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Minnesota has $1 billion in unemployment insurance debt. Lawmakers will have to decide how they want to pay for it.

Unlike a majority of states, Minnesota hasn’t dipped into federal American Rescue Plan money to help repay the debt.

Gov. Tim Walz
MinnPost photo by Peter Callaghan
Gov. Tim Walz has not yet decided how to approach the issue of how and when to pay the UI debt.
Of all of the relief delivered to Americans during the recession triggered by COVID-19 and its aftermath, just one major benefit wasn’t paid for with increased federal borrowing: the states’ share of unemployment insurance payments. 

At least not in Minnesota. And at least not yet.

To meet the surge in applications for jobless checks once the economic brunt of the pandemic hit in March of 2020, the state spent its unemployment surplus. It also borrowed heavily from the federal government to cover those payments. 

But unlike a majority of states, Minnesota has not dipped into federal American Rescue Plan money to help repay the debt. Now lawmakers, and Gov. Tim Walz, will need to decide whether to follow current law and practice, which assesses employers for those costs, or look at other ways to lower the expected hike in payroll taxes.

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There will be an increase in unemployment insurance taxes whichever way policymakers move, as new rates are already programmed into the system for next year. Those tax hikes will be much larger, however, if they are relied upon to pay back the federal loans, replenish the trust fund and pay the interest being charged by the federal government.

Those rates could increase by as much as 14 percent just to repay the borrowing. Notices of rates for 2022 will be sent this month, and whether those are the rates that will be applied when employers send their first quarter of 2022 payments on April 1 is up to the governor and legislators.

Lauryn Schothorst
Lauryn Schothorst
“It’ll be a shock at the end of the year for a lot of Minnesota businesses,” said Lauryn Schothorst, director of workforce management and workforce development for the Minnesota Chamber of Commerce.

Legislature has time to act

Business leaders, and some lawmakers, think there are better ways to address the issue than to increase taxes on businesses still struggling with a litany of challenges, including the difficulty of recruiting and retaining workers and ongoing supply chain disruptions. 

Minnesota could follow other states by dipping into unspent American Rescue Plan money, or it could use some of the expected state revenue surplus. Coincidentally, the debt owed the feds for covering unemployment insurance ($1.07 billion) is nearly identical to the ARP funds left on the table when the 2021 session adjourned ($1.15 billion). 

“The biggest thing to take away from this is that it is a preventable tax increase,” Schothorst said. While the tax rates will be sent to employers this month, the payments aren’t due until the end of March 2022. “There is time for the Legislature to act.”

“Almost 30 states have used federal pandemic relief funds to avoid or lessen UI tax hikes on employers who were able to survive the past two years,” wrote seven members of the House GOP leadership to Gov. Tim Walz. “Minnesota has used none to help reduce UI debt to date, placing the entire burden on struggling businesses.”

In response, seven members of the Senate DFL caucus issued a statement calling the House GOP request “unconscionable.”

“These funds are meant for our recovery, not to enhance corporate profits,” wrote the seven. “As COVID-19 rates reach alarming heights in our state, and with the discovery of the new Omicron variant, it is all too likely that we will encounter further COVID-19 related expenses in the near future.”

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But both of those groups of legislators are in the minority and won’t be making decisions on how to deal with the unemployment insurance debt. While they do show the two all-or-nothing options available, the end result could be something different.

Walz Press Secretary Claire Lancaster said the governor has not yet decided how to approach the issue of how and when to pay the UI debt. “The governor is looking at all options,” Lancaster said. “Our administration is listening to business leaders, legislators and workers to determine the best path forward.”

State Rep. Mohamud Noor
State Rep. Mohamud Noor
Rep. Mohamud Noor, the Minneapolis DFLer who is chair of the House Workforce and Business Development committee, said he wants to consult business leaders, labor leaders and workers before a decision is made. And he said he wants to keep the issue from being politicized more than it already is.

“We need to have a consensus,” Noor said. 

He said he is open to using money from surpluses or unspent federal dollars to ease the increases in payroll taxes, but there are competing uses for those dollars as well. “We have a new variant right now in the state of Minnesota and we’re trying to figure out where we stand,” Noor said. 

There also remains a hope to spend $250 million in ARP money for bonus checks to essential workers and a desire to invest more in affordable housing. “The question is how and who and how much,” Noor said of the competing priorities. 

The unemployment tax issue “is one of many things included in what we are looking into,” he said. “There is time. We’ll be in session.”

Noor also said that the state and federal governments have already done much to help businesses in Minnesota, from not penalizing sectors of the economy like hospitality that were hit unequally by layoffs with higher UI taxes to providing both large and small businesses with grants and forgivable loans.

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Senate Jobs and Economic Growth Committee Chair Eric Pratt, R-Prior Lake, said in September that he favors using other funds like ARP to reduce the impact of the payroll tax hikes on employers.

State Sen. Eric Pratt
MinnPost photo by Peter Callaghan
State Sen. Eric Pratt
“To take a significant chunk out of the trust fund deficit would be good for the Minnesota economy,” Pratt said then. “It would help employers feel good about going out and hiring people and it would help them with their cash flow.”

Minnesota one of 10 states that still owes the feds

The federal government sprang for many of the extra unemployment benefits offered during the pandemic, such as the $600 a week top off to regular benefits as well as checks for gig and contract workers, and several eligibility extensions beyond the normal 26-weeks. 

According to a report from the Tax Foundation, the federal government spent $660 billion across the U.S. for those benefits. In Minnesota alone, they totaled more than $7 billion and are credited with helping thousands of families and allowing the state recover from the recession in record time.

But regular benefits paid to the surge of  laid off workers sapped the state’s trust fund and triggered borrowing from the federal government. Such borrowing is a normal part of the safety net by which states are expected to build UI surpluses in good economic times but can borrow from the federal government when a recession is deep enough to deplete their own accounts. Minnesota ran down its surplus of $1.5 billion and began borrowing; it is that debt that must be repaid now, including interest at a rate of 2.27 percent interest. Minnesota is one of 10 states that still have debt.

The federal system allows repayments to be made gradually over many years. And the state could use other funds to reduce the size of any payroll tax hikes, as the House GOP members proposed. During the last legislative session, the Minnesota Chamber of Commerce asked that $600 million in unspent ARP funds be used to lessen the need for payroll tax hikes.

In addition to the unspent ARP funds, Minnesota is expected to show a projected revenue surplus in the billions of dollars when the state releases its economic and revenue forecast Tuesday. Its rainy day savings account is $2.4 billion.