By James A. Parrott, THE NEW SCHOOL | Editorial credit: JHVEPhoto / shutterstock.com

Unemployment insurance (UI) provides bedrock social and economic security for us all. But in New York that foundation is badly fractured. Our State-administered UI funding setup unfairly penalizes small- and medium-sized employers. It pays woefully inadequate benefits to laid-off workers. And it chronically runs a deficit that impedes efforts to improve it.

With the April 1st deadline for adopting a new State budget only days away, State leaders have the chance, and duty, to act promptly – before another major employment downturn happens – to correct those problems.

Like many states, New York borrowed heavily from the federal government to meet the big spike in unemployment claims created by the Covid-19 economic shutdown. New York borrowed $10 billion. As of March 18th, this “trust fund debt” still stood at $6.7 billion. In 2024, employers paid the State $3 billion in UI payroll taxes – only $800 million more than the cost of benefits paid out. At this rate, it will take until 2030 to retire the pandemic-era UI debt.

Governor Kathy Hochul’s Executive Budget proposes that the state’s taxpayers cover $165 million in interest that employers would otherwise owe on this debt to Uncle Sam. But that’s not even a band-aid for the UI trust fund crisis. It’s more like blowing a kiss at a serious wound. It won’t heal anything.

It’s only a matter of time before the next economic downturn throws more people out of work. President Trump’s tariff war and chainsaw attack on the government workforce are hastening that moment, creating what Federal Reserve Chair Jerome Powell last week diplomatically described as “remarkably high” economic uncertainty. But one thing’s for certain; there won’t be the kind of federal boost to unemployment benefits there was in Trump’s first term.

To protect the families of laid-off workers and our own economy, New York needs to repair its UI safety net now. It desperately needs three reforms: benefit adequacy, solvency, and tax fairness.

UI benefits are widely recognized as the most effective form of stimulus when the economy falters. Recipients plow their benefits right back into the local economy, helping put the brakes on what otherwise could be a downward economic spiral. Unfortunately, New York’s benefit levels have slipped badly in recent years.

(The system is further hampered by an antiquated “experience rating method” that charges an employer’s account when former workers draw down benefits. This method, now abandoned by many other states, leads some employers to challenge those unemployment claims. One result: a complex system that can baffle non-English speakers who then lose out altogether on UI benefits.)

Comprehensive UI financing reform is long overdue. Our UI system has been chronically under-funded for years. That’s because we have an inordinately low “taxable wage base.” Employers pay UI tax on only $12,800 in wages for each employee. This means that small and low-wage employers pay much more relative to their total wages and corporate giants pay less than they should.

The next chart illustrates the lopsided results. It shows New York State UI tax rates for three typical employers: a small retailer with 20 employees earning an average wage of $46,000; a medium-size construction company with 40 employees averaging $67,000 annually; and a large Wall Street firm with 2,000 employees and an average wage of $442,000. (The state’s average private sector wage is $95,000.)

The chart shows that a high-wage employer in an industry like finance (or tech, media, and professional services) might pay an effective UI tax rate relative to total wages of one-tenth of one percent, a tiny fraction compared to what a retail (2.7 percent) or construction (1.6 percent) employer might pay.

New York’s UI tax structure also means that when the state’s UI trust fund is in deficit (as it chronically is precisely because of its low taxable wage base), tax rates rise more for employers who are already paying higher rates. This adds insult to injury for small and medium-size employers paying low- and moderate-wages. (In addition to the tax rates shown in the above chart, all state employers also pay a 1.8 percent federal UI tax rate. That’s triple the normal rate – another consequence of the trust fund deficit.)

While UI tax rates are very high for some employers, UI taxes as a share of total wages paid in New York State are far from the highest among all states. The next chart shows that for 2024, employers here paid an average UI tax relative to total wages of one-half of one percent, less than what employers paid in 13 other states.

An alternative to Hochul’s fig leaf bailout—a temporary UI debt paydown surcharge

Large profitable employers with many high-wage workers can certainly afford to pay their fair share of UI payroll taxes. A higher taxable wage base would let the tax rate come down. New York should also take effective action to ensure that “gig economy” giants like Lyft, Doordash, and Instacart join Uber in reporting their workers’ wages to the State Labor Department and pay their fair share of UI payroll taxes.

We also need to revamp the experience rating method, following the lead of many other states that recognize the limited control most small employers have over economic conditions that can result in layoffs.

These principles should be applied both to a temporary debt paydown surcharge and to a permanently restructured UI tax system.

With a $100,000 taxable wage base, and a 0.5 percent tax rate, New York’s trust fund debt could be paid off in three years with a temporary debt paydown surcharge on the UI taxes employers owe. The surcharge should be designed to completely exempt all small- and medium-size employers of workers with wages below $60,000, since they have been paying more than their fair share for too long. (Big low-wage corporate employers like Wal-Mart wouldn’t qualify for the exemption).

The temporary surcharge would end when the trust fund debt is paid off. By then the State should have put in place a permanent tax structure with a higher taxable wage base and rates set at levels to ensure benefit adequacy, long-term solvency, and tax fairness.

 The governor’s $165 million UI trust fund interest bailout does nothing to address the program’s systemic under-funding. In their recent “one-house” budget bills, the Assembly and the Senate didn’t do any better. The Assembly accompanied action to update the maximum benefit with a dubious proposal to use $7 billion in taxpayer funds to pay off the trust fund debt, without a hint of how to ensure long-term solvency and tax fairness. The Senate one-house bill proposed a refundable UI tax credit for small businesses with 50 or fewer employees that would cost an estimated $1 billion over two years, but also without lifting a finger to ensure long-term solvency.

At a time when many voters across the country are looking to Democrats to deliver effective government, New York’s Democratic trifecta is three-for-three in the ostrich approach to governance.

The gathering economic storm clouds should compel timely action. Our Albany leaders should face up to the need for real financing reform that will deliver trust fund solvency and benefit adequacy while providing small business relief and UI tax fairness. They should get busy and fix this so the State will have the economic shock absorber it needs, particularly given the White House’s economic policy chaos.