and anxiety perpetuated by the irresponsible media and timid politicians. Apparently, many people cope with anxiety through hoarding. The markets build risk into pricing.

    There’s going to be some re-balancing of the economy, and this will take a bit of time to reverberate down through the supply chains. How long we stay in lock down will affect how far the re-balancing goes. Some otherwise perfectly fine companies will fail to make the transition.

    Until recently commercial grade TP was available through janitorial and commercial supply wholesalers. This is speculated to be due to the transition of work-from-home. In other words, offices didn’t need the TP. Companies that make the commercial grade paper are likely finding new distributors to get into the residential markets, for now.

    People still need to eat, but from where and for how long is that going to last? I wonder how companies like Sysco are dealing? Any investor or lender is going to think twice before putting money into “non essential” business, and I think the fall out from that will be long-term.

    With beef being hoarded, one would think cattle prices would be going up but so far cattle prices are actually going down. The reason, as I understand it, is that the meat supply chain is shutting down. In the short-term, if you want meat, better find a local farmer and butcher. In the long-term, I suspect it will revert back to normal.

    Business are rightly concerned they might be sued. Guilty or not, our legal system incentives settlements (cheaper to settle than fight it.) Some may prefer not to take the risk.

  8. We’re going to get an answer about major businesses pretty soon in Georgia and South Carolina.

    Will Cracker Barrel or Ruby Tuesdays open?

    Also – to be clear – the following are open:

    Walmart
    Lowes
    Home Depot
    Giant
    Total Beverage
    WaWa/Sheetz
    CVS/Walgreens
    Dollar General
    Dominos/ Papa John
    Doc in box/some doctors
    HVAC/plumbing/heating
    landscaping/mulch
    tires / service depts.

    You get the idea.

    There’s quite a bit that is already open and yet, the re-open crowd
    is in the streets. I suspect what they miss is the sit-down restaurants and sports…as much as the small businesses….

    • Larry, your list is short. Maybe start by culling this list for affected industries: https://www.naics.com/sic-codes-industry-drilldown/

      In the long-term, its not unlike the fear of automation and ill-founded speculation of losing jobs. However, unlike the slow progress of automation where history shows most people have time to adapt for the better, this is a government mandated shock to an typically fine balanced system.

      I suspect much of the tumoil is anxiety driven and that the hoarding is a self-fulfilling prophecy. But, in the short term, there are a lot of people that aren’t working now. All you have to do is look at the unemployment roles to see how wide spread this is, and that doesn’t consider the people that would rather sleep in their cars then take a government hand-out. Their loss of work, whether deemed essitential or not by our “Betters”, is still work that pays the bills and its unclear to most how that’s going be resolved short of opening for business.

      • more workers

        electricity
        water/sewer
        VDOT
        truck drivers
        distribution centers

        re: ” there are a lot of people that aren’t working now. All you have to do is look at the unemployment roles to see how wide spread this is”

        Oh I am not doubting it – I’m wondering what industries the unemployed are from.

        I mean we’re even doing food service – mostly all take out – just not sit-down. Chains like Sonic are killing it.

        So should we KNOW what the jobs are that are unemployed?

        I’m still thinking an awful lot of it is services that are not core services, sit-down restaurants, entertainment, sports, etc…

        We can get food, gas, electricity, internet, repair services for house and auto, so what is it we cannot buy?

  9. Like I said – whatever Mnuchin said to Congress, it scared the bejesus out of them and they panicked … reminded me of Bush going on TV and said we had “no choice” but to bail out the economy.

    Now supposedly, there are hard-core budget hawks types in the ranks of the GOP – but apparently they must have been faking it.. cuz when push came to shove they folded like a cheap deck of cards and acted just like Dems… using that same old “crisis” excuse.

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