Sense with Cents

Summary

Senate Bill 1434 (Durazo, 2023–2024 session) amended the right sections of the California Unemployment Insurance Code to modernize the state UI system. It left the dollar amounts as blank placeholders and died without committee ever filling them in. A package that completes SB 1434 would have four pieces:

• Wage base (fills SB 1434 blank in CUIC § 930): $15,000 phase-in year, $20,000 thereafter. Still the lowest wage base on the West Coast.
• Weekly benefit cap (supports SB 1434 § 1280 as drafted): $700 maximum, replacing the $450 that has been frozen since 2005.
• Indexing (not in SB 1434): Both numbers adjusted annually for CPI, capped at 3.5 percent per year.
• Rate schedule coordination (not in SB 1434): EDD directed to recalibrate contribution rate schedules so average combined employer contributions — state plus federal FUTA — do not rise under the new base.

Paired with a Governor’s request under IRC § 3302(g), this package ends the federal credit reduction, pays off the $21 billion Title XII loan in about a decade, raises the weekly benefit for California workers for the first time in twenty-one years, and holds average combined employer costs flat or declining.

Scope

This proposal concerns the UI taxable wage base under CUIC § 930 only. Two related taxes administered by EDD are intentionally not touched. The Employment Training Tax (CUIC § 976.6) remains at its $7,000 wage base and 0.1 percent rate; the Employment Training Fund is adequately capitalized under current collections, and § 977.5 already provides for automatic suspension when the fund balance warrants. UI and ETT have shared the $7,000 figure since 1983 only by statutory coincidence — the two funds have separate bases, separate rate mechanics, and separate purposes. Modernizing UI does not require moving ETT and this proposal does not do so. State Disability Insurance likewise has no wage ceiling since SB 951 took effect January 1, 2024; all wages are already subject. Fraud, SUTA dumping, and misclassification enforcement are important but separate topics, not addressed here.

The rest of this post is the supporting case.

The structural deficit

California is projected to pay about $7.1 billion in regular unemployment benefits in 2025 and collect about $4.9 billion from employers through the state UI tax (EDD January 2026 UI Fund Forecast). The $2.2 billion annual shortfall is a 31 percent gap. California’s outstanding Title XII loan balance stood at about $20.9 billion as of November 6, 2025 (U.S. Treasury data), and the same EDD forecast projects the year-end fund deficit will still be around $21.3 billion at the end of 2027. The pandemic is five years behind us. The deficit is structural.

The problem is base, not rate. California has been on Schedule F plus a 15 percent surcharge — the highest schedule the law allows — since 2004. Two decades of maximum rates still do not close the gap. The EDD January 2026 Forecast shows the average employer tax rate on taxable wages at 3.25 percent for 2025. But because only the first $7,000 of wages is taxable, that rate applies to roughly 10 percent of total wages paid statewide. The arithmetic result: California employers contribute roughly 0.35 percent of total wages to the UI fund on average, even while operating at the maximum rate schedule. States with broader wage bases collect more per employee at lower rates.

The $7,000 wage base was set at the federal floor in 1983 and has not moved through five presidential administrations, two recessions, and a pandemic. Other states adjust: Washington’s 2026 base is $78,200 (indexed to average wages), Oregon’s $56,700, Wyoming’s $33,800. Texas sits at $9,000, New York at $13,000. California remains at the 1983 floor.

SB 1434: what it did, what it didn’t

SB 1434 amended four places in the CUIC, plus the Disability Fund administrative section:

• § 930: Replaced the $7,000 taxable wage base with a phased increase — dollar amounts left as blank placeholders.
• §§ 1275 and 1279: Adjusted the benefit-computation provisions to match the revised wage base.
• § 1280: Repealed and re-adopted, replacing the current benefit table with a formula of one twenty-first of highest-quarter wages, $170 minimum, $700 maximum.
• § 3001: Amended the Unemployment Compensation Disability Fund administrative provisions (fund continuation and General Fund loan mechanics). Not a wage-base provision — SDI has had no taxable wage ceiling since SB 951 took effect January 1, 2024; all wages are subject.

The bill touched the right sections in the right order with the right effective-date mechanics. It did not propose specific wage base dollar amounts, inflation indexing, rate-schedule adjustments, or a federal companion action. Those four gaps are the conversation the bill was set up to trigger in committee and never got.

Filling the blanks

Wage base (§ 930): $15,000 for a one-year phase-in, $20,000 thereafter. For context, Oregon is $56,700 and Washington $78,200. Texas at $9,000 is the nearest state below this proposal. $20,000 places California at the bottom of the West Coast range and near the bottom of all states that exceed the federal floor. A phase-in year at $15,000 gives employers and payroll software vendors adjustment time.

An alternative argument worth noting: if the 1983 relationship between the wage base and a year of full-time minimum-wage earnings were simply maintained, the 2026 wage base would be about $35,000. That is not the recommendation here. It is an indicator of how far the current $7,000 has drifted from any recognizable economic reality, and it is the strongest case for including indexing. Without indexing, any new number chosen now will drift in the same direction over the next forty years.

Weekly benefit cap (§ 1280): $700 maximum, as SB 1434 proposed. In 2005 the $450 cap was about 42 percent of the average California weekly wage; today it is about 25 percent. The $700 figure restores roughly the 2005 benefit-to-wage ratio for a laid-off worker earning at or near the state median.

Indexing (new): Both the wage base and the benefit cap should be adjusted annually by the lesser of 3.5 percent or the rate of change in the U.S. Consumer Price Index. Rounding conventions: $100 for the wage base, $10 for the benefit. The cap prevents runaway growth in unusual inflation years while protecting both sides from two-decade erosion.

Rate schedule coordination (new): Directing EDD to recalibrate the contribution rate schedules concurrent with the wage base increase is the politically load-bearing piece of the package. Raising the wage base to $20,000 without adjusting rates would increase average employer contributions substantially. Recalibrating rates so average combined employer contributions (state UI plus federal FUTA) hold flat or decline is what makes the package revenue-neutral from the employer perspective and allows the benefit increase to be funded without a visible tax increase.

Fiscal arithmetic

Under current law, the average California employer pays about $354 per employee per year in combined state UI and federal FUTA — the 2025 tax year included $84 of FUTA credit reduction, and the 2026 tax year is accruing at $105. The do-nothing trajectory keeps climbing: about $396 per employee by 2028. The credit reduction adds another $21 per employee each year (0.3 percentage points on the current $7,000 wage base) and continues climbing beyond the 2027 EDD forecast horizon until the loan is repaid. Once the loan is eventually gone, combined costs fall back roughly to the pre-2022 range: normal $42 FUTA plus the state schedule in effect at that time. That end-state is many years away, and employers pay the climb the whole way.

Under the recommended package — $20,000 wage base, state rate adjusted to a middle-schedule range around 1.7 percent average, $700 benefit cap — the same employer pays about $382 per employee in 2028 (approximately $340 state UI plus $42 FUTA, with the credit reduction ended). That is about $14 per employee saved in year one. Savings grow each subsequent year because the do-nothing path keeps climbing and the reform path stops at the new state rate. Over time, the gap between do-nothing and reform widens into material three-figure annual savings per employee.

On the fund side: the broader base generates enough revenue to cover current benefits at the upgraded cap (the $450-to-$700 increase raises annual benefit payments from about $7.1 billion to about $9.6 billion), retire the Title XII loan within roughly a decade on reasonable projections, and stabilize the fund’s solvency ratio for future downturns. Indexing keeps both sides tracking inflation rather than fossilizing.

A fair word on distributional impact. Employers whose workforces earn mostly at or near minimum wage would see a larger state UI bill than they do today, since more of each worker’s wages fall within the new base. Employers with higher-wage workforces would pay less combined UI cost than under the do-nothing trajectory. Within approximately three years, the revenue-neutrality holds on average across the employer population; individual effects vary by experience rating and wage mix. Transition credits or phase-in protections for genuinely small operations are standard companion provisions and would be appropriate here.

These figures are calibrated against EDD’s published taxable-wage and contribution numbers in the January 2026 UI Fund Forecast. A state forecaster with full wage distribution data would produce more precise estimates; the direction and rough magnitude are not sensitive to the modeling assumptions.

The federal piece: § 3302(g), not § 3302(f)

The FUTA credit reduction has been collecting without reducing the overall deficit. The U.S. Treasury reported California’s outstanding Title XII loan balance at about $20.93 billion on November 6, 2025. The EDD January 2026 UI Fund Forecast projects the year-end fund deficit (loan plus accrued interest, minus assets on hand) at $21.78 billion for 2025, peaking at $22.10 billion by end of 2026, then declining to $21.33 billion by end of 2027. The same forecast projects FUTA credit reduction collections of $1.16 billion in 2025, $1.60 billion in 2026, and $2.03 billion in 2027. The credit reduction is large and growing — and yet the fund deficit is still projected to be larger in 2027 than it was in 2024. Under current policy, the credit reduction climbs $21 per employee each year (0.3 percentage points on the $7,000 wage base) and continues climbing beyond the 2027 forecast horizon, capped at 5.4 percentage points under federal law.

Two federal relief mechanisms exist in IRC § 3302. The § 3302(f) cap waiver (specifically § 3302(f)(2)(B), governed by 20 CFR §§ 606.20–606.22) limits how much the credit reduction can grow in a given year by waiving the Benefit-Cost-Ratio add-on that otherwise kicks in after five consecutive years of outstanding advances. California has been applying for and receiving this BCR waiver on an ongoing basis — the most recent determination is in the Federal Register notice of January 12, 2026 (91 FR, Doc. 2026-00342). The cap waiver does not end the reduction; it limits its ceiling.

§ 3302(g) is different. It authorizes a state to avoid the credit reduction for a taxable year entirely, by repaying Title XII advances in specified amounts during the one-year period ending November 9 of the taxable year. The governing regulations are at 20 CFR §§ 606.23–606.24. The structural revenue increase from wage base modernization creates the first realistic opportunity for California to qualify for § 3302(g) relief since the current credit reduction cycle began. The state would need to repay an amount at least equal to the potential additional tax during the qualifying year — which a broader wage base funds directly.

The practical package on the federal side is a Governor’s request under § 3302(g), conditioned on enactment of the state statutory reforms, with a supporting resolution from the Legislature. This is the companion action that lets the state reform actually end the surcharge rather than slow its growth.

Political framing: not a tax increase

A wage base reform is not a tax increase on California employers. It is the same money being collected through a different door.

California employers are already paying the $354 per employee per year today, and the total keeps climbing each year the state loan remains outstanding. That money is leaving employer payroll accounts regardless. The only question is which agency receives it. A modernized state system captures the same money directly, ends the federal surcharge, and provides predictability. A legislator who votes for this reform is not voting to raise employer UI costs on average — they are voting to redirect collections from a growing federal surcharge to a stable state system.

This is the political geometry of a bill that can move. A reform that asks employers to pay more without doing anything for workers is an easy vote against. A reform that redirects existing payments and uses the fiscal space to raise the weekly benefit from its 2005-era $450 has a labor coalition and a business coalition on the same side, even if for different reasons. Labor gets a real benefit increase for the first time in twenty-one years. Business gets predictability and the end of the federal surcharge.

Timing matters as much as coalition math. California’s wage-tax politics reflects cumulative change: SB 951’s removal of the SDI wage ceiling (effective January 1, 2024) was itself a significant structural change, and legislators have been understandably cautious about stacking additional wage-tax restructuring in close succession. The 2027-2028 window is structurally more favorable. SB 951 will be four years settled, employers and workers will have adjusted, and the SDI fund is stable. UI reform can stand on its own timeline.

Context: who else has said this

The technical case for raising California’s UI wage base has been made repeatedly for more than a decade. A partial catalogue:

• National Employment Law Project (May 2013) recommended raising the wage base to $17,500.
• California Federation of Labor Unions (2015) documented that $7,000 had fallen from roughly one-third of average California worker earnings in 1983 to less than one-seventh by 2015.
• CalMatters (October 2023) characterized the situation as an “urgent $20 billion problem.”
• California Legislative Analyst’s Office (December 2024) recommended raising and modernizing the wage base and fixing the financing system.
• California Budget & Policy Center has published parallel analyses reaching similar conclusions.
• California Chamber of Commerce, from the business side, has repeatedly called for solvency reform.

The LAO, the Budget & Policy Center, and the Chamber of Commerce agreeing on the basic diagnosis is unusual. What is missing is not analysis or coalition potential. What is missing is a legislative vehicle with the numbers filled in. SB 1434 was the vehicle. Completing it is the next step.

A separate technical issue: experience rating

Not part of the SB 1434 completion package, but worth noting for a broader modernization conversation: California’s experience rating formula can move an individual employer’s rate significantly on a single partial claim. An employer with a forty-year clean record who qualifies one worker for a partial benefit in one year can see the following year’s rate double. That is not price signal; it is noise. The formula weighs a single small claim against a small payroll base disproportionately.

A system designed to price risk accurately should respond slowly to outliers against a long clean record. Revisiting the experience-rating formula is the kind of technical fix Legislative Counsel could draft cleanly alongside or after the core wage base and benefit reforms. SB 1434 did not address it, and the recommended package here does not either, but it belongs in the broader conversation.

The ask

Reintroduce SB 1434 early in the 2027–2028 session, with the blanks filled: $15,000 phase-in, $20,000 wage base, indexed. Support the $700 benefit cap as the bill drafted it, indexed. Direct EDD rate-schedule coordination so the package is revenue-neutral on average to employers. Pair state enactment with a Governor’s request under IRC § 3302(g).

The numbers are a choice. A legislator can pick more aggressive numbers. A legislator can pick more conservative numbers. What cannot keep being chosen is to leave the blanks blank. Twenty-one billion dollars and counting is a lot of evidence.

Write the number.

Dennis Pearson is Developer, Shareholder & Managing Director of Medlin Software, Inc., a California payroll software company serving approximately 6,000 active small business customers across the state. This analysis reflects forty-plus years of direct experience implementing California UI tax mechanics in production payroll software, with AI assistance used for formatting and statutory cross-reference verification. Fiscal figures are calibrated against California EDD published data; a state forecaster with full wage distribution data would produce more precise numbers.