Unemployment insurance is a critical component of the governmental response to COVID-19, but states are now seeing an unprecedented number of claims that will tax state unemployment funds beyond their limits.

At the federal level, there is much support for expanding eligibility criteria and providing for extended benefits, both funded by the federal government. although the majority of initial costs are borne by the state.

From Tax Foundation:

State payroll taxes, called SUTA taxes, fund regular unemployment compensation (UC) benefits. In 2019, states paid out $26.5 billion in regular benefits, compared to $75.3 billion in 2009 during the Great Recession. Overall, UC outlays peaked in 2010 at $156.4 million, which included $63 million in regular benefits combined with $8 billion in federally funded extended benefits and $83.8 billion in emergency unemployment compensation and federal additional compensation, funded by the federal government. (Normally, if states provide extended benefits, they must pick up part of the cost, but the full costs were assumed by the federal government during the Great Recession.)

In general, states are responsible for covering 26 weeks’ worth of regular unemployment benefits, which means that although federal measures will help, states will still face a bleak situation going forward. Goldman Sachs has projected that 2.25 million new unemployment benefit claims could be filed in a weeks time, with last week showing a 33% spike already.

From Tax Foundation:

The U.S. Department of Labor assesses the health of state UI funds with several measures. One is called the Reserve Ratio, which looks at the trust fund balance as a percentage of the state’s total annual wages. Minimum adequate solvency entering a recession is calculated by dividing the Reserve Ratio by what is called the Average Benefit Cost Rate, which represents the average of the three highest rates of benefits the state had to pay out (as a percentage of state wages) over the past 20 years. If this yields a solvency level of 1 or greater, the state is deemed to have adequate UI funding to weather a recession.

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If states are unable to pay out regular benefits using their existing trust fund balances, they can take out federal loans. The 31 states with solvency levels of 1.0 or higher may do so without interest, at least initially, though states with lower solvency levels will incur interest payments. Eventually, should states take too long to repay these loans, technically called Title XII advances, in-state employers will face higher federal unemployment insurance taxes to compensate for their state’s indebtedness.

While federal intervention will very likely be a part of the solution for all parts of the country, states will need to take steps to keep unemployment insurance taxes from taking tolls on community businesses.