California’s Other $17.8 Billion Deficit

California currently has a $24 billion budget deficit. Would you be surprised to learn that there’s another $17.8 billion budget deficit on top of the current budget fiasco?

It’s true.

California has had a major problem with the funding of unemployment insurance for years. Unemployment benefits are paid for through taxes on employers: the FUTA, SUI, and ETT taxes. FUTA is the Federal Unemployment Tax; SUI is the State Unemployment Insurance Tax; and ETT is the California Employment and Training Tax. FUTA is generally $56 a year per employee while SUI and ETT totals $160 to $350 a year per employee. At the end of 2008 the fund had a slight surplus, but had been in deficit funding in prior years.

It was in poor shape because Democrats in California’s legislature increased benefits (which they could do with a majority vote) but didn’t increase taxes (which takes a 2/3 vote). Increased spending led to the usual result: an increase in the deficit of the unemployment insurance fund.

The problem has ballooned in 2009 with the increase in unemployment. The San Francisco Chronicle is reporting that the fund is solvent only because of borrowing $17.8 billion from the federal government. Unfortunately, the federal government wants to be repaid and if the fund doesn’t become solvent that’s impossible. Governor Schwarzenegger proposed an increase in the SUI tax along with a decrease in benefits. The measure has not been heard; frankly, there’s no chance of any tax increase passing in the legislature this year.

So California continues to drift towards fiscal Armageddon. Given the likelihood of even more unemployment in coming months this is a problem that will have to be resolved sooner than later. If California does nothing, the federal government can impose higher FUTA taxes on California employers. If that happens employers will certainly choose to increase employment in other states if they have that option.

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