States tap federal aid to shore up empty unemployment funds

Businesses could be spared billions of dollars of higher taxes in coming years — potentially freeing up money to spend on employees or invest in their operations — as a result of federal coronavirus aid flowing to the states.

Governors and lawmakers in more than half the states are planning to use at least part of their federal pandemic relief money to bail out unemployment insurance trust funds that were drained by a surge in jobless claims caused by business closures and restrictions, according to an Associated Press review.

By tapping into the federal aid, states could avoid automatic tax hikes that otherwise would be imposed on businesses to repay federal loans that have kept state unemployment systems afloat during the COVID-19 pandemic. That means state jobless funds could recover much faster than they did after the Great Recession, when it took some states five to 10 years to replenish their funds.

“For the first time in decades, states will be able to come out of an economic contraction with well-funded unemployment compensation trust funds and be able to save for the next downturn, rather than focusing on paying off the debt from the last one,” said Jared Walczak, vice president of state projects at the Tax Foundation, a Washington, D.C.-based nonprofit.

Some worker advocates would prefer that states spend their pandemic funds on direct aid to those who have suffered economically during the coronavirus outbreak.

“Using the money to just replenish an account is not serving workers,” said Jenna Gerry, a senior staff attorney at the National Employment Law Project, a New York-based group that advocates for low-wage workers and the unemployed.

But business groups contend that employees ultimately will benefit if their bosses don't have to bear the tax burden of...