New York owes $9.3 billion to the U.S. Treasury for pandemic-related debt that, if left unpaid, will inflict harm on resident businesses for years to come.

Meanwhile, there’s $12.7 billion in federal Covid aid the state can tap to help pay down the debt. It’s a windfall Congress allocated to New York last spring, in anticipation of pandemic-induced revenue loss the state treasury never suffered.

The havoc the pandemic and related lockdowns did wreak on the state included a tidal wave of layoffs and related unemployment filings. New York lost nearly 2 million jobs in March and April of 2020, more than tripling the state unemployment rate from 4.4 percent to 16.2 percent. 

Those who lost jobs due to the pandemic in New York and elsewhere received super-charged unemployment insurance (UI) benefits thanks to huge federal supplements. Almost $100 billion was paid out to unemployment claimants in New York between March 1, 2020 and August 6, 2021. That was mostly federal dollars, but the tsunami of filings quickly depleted the pre-existing $2.6 billion balance in New York’s UI trust fund that pays out “regular” state-funded benefits. The fund had to be replenished with $10 billion in advances from the U.S. Treasury.

The state currently owes Uncle Sam more than $9 billion, plus interest. And its New York’s private employers – overwhelmingly small businesses — who will be paying it back for years to come. That’s because, under state law, the UI tax rates they pay climb in step with the trust fund’s level of liability.

So even as New York lags virtually the entire nation in recovering from pandemic-induced job loss, Empire State employers are girding to pay a new surcharge averaging more than $200 per employee per year — a more than $1 billion annual tax on labor being imposed at a time when employers are struggling to restaff.

With the Governor’s budget AWOL on this front, the state Senate on January 25 unanimously adopted S. 6791A, which postpones for two years the penalty payroll tax rates. It provides employers temporary relief but worsens the problem in the long run by allowing interest on the UI debt to grow, leaving a larger future liability.

Rate relief should be paired with a large paydown of principal on the existing UI debt. Many states have used federal pandemic relief to do just that.  And New York isn’t just any state. Its UI trust fund debt is second only to that of California’s, and greater on a per-capita basis than that of any state other than Hawaii.  

We’ll be proposing structural reforms to ensure the fund’s future solvency, but a clear chance exists now to reduce its current debt.

The Governor’s budget office has been coy about its designs for the $12.7 billion in federal American Rescue Plan (ARP) funds the state was allocated last March. Almost certainly, much will fund new spending dimly, if at all, related to pandemic recovery. That includes $2 billion Hochul claimed she  “was smart enough to set aside” in the budget to spend in consultation with the Legislature “to help them help me decide how to spend it.”

Lawmakers have no shortage of election-year spending priorities. It’s for Hochul to exercise the responsible fiscal stewardship that must be driven from the governor’s mansion.

The Senate’s unanimous adoption of S. 6791A on the heels of her budget release provides the perfect pretext for Hochul to pivot and use the 30-day amendment process to repurpose at least the $2 billion slush fund in the budget toward paying down the state’s UI debt.

About the Author

Peter Warren

Peter Warren is the Director of Research at the Empire Center for Public Policy.

Read more by Peter Warren

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