ALBANY — Gov. Kathy Hochul and legislative leaders are negotiating proposals aimed at unburdening employers from a pandemic-era debt to the federal governmentfor unemployment benefits, which is also blocking increases in the benefits paid to workers who lose their jobs.

Hochul, Assembly Speaker Carl Heastie (D-Bronx) and Senate Majority Leader Andrea Stewart-Cousins (D-Yonkers) all have proposals to end the added, typical cost of about $450 per year for each employee paid by employers for their share of unemployment insurance. Employers are paying the added cost to pay off a loan from the federal government that the state incurred during the COVID-19 pandemic.

The added cost significantly increases the unemployment insurance tax paid by many employers. Previously, most employers were typically paying a bit more than $300 per employee per year under the state’s complex system.

But the debt also can hurt workers who lose their jobs. Currently, the maximum benefit is $504 per week, a figure unchanged since 2019. Under a state law, that figure was supposed to rise to $860 next year. But state law also freezes the benefit as long as the unemployment fund owes the debt.

In November, State Comptroller Thomas DiNapoli said the current benefit is lower than 29 other states and just 42% of the weekly wage of a worker in New York City.

Republicans and business groups have pushed to eliminate the added costs for years, but now they are joined by Democrats who want to be able to increase the weekly benefit paid to laid-off workers. Democrats note that New York faces proposed tariffs and federal funding cuts from Washington that could trigger a recession and widespread layoffs.

The placement of the issue in budget talks is an important step, said James Parrott, director of economic and fiscal policies at the Center for New York City Affairs at The New School. "That does show the Democrats are motivated in a way they haven’t been in recent years."

Back in the pandemic, states received federal loans to cover the spike in unemployment benefit claims caused by the shutdown. Most states used subsequent federal aid to pay off that debt. New York and California remain the only states that didn’t.

The state’s borrowing totaled $10.4 billion in March 2021, a year after the pandemic hit New York. After two years, the state still owed $8.04 billion in February 2023.But instead of using subsequent federal pandemic funds to pay down the debt further, the state spent the later funding on other issues related to pandemic recovery, including money for school districts and businesses.

Now New York’s debt is about $6 billion, with interest alone amounting to as much as $400 million over the next five years if nothing is done this year.

"It's one of the biggest issues we’ve been working on for over 5 years — we’ve been calling on the state to add general funds to help pay the debt that the mandated shutdown cost," said Patrick Bailey of the state Business Council.

"I believe this is an opportunity to make workers happy and businesses happy," said Heastie. "I think it would be a tremendous boon to business across the state to get this burden off them."

The proposals differ in addressing the issue, which has long been urged by business groups and Republicans and which hit smaller businesses operating on narrow profit margins hardest.

Hochul’s proposal would use $165 million in state funds to ease payments by employers this fiscal year. The Senate Democrats proposal would create a tax credit for employers with 50 or fewer employees to cover the cost of the unpaid debt for a year. The Assembly Democrats’ proposal is the boldest. It would pay off the debt using state funds, including dipping into the reserves Hochul has set aside for emergencies including recessions.

"We’ve gone many years without doing anything on unemployment insurance," said Ashley Ranslow, state director of the National Federation of Independent Business. "It’s news they all want to do something."

Assemb. Ed Ra (R-Franklin Square) said interest on the $6 billion debt could now rise under law because the debt is more than five years old.

"This is something that is a huge priority for the business community," Ra said in an interview. "We need to pay down the debt or hopefully eliminate it as soon as we can."

Sen. George Borrello (R-Hanover) said in an interview that there were "years of warning" about this problem. The Republican sponsors a bill that also would address the debt.

"These small businesses are absolutely getting hammered by the unnecessary charges," said Borrello, who owns a restaurant with his wife.

But state unemployment insurance needs more than a quick fix in the state budget, said Parrott. In a February legislative hearing, Parrott called the issue a "grave crisis."

He said beyond paying the debt, systemic changes to the unemployment insurance system are needed to keep it better funded to avoid further borrowing and to make sure the fund can cover appropriate benefits to workers who lose their jobs.