Businesses across the nation could soon face state tax increases to pay for the surge in Americans filing for unemployment benefits this year, further straining employers at a time when many are fighting for survival.

Massachusetts, New Jersey and Alabama are among the states looking at tax hikes that could cost employers billions of dollars. It would be a gut punch for businesses struggling because of the pandemic — and some fear it could trigger even more layoffs or prevent new hires.

Governors have been pressing the federal government to come through with more funds, but talks between House Speaker Nancy Pelosi and the White House over a new economic relief package have dragged on for months with no deal in sight, and state aid is one of the major sticking points.

“We’re in a situation where we’re trying to actually get employers to bring people back to work,” said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation. “You certainly don’t want to increase the taxes on employment, which is in essence what’s happening here.”

Both the federal government and states tax the wagesbusinesses pay in order to build up a store of funds in case of mass unemployment. Yet the extraordinary increase in the number of workers filing jobless claims since the pandemic hit in March caught the states by surprise, and the scale of layoffs sparked by the crisis already dwarfs those lost in the Great Recession, which lasted more than twice as long.

As a result, 21 states and the Virgin Islands have already exhausted the money in their accounts that pays for jobless benefits and are tapping into the U.S. Treasury-managed Unemployment Trust Fund for billions of dollars in federal loans to stay afloat. Congress waived interest on these loans in March for all states until the end of the year.

Once a state’s unemployment account dips into the red, it has little choice but to borrow from the Treasury or from private entities, because they are required under federal law to pay unemployment benefits.

Many states will need to cut benefit levels or raise taxes on employers to replenish those funds. The process is fairly routine: 27 states have a tax in place that automatically kicks in when the unemployment fund drops below a certain amount, according to the Tax Foundation. Thirteen of the states that are borrowing from the Treasury have laws on the books that call for an automatic tax hike. They include New York, New Jersey, Illinois, Pennsylvania, Texas and Massachusetts.

“It’s going to take many years for states to pay this back,” said Jared Walczak, vice president of state projects at the right-leaning Tax Foundation. “It’s going to mean higher [unemployment insurance] taxes for a very long time; it’s going to mean all of the costs associated with borrowing will be a fiscal constraint on states for many years to come.”

Glenn Spencer, executive vice president of employment policy at the U.S. Chamber of Commerce, said tax increases are inevitable given that more than 20 states are already borrowing tens of billions of dollars.

“That number is only going to go up,” he said. “So the potential tax burden on businesses across the board is only going to go up.”

In Massachusetts, businesses are staring down a tax hike of nearly 60 percent for 2021.

The state had a healthy balance in its unemployment trust fund in February, but job losses from the pandemic dried it up by July. The state now projects that the unemployment fund will have a nearly $2.5 billion deficit by the end of 2020.

Businesses will have to set aside on average $858 per employee in 2021, compared to $539 now. The costs will continue to rise, albeit at a slower pace, until 2024.

Christopher Carlozzi, the state director of the National Federation of Independent Business, said Massachusetts is hurting the job creators at the worst possible time.

“The state is looking to these small businesses to create jobs, but in the same breath, you’re making it more expensive to create that job,” said Carlozzi, whose group represents small businesses.

In New Jersey, unemployment insurance tax rates for employers could increase on average from 0.7 percent of payroll to 1.1 percent in July 2021. In total, businesses would see a hit of $919 million, according to an analysis by the state’s nonpartisan Office of Legislative Services.

A bill that’s working through the state Legislature would spread out the increase over a few years.

At a September hearing on unemployment issues, the state’s Labor Commissioner, Robert Asaro-Angelo, said what New Jersey really needs is help from the federal government in the form of cash assistance and extending the interest free loans that it’s getting from Treasuryinto next year.

“We are hopeful that there’s going to be relief for trust funds; we’re not the only state requesting this,” he said. “We hope that there will be direct funding for unemployment trust funds because that will ease the burden on employers in New Jersey and across the country.”

New Jersey is not alone. States across the country are seeking a life preserver from Washington with another aid package that could be used to bolster the unemployment trust funds. But President Donald Trump and Republican leaders are balking at giving money to Democratic-governed states like New York, California and Illinois, which they say are mismanaged.

Conservatives also argue that Washington shouldn’t give more money when states haven’t even spent all of the $150 billion that Congress set aside for them in March in the CARES Act to shore up their dwindling trust funds.

“There are a lot of states still sitting on coronavirus relief fund money that they’re allowed to be spending on unemployment compensation benefits right now and are not,” said Walczak of the Tax Foundation. He argues that states have been holding onto the CARES Act funds hoping Congress will pass another aid package that would forgive the loans or provide more flexibility for them to use the money for other priorities.

The New Jersey Business & Industry Association and other business groups have been lobbying for the state to put CARES Act money into the unemployment fund, but to no avail.

“The quicker the fund returns to good health, the more likely it is that the worst of the automatic tax increases can be avoided,” Christopher Emigholz, vice president of government affairs for NJBIA, said in testimony before the Legislature this month.

However, more than three-quarters of state and local governments recently surveyed by the Government Finance Officers Association said they have plans for the money and anticipated spending their share of the aid before the end-of-the-year deadline to use it.

At least a dozen states, including Georgia and Tennessee, used CARES Act funds to replenish their unemployment accounts.

But in some states, the aid wasn’t enough to stave off tax hikes. In Alabama, corporations are still staring at a 200 percent tax increase, even after Republican Gov. Kay Ivey put $300 million in CARES Act dollars into the fund.

Still, this tax rise will be much less severe than it would have been without the money. Alabama’s unemployment insurance tax rate was scheduled to go up from 0.65 percent to 3.95 percent, a more than 500 percent increase. Instead, the rate will increase to 1.95 percent.

“Without this infusion, employers could be facing an unemployment insurance tax increase of more than 500 percent, which could very well force many businesses to close their doors forever, resulting in even more job losses in Alabama,” Alabama Labor Secretary Fitzgerald Washington said in a statement.

On top of the increase in state taxes, businesses could be hit with a tax hike from the federal side as well.

States with dried-up unemployment funds have already borrowed more than $38 billion in interest free loans from the federal government. But the decision to eliminate interest on the loans was a temporary one, and starting next year, states will start accruing interest on what they borrow.

If they haven’t paid back the cash they owe by 2022, businesses in those locations will see a .06 percent increase in their base federal unemployment tax.

In the aftermath of the Great Recession of 2007-2009, 26 of the states and territories that borrowed from the federal government saw their federal unemployment tax go up because they didn’t pay back their loans in time, according to an analysis by the Urban Institute’s Wayne Vroman.

“Many states had debts for multiyear periods, and 11 programs were still making debt repayments in April 2016,” he wrote.

In a letter to congressional leaders earlier this month, the National Association of State Workforce Agencies urged lawmakers to extend the interest moratorium on unemployment insurance trust fund loans through 2021.

“With extreme claim loads, many states are borrowing in order to make UI payments,” the group, which represents unemployment agencies in every state and territory, wrote. “Given the continued economic stress, all state workforce agencies agree that a continued moratorium on interest accrual and payments is critical in order to avoid significant increased taxes and assessments on employers.”

This blog originally appeared at Politico on October 30, 2020. Reprinted with permission.

About the Author: Rebecca Rainey is an employment and immigration reporter with POLITICO Pro and the author of the Morning Shift newsletter.