The coronavirus pandemic and subsequent economic lockdowns forced millions of businesses across the country to shut down. Unemployment skyrocketed as employers had to lay off their workers. In fact, the unemployment rate in the United States reached 14.8 percent in April 2020—the highest rate since data collection began in 1948.

These newly unemployed workers filed for unemployment benefits to help them pay for daily expenses such as rent and groceries until they got their jobs back.

But as states paid millions of more Americans unemployment benefits, their unemployment trust funds started to deplete. Now, nearly two years into the pandemic, state trust funds have a negative aggregate balance and states may have to raise taxes to refill them.

There’s some good news, however. States have an opportunity to refill their unemployment trust funds with money from the American Rescue Plan Act (ARPA).

Before we go any further, it might be helpful to review what an unemployment trust fund is, as well as how much money states received through ARPA.

What is an unemployment trust fund?

Each state has an unemployment trust fund—which is a fund the state builds through tax revenue from business payroll taxes to pay unemployment benefits. Employers and businesses pay into the fund through payroll taxes. Businesses that experience more layoffs pay higher taxes into the fund.

States should use money from ARPA to replenish unemployment trust funds

The federal government passed ARPA on March 11, 2021. The legislation provides $350 billion to state, local, territorial, and tribal governments for recovery from the pandemic through the Coronavirus State and Local Fiscal Recovery Funds. This is much more money than the revenue losses they sustained during the pandemic. Because states now have an influx of federal aid, they should adopt policies that will support their fiscal health and economic recovery.

One of those policies is using money from ARPA to replenish unemployment trust funds.

The federal government recently issued additional guidance on how states may use their federal funds. States can use the funds to pay back federal Title XII advances which were borrowed to pay unemployment claims. In addition, states can use ARPA funds to make a deposit equal to the net draw down of the unemployment trust fund that occurred between January 20, 2020, and May 17, 2021.

Time is of the essence: States should act before April 1, 2022

But according to Treasury Department’s Final Rule for implementation of ARPA, states must take steps to start this process by April 1, 2022. If states don’t meet this deadline, they will still be able to use federal funds to refill their unemployment trust fund—but they won’t have as much flexibility in managing their unemployment program benefits. Not having flexibility means states won’t be able to reduce unemployment benefits until 2025.

States that take this opportunity will help businesses and communities

States that use federal aid to refill their unemployment trust funds won’t have to raise taxes on businesses to refill the funds. Business owners and their employees have been through so much throughout the pandemic. They’ve dealt with closures, layoffs, and complicated and shifting COVID-19 reopening guidelines and protocols. Most businesses are still struggling to find workers and get back on their feet.

Increasing payroll taxes not only hinders business owners. It also hurts the businesses’ employees and the communities they live in. Faced with higher payroll taxes, businesses might have to reduce hiring or cut employee work hours or increase prices to stay afloat.

States should act quickly to replenish their unemployment funds and help their businesses, workers, and economies recover from the pandemic.

Fast Facts: 5 Things States Need To Know

1. States can use federal coronavirus relief money to refill their unemployment trust funds—but need to so by April 1, 2022.
2. States that use federal aid to replenish their unemployment trust fund after April 1, 2022, will have less flexibility in managing their unemployment system.
3. If states don’t take this opportunity to refill their unemployment trust fund using federal aid, the fund balances will remain unnecessarily depressed and states will have to raise taxes on struggling businesses.
4. Increasing payroll taxes hurts businesses, workers, and communities.
5. Restoring the unemployment fund is a wise use of federal aid, will prevent future payroll tax hikes, and will help the states weather the next economic downturn while maintaining program flexibility.

Resources for State Think Tanks