California employers are paying billions extra in federal unemployment tax — and you have not heard about it.
Every other state repaid their loan. California is the only state still carrying this debt.
Instead of repaying the federal loan, California chose to expand healthcare coverage to non-citizens.
The state had money to spend — just not on repaying the loan that now costs every California employer.
California is the only state where employers pay this extra tax.
California did not repay its federal unemployment insurance loan while every other state did. Because of that decision, the federal government reduced the FUTA credit for California employers. This means higher federal unemployment tax on every covered employee, and critics say those costs will eventually hit every consumer in the state.
FUTA is a federal unemployment tax paid by employers on the first seven thousand dollars of each employee wage. Normally employers receive a credit for state unemployment taxes and the net FUTA rate is zero point six percent. That equals about forty two dollars per employee each year in most states.
Because California has an unpaid federal unemployment loan, the FUTA credit is reduced. The net rate for California employers is now one point eight percent. That is about one hundred twenty six dollars per employee each year.
The difference is the bill that comes from Sacramento decisions.
The table below shows how quickly this grows for a typical business in California.
| Number of employees | Extra FUTA per year |
|---|---|
| 5 employees | 420 dollars |
| 10 employees | 840 dollars |
| 20 employees | 1,680 dollars |
| 50 employees | 4,200 dollars |
| 100 employees | 8,400 dollars |
| 500 employees | 42,000 dollars |
These amounts show only the extra cost that comes from the credit reduction, not the basic FUTA tax paid in every state.
Yes. This extra cost hits every employer that pays FUTA in California.
Any business that has employees covered by federal unemployment tax pays the higher California rate. It does not matter if the business is large or small, new or old, or whether it even existed during the COVID shutdown years when this debt was created.
That means thousands of new employers that opened in 2023 and 2024, who never laid off staff and never received these unemployment benefits, are now forced to pay for a loan from a time when their companies did not exist.
Critics say this is retroactive taxation on job creation. Instead of using state funds to pay the unemployment loan, state leaders allowed the credit reduction to continue. That shifts the cost quietly onto the payrolls of every employer in California.
There is no separate vote at the cash register and no clear line item on a state budget bill. The cost shows up in higher FUTA tax for employers and eventually in higher prices for everyone who lives in the state.
When the cost of doing business rises, companies do not simply absorb it forever. They raise prices, add fees, hold back wages, cut staff, or reduce investment. Every path leads to the same place.
Higher costs for employers become higher costs for consumers.
Some policymakers talk as if this extra FUTA cost only affects businesses on paper. In reality every added tax becomes part of the price structure of the economy. That is why many people call it a hidden tax on every Californian.
Whether someone supports or opposes the policies that led here, the economic chain is simple.
This is not only about one loan. It is about how California chose to use its General Fund during the same years.
Based on state budget records and recent reports from the Legislative Analyst's Office, California General Fund spending on Medi Cal coverage for people with unsatisfactory immigration status, often referred to as undocumented immigrants, is estimated at about twenty five point three billion to twenty eight point three billion dollars over the last five fiscal years.
Costs climbed rapidly as the state moved from limited coverage for children to full scope Medi Cal coverage for undocumented adults by 2024.
During this same period, the state did not allocate General Fund dollars to retire the federal unemployment loan of about twenty one point three six billion dollars. That choice left the loan in place and triggered the ongoing FUTA credit reduction that employers now pay.
Supporters say the Medi Cal expansion reflects humanitarian values and long term health goals. Critics respond that Sacramento protected state programs while quietly shifting the unemployment debt onto employers and consumers through federal tax.