California Businesses, Households on the Hook for State's Default on COVID Loan

California businesses — and households that pay payroll taxes on domestic employees — are waking up to the reality that they are being forced to pay for the state’s default on $20 billion in federal loans to cover a COVID-era shortfall.

The issue came to light this week with a social media post by restaurateur Andrew Gruel about unexpected costs:

The Hoover Institution, based at Stanford University, had warned about the problem more than a year ago:

Little did California businesses know that they were cosigners on the state’s nearly $20 billion loan from the federal government that was used to cover California’s unemployment fund shortfall during the COVID pandemic. This ugly truth became apparent when the state recently decided to stop making payments on this loan. When a state defaults on its federal unemployment insurance loan, federal law requires that the state’s businesses repay the loan.

What makes this default even more egregious is that the stone-age-era IT system of the state’s Employment and Development Department (EDD) opened the floodgates to bad actors, permitting more than $30 billion in fraudulent unemployment claims during the pandemic. Those receiving fraudulent payments include incarcerated felons, a person impersonating a one-year-old, and a person impersonating Senator Dianne Feinstein. A single residential address received checks for around 60 separate individuals filing from that address.

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The state’s decision to default is inexcusable. California recorded a nearly $100 billion state budget surplus last year, thanks to the state’s top earners, that could have been used to repay the debt. The state received $27 billion in federal COVID aid it could have used to repay the debt. The state’s record $300 billion–plus 2022–23 budget could have retired the debt. Even after defaulting, the state could have resumed its payments this year and offset the tax burden on businesses, as it planned to do in its 2023–24 budget. But as the state’s finances continue to decline, the state has walked back making payments or offsetting higher business federal unemployment insurance taxes.

Households that employ legal immigrants and pay payroll taxes have been penalized with similar, sudden tax hikes.

Californians could soon be on the hook for more. Reason.com recently reported: “California’s total long-term debt, between the state and local governments, has quietly surged to over half a trillion dollars, making it the most indebted state in the nation.”

Joel B. Pollak is Senior Editor-at-Large at Breitbart News and the host of Breitbart News Sunday on Sirius XM Patriot on Sunday evenings from 7 p.m. to 10 p.m. ET (4 p.m. to 7 p.m. PT). He is the author of The Agenda: What Trump Should Do in His First 100 Days, available for pre-order on Amazon. He is also the author of The Trumpian Virtues: The Lessons and Legacy of Donald Trump’s Presidency, now available on Audible. He is a winner of the 2018 Robert Novak Journalism Alumni Fellowship. Follow him on Twitter at @joelpollak.