Ahead of Congressional debate over the next phase of COVID-19 relief and recovery, National Taxpayers Union is publishing a series of recommendations for policymakers on Capitol Hill and the Administration. We are hopeful that these briefs will guide lawmakers to consider the taxpayers’ perspective as they consider spending another $1 trillion or more to tackle the public health and economic impacts of the coronavirus.
This is the second of a three-part series, and covers policies and programs that can best support employers during the crisis. Our first piece covered the best policy proposals for workers and our next installment will focus on states.
In our original Phase 4 issue brief, NTU outlined three principles for lawmakers considering a new COVID-19 relief package:
- Relief efforts should be temporary, and targeted at the workers, businesses, and families most impacted by the pandemic and economic downturn;
- Recovery efforts should make broad changes to the tax code that do not seek to benefit one industry or interest over others and have a material effect that spurs economic activity;
- All efforts in the next COVID-19 bill should come with prudent guardrails, to prevent taxpayer dollars from flowing to unrelated or unproductive causes or to projects that have nothing to do with the pandemic and recession.
Several policies below undermine these principles, and several adhere to these principles.
Support Employers With Employee Retention
We Cannot Have a Jobless Recovery
The CARES Act rightfully focused on supporting employers through the course of state shutdowns to allow them to keep their employees on payroll. The main efforts devoted to this cause were the Paycheck Protection Program (PPP) and the Employee Retention Tax Credit (ERTC). PPP provided loans that would be forgiven in the event that a sizable portion of the loan went to maintaining payroll expenses for businesses with fewer than 500 employees. The ERTC is a refundable tax credit that reduces an employer’s payroll tax liabilities for wages paid to employees until the end of the calendar year.
Unfortunately, media reports coupled with politicians looking to score cheap political points resulted in “PPP shaming” of some of the companies who took these loans. Even the Small Business Administration initially urged franchise companies with public parent companies to return PPP money, ignoring the fact that small employers at the franchise level suffer from the same community impacts COVID is having on other small businesses. In fact, this would undermine the intention of Congress in attempting to blunt the economic impact of the COVID-related shutdowns: and is particularly unwise given that data demonstrates the franchise sector helped fuel economic recovery after the Great Recession. Congress should refrain from endorsing arbitrary restrictions on the type of businesses receiving PPP loans or ERTC support and instead focus the programs’ impact on maintaining the employer and employee connection during these difficult times.
Maximizing Flexibility for Ideas With Bipartisan Support
Congress adopted some of our earlier suggestions to create more flexibility within the PPP, and $131 billion remains to be disbursed from current funding levels. But more should be done to harmonize the intended impact of PPP and ERTC, so that employers can have maximum flexibility in navigating today’s unprecedented challenges. The CARES Act required employers to choose one program or the other to prohibit businesses from “double-dipping” - using taxpayer funds to cover expenses for which they also receive a credit. This is a legitimate concern, but one that can be navigated with more care to maximize support for employers. One possible approach would ensure that receiving a PPP loan does not automatically disqualify a business for ERTC, and that a business that does not receive PPP loan forgiveness for certain payroll costs can then use the ERTC for those payroll costs.
Other ways the ERTC and PPP loans could be better harmonized include:
- Increase the employer threshold for ERTC. The large employer threshold (where the payroll tax credit becomes less flexible) is currently set at 100 employees, which leaves out more than 112,000 firms employing more than 86 million Americans.
- Increase the wage base for the payroll tax credit. The CARES Act limits the tax credit to 50 percent of $10,000 in wages paid per employee, or a total credit of $5,000. Congress could consider expanding the percentage of wages that are eligible for the credit, and allow health care benefits to be included as a credit-eligible expense.
- Phase in the benefit so more employers can access ERTC. Currently, the ERTC is available to employers who experience a 50 percent decline in gross receipts. Congress should consider lowering this threshold to expand the number of businesses who would be eligible for the credit.
- Expand ERTC eligibility to the wages of employees who are rehired after having lost their jobs during the downturn. Such a provision could help companies quickly rehire some of the employees they laid off during the pandemic, with the potential to greatly improve America’s current unemployment situation. Lawmakers would have to carefully design such a provision so that it does not create an incentive for companies to lay off employees, and could do so by limiting eligibility to employees that were laid off between certain specified dates
Most of these ideas are included in part or in whole in the Jumpstarting Our Businesses’ Success (JOBS) Credit Act from Reps. Stephanie Murphy (D-FL), John Katko (R-NY), Suzan DelBene (D-WA), Brian Fitzpatrick (R-PA), and Chris Pappas (D-NH),
Tax Policy
Tax Advantages for Specific Industries Distort Rather than Stimulate
The discussion of tax credits aimed at encouraging Americans to take a vacation mischaracterizes the current environment and would create costly distortions in the economy. While it is true that certain industries have borne a larger share of the commercial disruption due to COVID-19, it is important to recognize that public health uncertainty, not the lack of economic incentives, is what is keeping people home during the pandemic.
The House-passed HEROES Act also includes tax changes that would undermine the goal of many CARES Act provisions to increase liquidity for businesses. One change was the roll-back of the net-operating loss (NOL) provisions included in CARES, which allowed companies to smooth out their tax obligations over the course of several years by “carrying forward” their losses from one year to another. This was an element of the federal response to the Great Financial Crisis in 2009, when the Obama-Biden Administration supported an expansion of NOLs in the 2009 “stimulus” package. NOLs exist to protect businesses from anachronistic business cycles, and the CARES Act applies a helpful expansion of this provision to today’s uncertain business environment.
Use the Tax Code to Lower Barriers and Create Certainty to Support Businesses
One challenge employers face during the pandemic is the mounting uncertainty about the future tax environment, thanks to changes in the tax code that are scheduled to expire. The Congressional Budget Office has estimated that unemployment levels will be above projected pre-pandemic levels through as long as 2030, which means Congress can act now to prevent tax hikes that will undermine the country’s path back to full employment in the future. This includes: extending beyond 2022 the full and immediate expensing provision for short-term assets passed in the Tax Cuts and Jobs Act (TCJA), expanding full and immediate expensing to structures, and rescinding the five-year amortization period for research and development costs enacted in TCJA and replacing it with full and immediate expensing.
Nearly half of the American workforce is employed by a small business, whose owner typically pays its taxes through the personal side of the tax code. As a result, Congress should also consider a variety of individual tax provisions that are set to expire at the end of the year, including the threshold for the medical expenses deduction, the deduction for qualified tuition expenses, and the exclusion from gross income for benefits given to emergency first responders.
Economic Certainty
The Congressional Budget Office expects unemployment to remain above six percent through 2022, indicating that even when a COVID-19 vaccine is developed the economic consequences of the pandemic will be felt for years to come. This requires policymakers to acknowledge that new rules are necessary to ensure a fair reopening that gives workers, consumers, and employers freedom to navigate the new normal.
While we are still learning more about COVID-19 and how it is spread, this learning process should not hand trial lawyers an opportunity to drag employers, many of whom run small businesses, through costly, timely, and wasteful lawsuits.
Setting Expectations for Communities
Liability protections that are clear and apply broadly to businesses, non-profits, schools, and universities will create protections for the pillars of our communities as Americans navigate the new normal. These protections should be temporary and instill a sense of certainty for organizations who want to open their doors and be an active part of the American economic recovery. They should also prevent extra-legal and ultra-litigious action from scaring businesses and important entities into staying closed. While federal liability protections may be necessary, this issue would be ideally handled at the state level. Congressional action on liability should not supersede any state laws that have been enacted.
Conclusion
The CARES Act clearly anticipated the COVID-19 crisis to have abated by the summer - as a result, the support for businesses is running out and the expansion of unemployment benefits expires at the end of July. Instead, there is just as much uncertainty now as states struggle to reopen and keep their infection rates under control. As the private sector attempts to recover from the government-mandated shutdowns from the early spring, Congress has an important role to support the recovery and ensure all Americans can participate in a robust economic revitalization. Supporting employers as they work to retain their workers throughout the crisis, using the tax code to make broad changes that reduce economic barriers and providing economic certainty to all employers are important goals for Congress to consider in its next round of coronavirus legislation.