Inside the unemployment mess that will hit Mass. business owners' wallets in 2027

The big picture: The unemployment trust fund, which is largely paid by employers' quarterly tax bills, faces a perfect storm of calculation errors, mounting debt and economic uncertainty that stands to send employers' quarterly tax bills soaring for years.

Threat level: The state projects its unemployment trust fund could run out of money by late 2027.

• Meanwhile, the state will be trying to play catch-up in paying the federal government billions it owes related to COVID-era loans and misused funds, with employers footing the majority of the bill into the 2030s.
• And there's no telling what unemployment will look like in two years, between federal funding cuts hitting the state's top sectors and disruptions brought on by AI.

What they're saying: "Small businesses are closing in large numbers ... and I find it hard to find any bigger priority for Beacon Hill than that," said Jon Hurst, president of the Retailers Association of Massachusetts.

Zoom in: Evan Murphy, a principal at Unemployment Tax Control Associates in Springfield, works with businesses across the country, including in Massachusetts.

• He says at least five clients are either considering moving some operations out of Massachusetts or rethinking their business growth plans in the state over concerns about unemployment bills rising.
• "I think there's a way to get it done, but if the solution is just we're going to continue to raise the cost for employers and hope for the best, it's just not sustainable," Murphy, a lifelong Massachusetts resident, tells Axios.

How we got here: Much of the debt that will drain the trust fund stems from COVID-era unemployment, per the Massachusetts Taxpayers Foundation.

• Massachusetts is repaying a $2.3 billion loan from the federal government to cover unemployment benefits during the pandemic.
• Massachusetts misused some $2.5 billion in CARES Act funds under former Gov. Charlie Baker to cover certain unemployment benefits — a $3 billion liability, including interest and fees.
• Gov. Maura Healey reached a deal with the Biden administration in January to repay $2.1 billion over 10 years.
• Employers are ultimately footing most of the bill for both, with the latter payments starting Dec. 1.

How it works: Business owners in 2023 started paying an extra line item in their quarterly tax bills to cover the cost of bonds that were issued to repay the loan without accruing interest.

Yes, but: Employers have paid the lowest possible base UI tax rate since 2023 after the state used $900 million of its special bonds to pad the unemployment trust fund.

• That means less money has gone to the trust fund itself.
• This past fiscal year, the trust fund issued more money than it took in.
• That trend could continue if unemployment rises, partly because Massachusetts offers enhanced jobless benefits whenever a single metro area's unemployment rate exceeds 5%. Springfield's unemployment rate hit 5.2% in April.

The state's schedule for setting UI rates for employers' quarterly bills complicates matters even more.

• Massachusetts sets its annual UI rates in September for the following year.
• The costs associated with repaying the misused funds, which start in December, won't be calculated in the rates until next September.
• By early 2027, the state will have made two years' worth of payments, around $203.4 million a year, and employers will be on the hook for these costs if the state doesn't act, per MTF.

What we're watching: Business leaders have pleaded with state leaders to add money to the trust fund and review benefits.

• So far, neither the Healey administration nor lawmakers have proposed reforms to the unemployment system.