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With the May jobless rate at 13.3 percent—an improvement over April but still terrible-- policymakers are considering many ideas to support workers in the COVID-19 economy. One would continue government incentives to not work, an idea that seems crazy in normal times but may make sense today, when the pandemic still is keeping many people at home. The others would subsidize work, mostly by providing new tax breaks to employers. But each has different features and would produce very different results.
Start with the threshold question: Has the pandemic eased sufficiently that government should encourage people to go back to work? That is the view of President Trump and many Republican governors and Capitol Hill lawmakers.
Or, should government continue to support people who stay home from work? According to this argument, the continued lack of testing, contract tracing, and other public health measures suggest that non-essential workers should continue to stay home, even if it extends the steep slowdown in consumption and production. That’s the view of many Democrats and public health officials.
Extending unemployment benefits
For them, the simple policy response is to extend the supplemental federal unemployment benefits Congress created in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Some would retain the extra $600 weekly benefit in the law, others would trim the benefit. Still others back another round of the direct tax rebate payments in CARES.
Those who believe that it is time to re-open the economy are pursuing several ideas, some overlapping, others complementing one another.
President Trump has pushed an unspecified payroll tax holiday since well before the pandemic. But whatever its design, a payroll tax cut creates two fundamental problems—it benefits only those who are working, not the millions who lost their jobs in the pandemic. And it blows a hole in the Social Security Trust fund that inevitably would have to be filled with general fund revenues—a challenge when the federal government could run a deficit this year in the neighborhood of $4 trillion.
Alternatives to jobless benefits
The senior Republican on the House Ways & Means Committee, Kevin Brady (R-TX), has proposed an alternative to extended unemployment benefits. He favors a $1,200 cash payment (effectively two weeks of the additional jobless benefits) for those who return to their jobs before July 31. Sen. Rob Portman (R-OH) has a similar idea. This avoids the Social Security shortfall problem but still does nothing for the unemployed, those likely to need the money the most.
Supporters of the back-to-work agenda favor other non-tax policy changes as well. One is Senate Majority Leader Mitch McConnell’s (R-KY) push to waive a firm’s liability if employees or customers contract COVID-19 in their establishments.
The next set of back-to work alternatives follows a very different model. Each would create a form of wage credit for employers who hire, rehire, or retain workers. Lawmakers ranging from Rep. Pramila Jayapal (D-WA), one of the House’s most liberal members, to Sen. Josh Hawley (R-MO), a conservative Republican, have proposed variations on this idea. So has a broadly ideological diverse group of Senate Democrats, led by moderate Mark Warner (R-VA) and including liberal Bernie Sanders (I-VT), who caucuses with Democrats, and conservative Doug Jones (D-AL).
The basic design of all these ideas is the same: An employer tax credit linked to wages. They differ in the size of the credit, the qualified wage amount, other expenses eligible for the credit, whether they are available for current workers, and criteria for business eligibility. But all would provide tax subsidies to firms based in some way on their workforce.
Of course, the tax code already allows firms to deduct labor costs from their taxable business income. And the CARES Act created a modest new subsidy called the employee retention tax credit (ERTC). It allows firms to claim a 50 percent credit for wages and some health insurance costs of up to $10,000 per employee.
Firms are eligible for the ERTC if they closed due to the pandemic, partially suspended operations, or suffered a decline of at least 50 percent of gross revenues. Importantly, they do not qualify if they accepted the more generous Paycheck Protection Program payments. Thus, relatively few businesses have claimed the credit.
A thousand flowers
The HEROES Act, passed by the House last month, would build on the ERTC. It would raise the limit on annual wages eligible for the credit to $45,000, increase the credit rate to 80 percent, and allow firms to claim a phased-in credit if their gross receipts fell by at least 10 percent.
But the many bills floating around Congress would do even more.
For example, Jayapal’s plan would cover 100 percent of annual wages up to $100,000 per employee, along with benefits and other expenses such as rent.
Hawley’s plan, which has been evolving, would provide a credit of 120 percent of annual wages up to $50,000 for rehired workers and 80 percent for the first $50,000 for retaining current workers. Firms of any size would be eligible, as long as they could show that they suffered revenue losses of 20 percent during the pandemic.
The Warner bill would expand the ERTC. Firms could claim a credit of up to $90,000 to cover wages and health benefits for each laid-off or furloughed worker it rehires. Small and mid-sized businesses also could claim an additional credit of up to 5 percent of gross receipts for their costs of rent, mortgages, utilities, and other operating expenses.
These ideas have generated surprising interest on Capitol Hill, and may make sense once it is safe to go back to work. But they raise three big questions: How much does Congress want to spend on such a program? Is the real problem a lack of workers or an absence of consumer demand? And when is it the right time for the government to encourage people to go back to work?
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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