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Payroll Taxes for California Employers Could Go Up by $6 Billion

California's unemployment insurance program needs to pay back a loan from the federal government that has kept the state's program afloat. If the loan is not repaid, California businesses could be facing a payroll tax increase of up to $6 billion.

That was the conclusion of a state audit of the California Employment Development Department, which distributed $22.9 billion in unemployment benefits last year. The EDD has been insolvent since January 2009, so it relies on federal loans in order to continue to pay unemployment benefits. The debt to the federal government is expected to hit $13.4 billion by the end of this year unless state lawmakers and the governor agree to cut benefits, raise payroll taxes, or come up with some combination of both.

By law, the state, which faces a $26-billion general budget deficit, must repay the federal loans to the EDD by November. Orange County tax attorneys have noted that an interest bill of $362 million is due in September.

If EDD fails to repay the loan, it would trigger a $325-million federal tax hike next year on employers. That payroll tax bite would rise incrementally to a maximum of about $6 billion if the loan goes unpaid and the state continues to miss interest payments.

Demand for unemployment benefits has skyrocketed during the economic downturn. Initial claims increased almost 150% between 2007 and 2010.

In April, the federal Department of Labor classified the state as being "at risk" in its ability to fulfill federal requirements for handling unemployment claims in a timely manner.

Source: Los Angeles Times "California employers could be hit with big tax bill for jobless benefits, auditor warns" 3/24/2011

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