Small business owners face mounting costs after California fails to prioritize repayment of federal loans.
Businesses across California are grappling with increased payroll taxes following decisions by Governor Gavin Newsom and the state legislature to divert federal pandemic aid away from repaying a $20 billion unemployment debt. The consequences of this fiscal mismanagement are now squarely on the shoulders of employers, already struggling to recover from the pandemic’s economic toll.
During the pandemic, California borrowed $20 billion from the federal government to cover skyrocketing unemployment costs after state-mandated shutdowns left millions jobless. Fraud accounted for more than $32 billion of the $200 billion spent on unemployment benefits, further exacerbating the financial strain. While other states used federal stimulus funds to repay similar loans, California opted to allocate its $27 billion stimulus to unrelated expenditures, despite boasting a $100 billion budget surplus at the time.
Now, under federal law, employers must shoulder the repayment. Starting in 2025, businesses will pay an additional $21 per employee in annual payroll taxes, a figure set to rise incrementally until the debt is fully repaid. By 2027, the cost will reach $63 per employee, with annual increases continuing thereafter.
Small Businesses Hit Hard by New Costs
The impact on small business owners has been swift and severe. Becca Kenyon Westfall, owner of CycleLife fitness studios in Sacramento and nearby cities, expressed shock to KCRA news regarding the unexpected financial burden. “That’s definitely an amount I was not planning on paying,” Westfall said, noting her payroll costs spiked by $2,100 for her 32 employees. “This just feels like a gut punch after everything else COVID has done to us. It’s frustrating.”
Chef Andrew Gruel, a Southern California restaurant owner, echoed her concerns. After discovering an unexplained $2,000 deduction from his payroll, he lamented the lack of foresight from state leaders. “Restaurants don’t have thousands of dollars sitting around because we have perishable inventory,” Gruel said. “If I knew there was $2,000 that was going to be taken out, I wouldn’t buy futures into some of my seafood. I would’ve kept more cash in the bank accounts.”
State Leadership Under Fire
Critics have pointed to poor planning and irresponsible spending by California’s leadership as the root of the problem. Chris Micheli, a law professor and veteran lobbyist, highlighted the state’s failure to make even minimal payments toward the loan principal. “Every employer, no matter the size or type of business, faces this increase each and every year until that $21 billion is paid back. It’s all on the shoulders of the employers,” he said.
Lawmakers initially approved a tax credit in 2023 to help small businesses offset the rising payroll costs but later blocked its implementation. This decision, combined with years of mismanagement, left businesses without relief. “That amount of money is unfathomable,” Westfall said. “I wish they’d be a little more responsible with our tax dollars.”
Governor Newsom deflected blame, insisting he had pushed for loan repayments but was overruled by the legislature. “We’ll continue to make the case with the legislature and the imperative and importance of paying down this,” Newsom said. “We just want to make sure we don’t do it on the backs of employers.”
A Broken System
State leaders have also attempted to shift focus to California’s long-standing unemployment insurance issues. Decades of underfunding and outdated practices have left the system ill-equipped to handle financial shocks. Senate Pro Tem Mike McGuire and Assembly Speaker Robert Rivas acknowledged the severity of the problem but offered little in terms of immediate solutions. McGuire claimed the legislature would “continue to work on mitigating the immediate impacts” but deferred responsibility for long-term fixes.
The Legislative Analyst’s Office (LAO) recently proposed reforms, including raising the taxable wage base and refinancing the debt to distribute costs between the state and businesses. However, such measures face significant political hurdles.
Employers Demand Accountability
For many business owners, the damage is already done. With no clear resolution in sight, California employers are left to absorb escalating costs resulting from years of state mismanagement. The mounting frustration among small businesses reflects a growing sentiment: California’s leaders have failed to prioritize fiscal responsibility, leaving hardworking entrepreneurs to clean up the mess.
