California employers are now paying the highest federal payroll taxes in the nation
Elon Musk made international news when he announced Monday that he’s pulling his businesses out of California. But perhaps more remarkable than Musk’s departure was his reason: Governor Gavin Newsom’s signature on a bill that strips parents of authority over their school-age kids, beginning with gender identity. The law goes into effect January 1.
“This is the final straw,” Musk said on X. “Because of this law and the many others that preceded it, attacking both families and companies, SpaceX will now move its HQ from Hawthorne, California, to Starbase, Texas.”
Musk’s complaints about California go well beyond this new, malignant law. Under Newsom, the state has logged a number of firsts and worsts: the nation’s worst unemployment rate, its highest business and marginal-income tax rates, and massive, growing and fatal government pension liabilities. Suffering the nation’s highest poverty and homeless rates, the highest costs of living, housing, electricity, insurance and gasoline, it’s also reeling from the nation’s worst-ever state budget deficit. Like the earthquakes with which all Californians are familiar, the financial aftershocks of this one will shake California budgets for years ahead.
That much is widely reported. But there’s another, nearly unreported indicator of California dysfunction. Thanks to Newsom’s refusal to repay a federal loan, California employers are now paying the highest federal payroll taxes in the nation – taxes that will rise each year.
But there’s worse news: because of the state’s underlying economic instability, a state auditor said it’s no longer possible to predict when the punishing federal taxes will end.
“Our earlier initial estimates suggested this process could take 10 years or more, but we no longer provide a formal forecast of the repayment date,” California’s principal fiscal and policy analyst Chas Alamo told me. “This is because the magnitude of uncertainty looking ahead is too great.”
The debt is a taxpayer form of Long Covid. Like half of all states, California went into 2020 with a well-funded unemployment insurance trust fund. As in those other states, all confronted by Covid, California’s unemployment account drained so quickly that the Trump administration stepped in to shore it up with a $20 billion loan.
But those states repaid their loans quickly. California and New York (along with the territory of the Virgin Islands) have not.
Newsom’s decision to stiff the federal government triggered a retroactive December 2023 increase in federal withholding for California employers in the state. That tax, described in the Federal Unemployment Tax Act, or FUTA, requires employers to pay 0.06 percent on an employee’s first $7,000 of pay. Newsom’s failure to repay the debt automatically raised the federal withholding to 0.
