The May jobs report dominated conversation in D.C. this past week, likely pushing action on a Phase Four COVID-19 package further back to late July. This weekly newsletter outlines the latest developments in Washington, including major tax, small business and financial services developments in the negotiations on Phase Four legislation and regulatory guidance from various federal agencies.
What to Expect in Next Economic Recovery Package
A Controversial May Jobs Report
The Department of Labor surprised the most prophetic of economists on Friday when it reported the unemployment rate had fallen to 13.3% from 14.7%, rather than increasing to nearly 20% as many had expected. However, unemployment rates remain at highs not seen since the Great Depression, with 21 million Americans still out of work. The Congressional Budget Office (CBO) estimates the unemployment rate will not approach the pre-pandemic level of 3.5% even by the end of next year. In fact, the CBO predicts that unemployment levels will continue above 10% through 2021. For comparison, peak unemployment during the Great Recession in 2009 was 9.9%.
After releasing the report, the Bureau of Labor Statistics (BLS) issued a statement that it misclassified data in March, April and May. Without the error the unemployment rate would be higher at 16.3% for May, down from 19.7% for April. Errors in BLS’ analysis included misclassifying furloughed workers as employed, though not all furloughed workers are expected to be recalled to work once businesses recover. The statistics also do not include workers who may have dropped out of the workforce. Additionally, BLS treated all workers being paid through the Paycheck Protection Program (PPP) as being employed, even if they were not currently at their jobs or working.
Despite the May jobs report, Congress and the Trump administration are still moving ahead with a Phase Four COVID-19 stimulus package, though calls for immediate action have lessened, especially amongst Republicans who have encouraged a “wait and see” approach. Below is the current state of play on the next relief package from each camp, in light of the most recent news.
The White House
President Trump said he will urge Congress to enact another round of economic stimulus legislation. During a White House press conference celebrating the jobs report, President Trump doubled down on the policies for which he has advocated since the onset of the pandemic, again calling on Congress to pass a payroll tax cut and lending support for the restaurant and entertainment industries.
To read more about the specific policies under consideration by the White House, click here.
In addition to the policies highlighted by the president, National Economic Council Director Larry Kudlow added that a return-to-work bonus—a policy supported by many congressional Republicans—remains in the mix. Kudlow said the administration is “looking at a number of options on that score.”
Kudlow also said no decision has been made on whether to extend the additional $600 unemployment insurance (UI) payments, which expire on July 31.
Over the weekend, Kudlow adjusted his own expectations on the timeline for passage of the next relief package. The original plan was to have Congress approve legislation prior to the July 4 congressional work period. Kudlow now says that negotiations will likely only begin in earnest after July 4. This prediction was echoed by White House economic advisor Kevin Hassett, who said last week the next package will depend heavily on the next jobs report, which will be released on July 3. A package is now likely in late July, prior to the expiration of expanded UI benefits.
Congressional Republicans
Republican lawmakers continue to oppose the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) Act (H.R.6800), saying that the next package should include legislation more tailored to specific issues. Senate Majority Leader Mitch McConnell (R-KY) underscored this point in a statement last week, stating, “Future efforts must be laser-focused on helping schools reopen safely in the fall, helping American workers continue to get back on the job, and helping employers reopen and grow.”
McConnell has no plans to act on legislation prior to the two-week July 4 Senate work period. This timeline was supported by Senate Finance Committee Chair Chuck Grassley (R-IA), who said he is in no “rush to pass expensive legislation” and would instead prefer to have a deeper “understanding of the economic condition” before acting.
House Ways and Means Committee Ranking Member Kevin Brady (R-TX) agrees. He said last week Congress should think again about enacting expensive legislation, and instead provide a return-to-work bonus that would allow the economy to more robustly rebound.
Congressional Democrats
In response to the jobs report, House Ways and Means Committee Chair Richard Neal (D-MA) said last week that, although the report was encouraging, Congress still needed to act. Neal added that “it would be extremely irresponsible for Congress to take a step back at the first sign of improvement.” Following the jobs report, the committee majority issued a press release highlighting the benefits of extending enhanced unemployment compensation, given predictions of high unemployment rates that are expected to continue through 2021.
Jason Furman, former National Economic Council director during the Obama administration and influential thought leader among Democrats, agreed with Neal that unemployment insurance must be extended. At the same time, Furman said state and local funding, another top focus for many congressional Democrats, should also be a top priority.
In addition to these priorities, Neal also wants to pass another round of economic impact payments for individuals. Beyond a Phase Four deal, Neal has expressed an interest in green energy provisions, such as an extension of renewable energy tax credits. According to a committee spokesperson, Neal is specifically interested in “moving legislation related to green energy and efficiency in tandem with the Congress’ efforts on infrastructure.”
Neal plans to meet this week with Treasury Secretary Steven Mnuchin. During a June 3 webinar, Neal said he expects to discuss expanding the new markets tax credit for private investment in low-income communities, low-income housing tax credits for building affordable housing, and historic rehabilitation tax credits.
Activity This Week
Congressional committees continue their slow return to a more normal legislative calendar. Below is a brief discussion on select hearings for the tax and financial services committees.
Senate Banking Committee
On Tuesday, the committee held a hearing entitled “Oversight of Housing Regulators,” during which it heard testimony from the following witnesses:
- Mark Calabria, director, Federal Housing Finance Agency; and
- Ben Carson, secretary, U.S. Department of Housing and Urban Development.
Senate Finance Committee
On Tuesday, the committee held a hearing entitled “Unemployment Insurance During COVID-19: The CARES Act and the Role of Unemployment Insurance During the Pandemic,” during which it heard testimony from the following witnesses:
- Eugene Scalia, secretary, Department of Labor;
- Michele Evermore, senior policy analyst, National Employment Law Project;
- Les Neilly, president, Neilly Canvas Goods Company;
- José Javier Rodríguez, state senator, Florida Senate;
- Scott Sanders, executive director, National Association of State Workforce Agencies; and
- Beth Townsend, director, Iowa Workforce Development.
House Financial Services Committee
On Wednesday, the Subcommittee on Housing, Community Development and Insurance held a hearing entitled “The Rent Is Still Due: America's Renters, COVID-19 and an Unprecedented Eviction Crisis,” during which it heard testimony from the following witnesses:
- Cashauna Hill, executive director, Louisiana Fair Housing Action Center;
- Mike Kingsella, executive director, Up for Growth; and
- Ann Oliva, visiting senior fellow, Center on Budget and Policy Priorities.
On Thursday, the Task Force on Financial Technology will hold a hearing entitled “Inclusive Banking During a Pandemic: Using FedAccounts and Digital Tools to Improve Delivery of Stimulus Payments.” No witnesses have been named.
House Ways and Means Committee
The committee has no activity scheduled.
Phase Four Proposals
Although lawmakers have not yet begun negotiating the next COVID-19 response package, lawmakers have continued to flesh out some policies they would like to see included in the next package. Below is an overview of some of the top concerns.
The main legislative priorities for congressional Democrats and Republicans are securing more funding for state and local governments and ensuring businesses and schools are safeguarded from legal liability after reopening, respectively. In addition to these concerns, lawmakers are considering the following tax and economic incentives:
- Employee Retention Tax Credit. An effort to expand the employee retention tax credit (ERTC) has been gaining bipartisan momentum in Congress, and it appears as though such a provision will be included in the next COVID-19 response measure. The ERTC, enacted under the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L.116-136), gives businesses a tax credit of up to $5,000 per employee to offset wage and health care costs. Some lawmakers now want to expand and extend the credit so that businesses can receive up to 80% of $15,000 of wages per employee each quarter and allow businesses with 1,500 or fewer employees, as opposed to 100, to use the credit for wages paid when employees are working.
- Back-to-Work Bonus. Lawmakers, primarily congressional Republicans, have been advocating for incentives that would encourage workers receiving unemployment benefits to return to their jobs despite receiving a higher income through the government benefits. Led by Sen. Rob Portman (R-OH), one proposal would give workers $450 a week if they return to their jobs. Another proposal from House Ways and Means top Republican Kevin Brady (R-TX) would give workers a one-time $1,200 payment to return to work. Many congressional Democrats believe the proposal must be paired with premium pay for essential workers that continued to work through the pandemic. Democrats also believe that the back to work bonus does not eliminate the need for expanded unemployment benefits, given the number of individuals that will remain unemployed past the July 31 expiration of the additional $600 UI payments.
- Fixed Expense Tax Credit. The HEROES Act contains a new payroll tax credit for fixed expenses allowing employers to offset the cost of mortgage and rent, in addition to utility payments. Businesses enduring more than a 50% reduction in gross receipts would receive the full credit, and those enduring between 10% and 50% would only receive a partial amount. Senate Republicans are considering proposals that address fixed expenses, though they have concerns about further burdening the payroll tax system.
- Personal Protective Equipment and Cleaning Costs Credit. A bipartisan group of lawmakers introduced the Clean Start: Back to Work Tax Credit Act. The legislation, introduced by Reps. Stephanie Murphy (D-FL) and Darin LaHood (R-IL), would create a credit for businesses to apply towards the expense of industry-recognized training and certification, contracting a cleaning company and/or the purchase of necessary cleaning products, tools, machinery, personal protective equipment, and other sanitary-related equipment needed to help ensure a safe and sanitary environment.
Each business entity including, but not limited to, franchisors or franchisees, and commercial property owners and management companies, will be eligible for a 50% tax credit of up to $25,000, per location, up to a maximum of $250,000 per business entity. The credit would cover expenses through March 31, 2021 to help offset increased expenses associated with a potential “second wave” during the fall or winter.
The Senate is not as far along as the House on crafting a proposal related to increased post-COVID-19 operational expenses, though it has not ruled out doing so. There is a growing demand from businesses as they reopen and contend with cleaning and PPE-related expenses.
- Net Operating Loss Clawback. In the HEROES Act, congressional Democrats included a provision that would allow businesses to carryback net operating losses during tax years 2019 and 2020 for only three years, as opposed to the five years as enacted under the CARES Act.
The Week in Rewind
Much of the focus last week was on the legislation to amend the PPP, which was signed into law on Friday. Below is an update on the Internal Revenue Service’s (IRS) efforts to bring its employees back to work.
IRS Officials Return to the Office
The IRS called on 11,000 employees in three key states—Kentucky, Utah and Texas—to return to the office on June 1. Employees in these three states process a significant amount of the agency’s mail and paper returns, so recalling workers in these offices will allow them to begin reducing the backlog of work that cannot be done remotely. As of May 16, the IRS had about 4.7 million tax returns to process and 10 million pieces of unopened mail.
IRS Commissioner Charles Rettig has said the agency has cleaned offices, provided face coverings and hand sanitizer and reorganized work spaces so as to allow for social distancing. Despite the assurances from Rettig, House Ways and Means Committee Chair Richard Neal (D-MA) said the committee will be closely monitoring IRS employees' transition back to work with an eye towards whether or not additional precautions should be taken.
The National Treasury Employees Union (NTEU), which represents thousands of IRS employees, applauded the agency for its efforts to protect workers as they returned to the office. Tony Reardon, who heads the NTEU, said “proper safety protocols were in place for the majority of employees who were ordered back: They were provided hand sanitizer, masks if they didn’t bring their own, and physical space in order to distance themselves from their coworkers.” At the same time, however, Reardon acknowledged the IRS would be unable to conduct widespread COVID-19 testing for workers reentering the offices.
According to Rettig, the IRS will continue to recall certain employees throughout June. In a message to agency personnel, he said the next phase will focus on processing centers, notice print facilities and call centers.
The IRS also plans to recall workers in the following states this month:
- June 15: Georgia, Tennessee, Missouri and Michigan
- June 29: Indiana, Ohio, California, Oregon and Puerto Rico
While the agency recalls workers necessary to address the backlog of paper work, Rettig also reiterated in his message that “For those who can perform their duties at home, our mandatory telework policy remains in effect for the foreseeable future to maximize social distancing.”
Implementation
After lawmakers rushed to enact legislation, agencies are now attempting to keep up by quickly releasing regulations and other guidance. Below is a look at select COVID-19-related implementation guidance and non-COVID-19 related guidance released during the previous week.
- Alcohol-Related Regulations. The Alcohol Tobacco and Trade Bureau adopted final temporary regulations on excise taxes levied on distilled spirits, wine and beer. The regulations were adopted as part of the PATH Act in 2017 that changed the code to remove bond requirements and amend the tax return due dates.
- Interest on Loans. The IRS published rules that state banks may charge interest on loans at the maximum rate under any state-chartered or licensed lending institution. Further, the rules state that when a bank transfers a loan, the interest permissible prior to the transfer is permissible after the transfer.
- July 15 Deadline. The IRS sent out a reminder that for taxpayers living abroad, the tax deadline is now July 15, a change from June 15.
- $159 million. Thus far, the IRS has paid out $159 million in economic impact payments. Further, the agency reminds low-income Americans who do not usually file tax returns to register for payment prior to October 15.
- Physical Presence Requirement Relief. The IRS released Notice 2020-42, which provides relief from physical presence for both witness by a notary public and witness by a plan representative.
- Community Reinvestment Act. The IRS published regulations that clarify and expand the qualified activities for the Community Reinvestment Act credit. The regulations aim to create a more consistent and objective method for evaluating performance of activities and data collection.
- Third Quarter Interest Rate. The IRS released Revenue Ruling 2020-13, which defines 2020’s third quarter interest rates under section 6621. The third quarter begins on July 1, 2020 with 3% for overpayments, 2% for corporations for overpayments, 3% for underpayments, and 5% for large corporate underpayments.
- Opportunity Zones. The IRS released Notice 2020-114 to provide guidance on questions related to opportunity zones during the COVID-19 pandemic. Frequently asked questions on opportunity zones have also been updated at the IRS website.
- Tax Capital Reporting. The IRS published Notice 2020-43, which requests public comments on a proposed requirement for partnership entities to satisfy the Tax Capital Reporting Requirement.
- Highly Paid Nonprofit Employees. The IRS released regulations on highly paid nonprofit employees, specifically aimed at college coaches. The regulations focus on section 4960 of the code, which imposes a tax on remuneration in excess of $1,000,000 and excess parachute payment by a tax-exempt organization to a covered employee. The regulations will be published in the Federal Register on June 11, 2020.
For additional information or assistance with a particular issue, please contact a member of the Brownstein National Tax Policy Group.
This document is intended to provide you with general information regarding federal updates related to the coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.