Before the ink was dry on the $2 trillion CARES Act, the third and largest coronavirus rescue package enacted to date, it was evident that Congress would need to pass another. Over 10 million Americans have filed for unemployment insurance in the last two weeks and millions more are on the way. Janet Yellen, former chairman of the Federal Reserve, said unemployment is already around 13 percent and that the domestic economy will shrink at an annualized rate of 30 percent in the second quarter.
We are in the midst of an unprecedented public health crisis where, in order to save hundreds of thousands of American lives, large sectors of our economy have been placed in a self-induced coma. The Concord Coalition supports the federal government’s efforts to sustain workers and the domestic economy until it is safe to reboot the economy, provided that such actions are timely, targeted, and temporary. Some proposals from high-ranking lawmakers, however, raised eyebrows among economists and budget watchers for their failure to meet the “three T” criteria.
Speaker Pelosi has suggested temporarily eliminating the cap on the deduction for state and local income taxes paid (SALT). For those who itemize, federal tax law allows taxpayers to reduce their taxable income by deducting a portion of their state and local taxes paid. Prior to the 2017 tax reform, all state income taxes, sales taxes (in lieu of income taxes), personal property taxes, and certain real estate property taxes were deductible, but the tax act temporarily capped the deduction at $10,000 for tax years 2018 through 2025. As a result of this change and the near-doubling of the standard deduction, those most likely to benefit from the new cap would be high income taxpayers in high tax states, failing to target aid to those most in need. Research by the Tax Policy Center reveals only 9 percent of US households would benefit from this change and 96 percent of the tax cut would go to the top 20 percent of households.
President Trump wants to reinstate the business deduction for entertainment and meal expenses. Under the 2017 tax reform law, companies can now deduct only 50 percent of their spending on meals that are directly related to the conduct of business and can no longer deduct entertainment spending. President Trump has suggested restoring the full deduction as a way to help the restaurant industry by incentivizing companies to spend more on restaurant meals.
This proposal fails all three of the “three Ts”: it is neither timely, targeted, nor temporary. A majority of restaurants and entertainment venues are temporarily shuttered in compliance with social distancing and shelter-in-place directives and they need cash now to pay normal operating expenses: rent, payroll, health insurance, utilities, and more. Incentivizing companies to spend more money in restaurants that are necessarily closed until further notice is not a successful way to get these businesses the liquidity they need today.
Moreover, in the midst of this public health crisis, this provision is more likely to provide direct aid to companies that use entertainment and meals as part of their strategies to grow, not the intended targets (restaurants and entertainment venues). As economists across the political spectrum will attest, there are other more efficient and effective ways to support these struggling industries.
Employee-paid payroll tax cuts. Once public health officials recognized that the US economy would need to shut down to prevent exponential spread of the coronavirus, President Trump floated the idea of a temporary payroll tax cut to help boost the economy. The payroll tax -- a 15.3 percent tax on all employee wage income up to $137,700, split between employers and employees -- is used to finance the two large social insurance programs, Social Security and Medicare.
While reducing the employer-paid portion of the tax would have a beneficial impact on employer cash flow and help them retain their workers (and, hopefully, their employer-provided health care benefits), reducing the employee-paid portion of the payroll tax will only help those who still have a job. The payroll tax is not paid by workers who lose their jobs as a result of a sudden downturn, nor is it paid by the growing number of workers in the gig economy or retirees living on Social Security benefits -- those groups most likely to need additional income support during an economic crisis. This idea clearly fails the “targeted” test.
Not only is this approach ill--targeted, it would also be very expensive, reducing its “bang for the buck” value. A one-point reduction in the employee-paid portion of the payroll tax would cost approximately $80 billion per year. Moreover, a payroll tax holiday would divert revenues needed to pay current benefits for Social Security and Medicare enrollees. The diverted funds would likely be repaid by general revenues, which risks altering the basic financing structure of these programs and would threaten funding for other domestic priorities.
Other ideas that fail the “three Ts” have fallen off the negotiating table. Early media reports suggested that a massive investment in transportation infrastructure and clean energy, postal service reform, and a capital gains tax cut were also under consideration. It appears these ideas have been abandoned by lawmakers, at least for now, and the Concord Coalition applauds their wisdom.