With non-essential businesses ordered closed, the federal government has moved in to subsidize more … [+]
The federal government is now on track to directly subsidize more than half of the U.S. workforce. That eye-popping estimate comes courtesy of economist Martin Sullivan, a veteran of the Treasury and Congress’ Joint Committee on Taxation, and now chief economist for Tax Analysts.
In February, a record 164.6 million Americans were in the workforce and the unemployment rate was a rock bottom 3.5%. Then, in mid-March, to slow the spread of the novel coronavirus, state and local governments began ordering all sorts of “nonessential” businesses to close their doors and send their employees home. In just two weeks, nearly 10 million workers filed for unemployment—and many more likely tried to file, but couldn’t, as state web sites crashed.
The $2 trillion-plus dollar Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, provides a $600 a week boost to normal state unemployment benefits. But even more federal dollars are slated to go to three broadly available new programs that will subsidize companies and not-for-profits that keep paying their workers.
“A mind staggering percentage of the U.S. workforce is going to get their wages subsidized by this legislation,” Sullivan says. “The labor market has been hit by an unprecedented category six storm. The federal government has responded with an off-the-chart emergency relief package,’’ he adds.
If all plays out as Congress intends, about 60% of those workers who get government help will receive it through their current employer. “We’re looking at employees being ready, not lost in this process. We want businesses to stay intact,’’ Jovita Carranza, head of the Small Business Administration, said at a White House briefing last week. Her agency is charged with overseeing the most complicated part of the job subsidies: $349 billion in government guaranteed Paycheck Protection Program loans to small and medium sized businesses and not-for-profits. The key is this: the loans will be forgiven if employers keep their workers on the payroll, at full salary, for eight weeks and use at least 75% of the loan proceeds for payroll.
The U.S. isn’t the only wealthy country seeking to keep businesses intact through wage subsidies. The United Kingdom, for example, is paying up to 80% of wages (capped at about $3,000 a month), to induce companies to keep workers employed, even if they can’t do their jobs because of the pandemic. Denmark is paying 75% of private sector salaries, capped at about $4,400 a month.
In the U.S., keeping workers on their employers’ payrolls is arguably even more crucial, since so much health insurance flows through the workplace. But the complexity of the new U.S. programs has obscured just how broadly Uncle Sam has gotten into the workforce subsidy business.
That complexity results from the less than direct ways Congress has fashioned its support—in addition to the Paycheck Protection loans, there are two “refundable” tax credits, which essentially means the Internal Revenue Service has been given the task of handing out employment subsidies just as it is in charge of disbursing stimulus payments directly to households. “Small unsophisticated business people have to deal with these very complicated provisions which I can barely understand after three days of study,” Sullivan observes.
Sullivan bases his conclusion that more than half the labor force will be subsidized on the JCT’s official estimates of the revenue costs of two tax provisions, one in CARES on in the first March stimulus bill, the Families First Coronavirus Response Act, plus unofficial estimates in Congress of what the unemployment compensation program will cost. (In addition to the four broad programs that figure in Sullivan’s calculations, the CARES Act also includes $33 billion in grants to the airline industry to subsidize the pay of as many as 750,000 industry workers through September 30th.)
Here are the big four programs and a rough estimate of how many workers, and the share of the workforce (measured as of February) these programs are likely to support.
Federal Pandemic Unemployment Compensation
Cost: $260 billion (unofficial estimate used in Congress)
Workers subsidized: 33.3 million, 20.2% of the labor force
Conceptually, this is the simplest of the four workforce support programs, although even it won’t be easy to administer. Many state unemployment systems are overwhelmed. Plus, self-employed independent contractors and gig workers, who haven’t traditionally been eligible for unemployment insurance, are eligible for this benefit, creating added administrative challenges.
Sullivan figures if workers get an extra $600 a week for an average of 13 weeks, the subsidy will amount to $7,800 per worker. Divide $260 billion by $7,800, and that works out to 33.3 million workers, or 20.2% of the labor force drawing this benefit. “These magnitudes for me are mind boggling,’’ says Sullivan.
Keep in mind that the total dollar cost of this benefit isn’t capped in the CARES Act, as are the Payroll Protection loans. So if unemployment shoots above 20%—it peaked at 25% during the Great Depression— so too will the share of the workforce receiving this benefit.
Employee Retention Tax Credit
Cost: $55 billion (JCT estimate)
Workers subsidized: 11 million, 6.7% of the workforce
Also a part of CARES, this new, refundable credit is available to employers of any size who have experienced a 50% decline in sales receipts or whose business has been partially or wholly suspended as a result of a government order. They can apply to receive a refundable 50% payroll tax credit for up to $10,000 in wages per eligible employee. In other words, this is a subsidy of $5,000 per worker, which could be particularly helpful to employers in low-wage service industries.
The credit is more generous to businesses who had fewer than 100 employees as of 2019—they can claim the credit for all the workers they retain. Larger employers, by contrast, can only claim the credit for wages paid to employees who aren’t providing services to their employers, even as they are kept on the payroll.
The JCT estimates the Employee Retention Tax Credit will cost $55 billion in revenue. At $5,000 per worker, that works out to 11 million workers, or 6.7% of the labor force, being subsidized. As with the Federal Pandemic Unemployment payment, there’s no dollar cap on how much Uncle Sam will spend on this benefit, so if it proves popular among employers, even more workers could be subsidized.
Paid sick and family leave
Cost: $105 billion (JCT estimate)
Workers subsidized: 6.9 million, or 4.2% of the labor force
The Families First Act, which President Trump signed into law on March 18th, requires employers with fewer than 500 workers to provide two weeks of paid sick leave to those who have COVID-19, have symptoms of it, or are quarantined because of possible exposure to the coronavirus, at 100% of pay up to a maximum rate of $510 per day, or $5,110 per employee. Those caring for someone who has COVID-19 or who is quarantined because of exposure, are to get two weeks of sick pay at a two-thirds of pay rate, up to a maximum of $200 a day or $2,000.
The law requires those same employers to grant 12 weeks of family leave to anyone who has to stay home to care for a child whose school or day care has been closed because of the pandemic, with the first two weeks unpaid and the next 10 paid at a two-thirds rate maxing out at $200 a day, or a total of $10,000.
Not only are employers fully reimbursed (through refundable tax credits) for these sick leave and family payments, but according to guidance issued by the IRS they won’t owe normal Social Security or Medicare payroll taxes for those weeks and will also be reimbursed for the group health care premiums for employees who are receiving these benefits.
The JCT estimates this provision will cost $105 billion. Sullivan figures that if each employee gets the maximum $15,110 subsidy, the $105 billion will pay for subsidies for 6.9 million workers, or 4.2% of the labor force. Of course. not every worker has children or earns as much as $510 per week, so the amount per worker could be less and the number of workers subsidized could be higher. And as with the Employee Retention Tax Credit, there’s not a dollar limit in the law on this benefit—just a JCT estimate.
Paycheck Protection Program loans
Loans authorized: $349 billion
Workers subsidized: 33.5 million, 20.4% of the workforce
Of the big four programs, this is the most complicated, which obscures the extent to which it is aimed at benefiting workers, and not just business owners. Both businesses and not-for-profits with up to 500 employees are eligible for Paycheck Protection loans, which will be issued by banks and guaranteed by the SBA. Moreover, self-employed independent contractors, who report their net business earnings on Schedule C of their 1040s, are also eligible for these loans, although the SBA has yet to issue guidance on how banks should treat their applications.
You can read more about the confusing (and probably still evolving) details of these loans here, here, and here, but the main point is this: loans are for up to 2 ½ months of an employers’ average 2019 payroll (with a maximum loan cap of $10 million) and will ultimately be forgiven (in whole or in part) if the borrower keeps workers employed at full pay for eight weeks. (Borrowers who have already laid off workers during the crisis can qualify by restoring their pre-crisis employment and salary levels.) Even better, this forgiven debt, unlike most forgiven debt, isn’t considered taxable income to the borrower.
The government began accepting applications last Friday and in the first 24 hours banks processed 28,00 loans, President Donald Trump boasted at his press conference on Saturday. If the program runs out of “I will immediately ask congress for more,’’ he added.
How many workers might be subsidized? Sullivan’s back-of-the-envelope method is to assume an average worker salary of $50,000. At 2.5 months of pay for each, that’s a $10,417 subsidy per worker.
With a $349 billion pot, that works out to 33.5 million workers subsidized, or 20.4% of the workforce. If the pot grows, as Trump has already suggested it might, even more workers could end up being subsidized.