Democrats voters are going to want to think again when election day rolls around.
California business owners are bracing for a major tax increase after Governor Gavin Newsom and Democratic lawmakers failed to repay a massive unemployment debt that has been hanging over the state since the pandemic.
Republican leaders say the result is a hidden tax hike that will hit employers, threaten small businesses, and put more pressure on job creators already struggling with inflation, regulation, and high operating costs.
California’s $20 Billion Debt Problem
California still owes roughly $20 billion to the federal government after borrowing heavily to fund unemployment benefits during the pandemic era.
While most states used federal relief money to eliminate their unemployment insurance debt, California directed much of its funding toward other priorities, including homelessness programs, infrastructure spending, and expanded government initiatives.
Now the bill is coming due—and businesses are being forced to pay.
Employers Hit With Steep Payroll Tax Increases
According to the California Business Roundtable, California employers could soon face a payroll tax burden of 5.2%, dramatically higher than businesses in states that have already paid off their debts.
Employers are expected to pay an additional $42 per employee this year alone, and that amount is projected to rise annually until the debt is fully repaid.
For larger companies, the cost could total tens of thousands of dollars each year.
Small Businesses Could Suffer the Most
Small businesses represent 99.8% of all businesses in California and support approximately 7.6 million jobs.
Many of these companies survived pandemic shutdowns, supply chain disruptions, and soaring inflation. Now they are being asked to absorb yet another government-imposed expense.
Business leaders warn that the additional costs could lead to reduced hiring, slower wage growth, and fewer opportunities for workers.
Republican Lawmakers Demand Federal Relief
Brian Jones, the Republican leader in the California State Senate, filed a resolution calling on Congress to stop the automatic federal payroll tax hikes triggered by the state’s outstanding unemployment debt.
Jones argued that California officials made a conscious decision not to pay down the debt when they had the resources to do so.
“Every other state paid down its debt, but not California,” Jones said.
He added that businesses that stayed open and kept employees on payroll are now being forced to cover the cost of state mismanagement.
The “Greatest Hidden Tax”
Rob Lapsley described the growing burden as “the greatest hidden tax.”
He warned that penalties linked to the debt could eventually exceed $400 per employee if California continues to delay repayment.
For employers with dozens or hundreds of workers, the impact could be substantial.
Billions Lost in Unemployment Fraud
Republicans also point to the Employment Development Department (EDD) fraud scandal, in which billions of taxpayer dollars were paid to fraudulent claims.
Estimates place the total losses at at least $20 billion.
Critics argue that honest businesses should not be forced to pay higher taxes because of widespread waste and abuse.
Federal Government Steps In
In February, the United States Department of Labor notified California officials that a federal strike team would be sent to investigate unemployment fraud and strengthen oversight.
The move underscored growing concerns about how California handled billions in taxpayer funds.
Economic Consequences for Workers and Employers
Business advocates warn that rising payroll taxes may force companies to delay expansion plans, reduce hiring, and reconsider investments in California.
For workers, that could mean fewer job openings and slower economic growth.
At a time when many Americans are already coping with higher prices and financial uncertainty, critics say California’s debt crisis is another example of government decisions creating new burdens for taxpayers and employers.
Bottom Line
California’s decision to leave a $20 billion unemployment debt unpaid is now translating into higher payroll taxes for businesses across the state.
Republican lawmakers say Congress should intervene before employers are saddled with even greater costs.
For many business owners, the issue is simple: after years of waste, fraud, and overspending, Sacramento is once again asking the private sector to foot the bill.