Covid-19 has taught employers the surprising lesson that for many more positions than expected, remote work is preferred by workers and seems to have little negative impact on workplace productivity. Within the federal government, a September poll showed that 53 percent of remote federal employees agreed they could perform their duties with minimal or no disruption and a November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before.
A more distributed federal government would likely raise real worker wages, improve recruiting, and lower the government’s overall operating costs. But the federal government has several additional reasons to prefer a more distributed workforce.
By allowing jobs to be performed by people who do not live in DC, a more distributed workforce can combat the trend of ever widening geographic inequality. Compared to policies like the relocation of federal agencies, it is more incremental, less political, spreads jobs to more areas, and will likely result in far less employee attrition.
Remote work brings the federal government closer to the governed, advancing the goal of recruiting a workforce drawn from all segments of society.
Property prices in DC have increasingly pulled away from national levels, but the federal presence in DC is large enough that a more distributed workforce could lead to meaningful downward pressure on residential and office rental prices in the city, benefiting residential and business renters who do not relocate.
“The Biden Administration has a unique opportunity to help distribute the federal bureaucracy across the U.S. and thereby empower workers, improve hiring, and promote regional economic development. This natural experiment over the past year has shown that for more workers than previously anticipated, working remotely can be just as effective and has unexpected benefits. Moving to a model where even 20% of the federal workforce is distributed would be a significant change. The U.S. government has aspired to achieve a workforce from all segments of society and by embracing remote work, where appropriate, we can bring that closer to reality.”
The Biden administration has a unique and largely undiscussed opportunity. Prior to Covid-19, 5 percent of the U.S. workforce primarily worked from home. During the pandemic, this share rose as high as 50 percent; as of November, 36 percent of federal workers were still working remotely. With vaccines already beginning to roll out, this temporary arrangement is likely to end during the Biden administration. The government will face a choice between making what has been a temporary experiment permanent or returning to the status quo ante and bringing everyone back to the office. We believe the latter would be a mistake.
Covid-19 has taught employers the surprising lesson that for many more positions than expected, remote work is preferred by workers and seems to have little negative impact on workplace productivity. Within the federal government, a September poll showed that 53 percent of remote federal employees agreed they could perform their duties with minimal or no disruption and a November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before. Full-time remote work also decouples where workers live and work, allowing firms to employ workers from anywhere. Hiring from outside of expensive urban centers tends to lower costs and expands the pool of applicants from which an organization can hire. For these reasons, surveys indicate private companies anticipate a dramatic expansion of permanent remote work relative to before Covid-19.
The federal government should follow suit and give current workers the choice to continue to work remotely full-time if they were able to function well during the crisis. Going forward, the government should start with the assumption that new positions will offer workers the same choice, opening up federal positions to people living anywhere in the country. While not every position can be performed remotely, a large fraction of the 36 percent currently being done remotely can.
A more distributed federal government would likely raise real worker wages, improve recruiting, and lower the government’s overall operating costs. But the federal government has several additional reasons to prefer a more distributed workforce.
By allowing jobs to be performed by people who do not live in DC, a more distributed workforce can combat the trend of ever widening geographic inequality. Compared to policies like the relocation of federal agencies, it is more incremental, less political, spreads jobs to more areas, and will likely result in far less employee attrition.
Remote work brings the federal government closer to the governed, advancing the goal of recruiting a workforce drawn from all segments of society.
Property prices in DC have increasingly pulled away from national levels, but the federal presence in DC is large enough that a more distributed workforce could lead to meaningful downward pressure on residential and office rental prices in the city, benefiting residential and business renters who do not relocate.
With the end of the pandemic finally in sight, now is the time to move to a more distributed workforce. It will never be easier than it is now to reorganize the federal bureaucracy into a more decentralized model. Managed well, all these goals can be advanced without sacrificing the quality of federal government service.
A Historic Opportunity
This is a unique opportunity to reorganize the large federal bureaucracy. Moving from a co-located to a distributed labor force presents significant challenges for any organization: new technology must be acquired and allocated, processes rethought and rewritten, and employees trained to use new technology and follow new procedures. Even then, there will be uncertainty: what problems are unforeseen and will need to be solved? Will they be solvable? And looming above it all is a bias towards the status quo (don’t fix what isn’t broken). For all these reasons, firms have historically been hesitant to pivot to remote work, even when it was technically feasible.
But due to the Covid-19 global pandemic, many of these sources of friction have been overcome. Organizations that can operate remotely are likely to have more than a year’s experience doing so by the time they can safely bring workers back into the office. Technology has been acquired and allocated, processes have been changed, and workers have learned to use their new tools and procedures. Uncertainty is resolving and with practice organizations are getting better — not worse — at working remotely. Perhaps most importantly, remote work is now the status quo for much of the federal government.
Reinforcing this rationale is the unusually large employee turnover that is expected to occur during the Biden administration due to the retirement of the baby boomers. In 2018, just 14 percent of federal employees were eligible to retire, but this number is expected to rise to 30 percent by 2023. NASA, HUD, the Treasury, and the EPA are all forecast to have more than 40 percent of employees eligible for retirement by 2023.
This presents an unusual opportunity to reorient the federal workforce towards workers who prefer remote work. One potential challenge to a more distributed federal workforce is that federal workers may believe career advancement is more difficult for remote workers if senior managers have a preference for co-location. Indeed, in pre-Covid surveys, older workers do tend to be less interested in remote work than young ones. When this is the case, remote work may become unattractive to the most ambitious (young) workers, which can undermine the successful transition of an organization to remote work. Fortunately, the retirement wave presents an opportunity to give the federal government a large infusion of workers who are comfortable with managing and working remotely, which should help mitigate these concerns.
The Benefits of Decentralization
Allowing more remote and distributed federal work has several advantages.
Morale and Real Wages
Workers like remote work. As described in detail in another report, remote work is valued by workers for a variety of reasons. The freedom to work from anywhere allows workers to move to be closer to friends and family or to where they can live in their preferred lifestyle. Remote work also eliminates commuting time, tends to reduce meetings and distractions, and frequently increases schedule flexibility. In a pre-Covid study workers were willing to accept wages that were 8 percent lower in exchange for the opportunity to work remotely; another showed that remote work significantly reduced employee turnover.
In the era of Covid-19, greater experience with remote work has done little to dampen enthusiasm for it. Overall, 76.1 percent of workers who can work from home say they want to do so at least a day a week when the pandemic is over, and 27.3 percent want to be fully remote. Among tech workers, the desire to be remote is even higher: a November survey found that 95 percent with the option to work remotely permanently would choose to work remotely on a permanent basis, and that 6 in 10 would take a pay cut to work remotely. Giving federal workers the option to work fully remotely is a cost-effective way to raise employee morale.
Remote work’s most salient benefit for federal workers may be its potential impact on the real wage of federal workers (i.e., the wage relative to their cost of living). A plurality of federal workers live in and around Washington, D.C., where the cost of living has diverged from the national average at an increasing rate. BEA data shows the overall cost of living in the DC metro area was 17.4 percent higher than the average for the U.S. in 2019. This difference is largely driven by significantly higher housing costs, which Census data show has increasingly pulled ahead of the rest of the country over the last two decades.
By allowing federal workers to relocate from the Washington metro region to areas with a lower cost of living, federal workers in Washington, D.C. can benefit from an increase in their real wage (that is, their wage relative to cost of living). Given the BEA’s estimate, D.C.-based federal employees can enjoy the equivalent of a 17.4 percent reduction in living expenses by moving to a region with a nationally representative cost of living.
This benefit, of course, depends on how much pay is adjusted for remote workers. In principle, the federal government could allow workers to retain their original pay, regardless of their location, or it can adjust pay to reflect local cost of living (as is current federal policy for full-time telework). The maximum benefit to federal workers would allow workers to retain their original salary, while the maximum savings to government would adjust pay to reflect cost of living.
It is important to note that D.C.-based federal workers could very well see their real wages rise if they relocate, even under the current system of locality-based pay. Federal workers are typically paid according to the general schedule, which includes locality pay adjustments based on the prevailing local wages for non-federal employees. For the year 2021, the location pay adjustment for the Washington, D.C. metro area was 30.5 percent, as compared to the lowest locality adjustment of 16.0 percent for “rest of the United States.” Thus, in general, a worker relocating to a place with nationally representative prices would see their cost of living decline by 17.4 percent according to BEA data, but would see their wages reduced at most by 14.5 percent.
This understates the potential gains from relocation, since the places with the lowest locality pay have lower than average costs of living. To take one example, the location pay adjustment for Des Moines, Iowa (where one of the authors of this report resides) is also 16.0 percent. A federal worker relocating from Washington, D.C. to Des Moines would see their salary reduced by 14.5 percent, but would see their cost of living fall by nearly twice as much (27.2 percent).
An alternative approach would be to default to the current system of locality wages in the new location while retaining the option for agencies to hire using the D.C adjusted pay scale on a case-by-case basis. Doing so would essentially allow agencies a 17.4 percent average increase in the real wage they could afford to pay under the General Schedule pay scale. This would enable the federal government to attract more qualified candidates than would ordinarily be the case.
Not everyone prefers remote work, but there is no reason the federal government cannot provide office space in D.C. for workers who prefer it. One of the main advantages of remote work is greater choice and autonomy for workers, including the choice to work in a traditional office environment. Others will prefer a hybrid arrangement, enjoying a less frequent commute into the office (as was already the norm for much of the federal workforce prior to Covid-19). Moreover, even federal workers who do not work remotely will likely benefit from a more remote friendly policy. In San Francisco, an exodus of tech workers due to the option to work remotely led to a 27 percent drop in real rental prices over the year. Downward pressure on rental prices in the D.C. area would also serve to raise the real wages of federal employees who are unable to relocate to areas with a cheaper cost of living. It could also reduce congestion and commuting times for D.C. residents. This is important since, as we discuss later, the majority of federal positions will probably remain co-located for the foreseeable future.
Lower Costs
Whether the government ultimately chooses to adjust pay based on locality, remote work will allow the work of the federal bureaucracy to be done at lower cost. Renting office space in Washington, DC is expensive. According to Moody’s Analytics, office space is 41.6 percent above average for the U.S., making the D.C. metro area the 7th most expensive in the country. The US Patent and Trademark Office, which already has a work-from-anywhere program for patent examiners, estimated remote work saved it $52.1mn on reduced office space requirements in 2019 alone. And just as workers unable to relocate from D.C. may benefit from lower property prices if a significant portion of D.C. workers relocate, D.C. based agencies may benefit from lower prices for office space due to reduced local demand.
Office space isn’t the only source of savings. Increased worker morale due to remote work has been found to reduce employee turnover in some settings. The USPTO estimated that increased retention accounted for $23mn in savings over 2019.
As noted above, a more distributed federal government could also choose to save money by adjusting pay by locality. To estimate the potential savings if some portion of D.C.-based federal workers relocated, we use data on 1.5 million federal government employees from U.S. Census data from 1980 through 2019 to estimate the DC pay premium with regression analysis. The results show that (conditional on age and time varying education premiums) the relative cost of employing workers in DC has gone from around 6 – 7 percent in the 1980s and 1990s, to 10 percent in the early 2000s, to around 22 percent in the most recent years, relative to federal workers in the rest of the country.
A Larger Labor Market
Remote capabilities can also improve government quality by facilitating access to the best job candidates in the nation, rather than the best in the local job market. Thus, even if a given worker is slightly less productive when working remotely than in an office (and they probably are not, as discussed later), this disadvantage can be more than outweighed by the benefits of access to a larger labor market. As an illustration, suppose it’s a bit harder to do some job remotely; any particular worker is 5 percent less productive performing their job remotely than they would be in an office. Since the remote job is open to anyone in the country, if that lets the government hire a worker who is 6 percent more productive than could be had locally, this will more than offset the decreased productivity of doing the job remotely.
These issues are particularly salient to the federal government.
First, relative to the nation as a whole, the federal government is unusually suited to remote work. As indicated in the figure below, the share of federal workers who are working remotely has persistently been 15 percentage points higher than the national average of all workers.
Importantly, the estimates above are likely to be conservatively low, since BLS estimates only refer to working remotely due to the pandemic and exclude those who were already remote. In addition, otherestimates find significantly higher rates of overall remote working than the BLS, suggesting it is on the conservative end of the spectrum.
To get a better sense of the kinds of federal positions that can be done remotely, we can turn to the current population survey, which has asked employees if they are working remotely due to the pandemic since May. Over September, October, and November 2020, federal government position types with more than 30 percent remote workers are displayed below.
Note: From 2020 CPS, limited to cells with a sample size of 100 responses or more.
Note that many of these position types require high levels of skills, education, or experience, which can make hiring challenging. This is important given the anticipated spike in retirement eligibility during the Biden administration as the baby boomers retire. Making the federal bureaucracy remote will facilitate filling these vacancies quickly with the best candidates in the country. Moreover, given the move to remote work by much of the private sector (one survey found 22 percent of US workdays will be remote even after the pandemic subsides), the US government will be at a significant hiring disadvantage if it insists workers relocate to accept positions and other organizations do not.
Finally, it’s worth considering new types of talent that wouldn’t previously have considered working for the federal government that would be open to public service under a permanent remote work arrangement. In particular, the federal government has struggled to increase its technical capacity with many workers earning higher salaries at firms like Google, Facebook, and Microsoft than are possible working under the General Schedule pay scale. To combat this, the federal government has attempted to increase the frequency of technical “tours of duty” that tech workers can undertake. However, take-up has remained low, with one reason being the difficulty of relocating to D.C. for a temporary fellowship. But if these workers could work remotely, opportunities within federal agencies will become more attractive.
Geographically Dispersed Workforce
A geographically dispersed workforce has several other advantages for the federal government. The first principal of the US Merit System is (emphasis added):
Recruitment should be from qualified individuals from appropriate sources in an endeavor to achieve a work force from all segments of society, and selection and advancement should be determined solely on the basis of relative ability, knowledge and skills, after fair and open competition which assures that all receive equal opportunity.
By removing relocation barriers to employment, more opportunities to work from anywhere would contribute to a more geographically representative workforce. These barriers can be significant, even when the monetary cost of relocation to D.C. is covered by the employers. A 2020 study found the typical U.S. adult would need to be paid an additional $24,000 (43 percent of the typical salary) to relocate to a job that took them away from friends and family.
Otherstudies have highlighted the importance of informal ties and social networks for finding jobs. Clustering federal jobs in a small number of locations means the social networks of government workers are geographically constrained, contributing to an information gap about job openings, the desirability of different positions, the kinds of experiences that would be valued, and so on, outside major federal clusters. Over time, a dispersed workforce would help erode these information gaps.
More speculatively, a geographically dispersed workforce could help rebuild trust in government, which has been nearing historic lows. Working from home during the Covid-19 pandemic has been associated with a 31 percent increase in white collar crime tips to the Securities and Exchange Commission, which may have been caused by a more arms-length and professional relationship between coworkers. A dispersed workforce may also be harder to improperly influence for similar reasons (it is harder to convince someone to bend the rules over email than dinner and drinks). Lastly, it is worth noting that historically, Americans have trusted their local government more than their state government, and their state government more than the federal government. No doubt this is partially due to the social and physical distance between the local, state and federal governments and the governed.
Economic Development
Finally, remote work could be a new tool for economic development in regions that are being increasingly left behind by the rising importance of agglomeration effects. The increased importance of agglomeration effects over the last several decades have led to economic prosperity for cities and economic decline in rural areas. This is one of the root causes of the serious political and social challenges we face today. A variety of policies have been suggested to revitalize or at least slow the decline of lagging US regions, including proposalstorelocateseveral federal agencies outside of Washington, D.C. The purpose of relocation is to move jobs to regions with shrinking economies (and tax bases). These are not just the jobs of the workers in federal agencies, but also workers in related fields who work with the agencies (lawyers, lobbyists, etc.), and workers who provide services to high-paid government workers (barbers, restaurant workers, IT personnel, etc.).
Dispersing the federal bureaucracy is a much easier way to gain the benefits of economic development that is relocation’s goal.
It would distribute the gains of relocation more widely, including to rural areas, rather than concentrating them in a handful of expensive, urban cities.
It would allow more jobs to be moved out of Washington. Agencies that do not need to be physically present in Washington could go remote. But, even more workers from agencies that cannot relocate could also go remote, as long as their specific position does not require physical proximity.
It would be far less politically contentious than deciding centrally where to relocate entire agencies. Instead, workers would have the choice on if and where to relocate.
It would avoid the attrition and disruption that typically accompanies relocation. For example, the relocation of the USDA Economic Research Service to Kansas City led to the loss of at least half the staff (and up to 93 percent) as workers declined to move.
Moves could be implemented incrementally, one open position at a time.
It would be cheaper and logistically easier than organizing a move. The costs and logistics are borne by staff, not the Agency.
Embracing remote work at the federal level will help entrench remote work as a new mode of organizing business in general. As more firms adopt a remote-first orientation, geographic inequality will be further reduced.
Data from the BLS suggests approximately 40 percent of federal workers were working at home in September, and a survey of remote workers from the same month found that slightly over half agreed that they could perform their work remotely with minimal or no disruption. Taking these estimates seriously suggests 20 percent of federal jobs can already be performed remotely. Given that the federal government has consistently had more remote workers than the national average, this estimate is likely conservative: a survey from Upwork of 1,000 hiring managers found they were planning an average of 22.9 percent workers fully remote in the long-run.
Looking only at the 400,000 federal workers based in D.C., Maryland, and Virginia, 20 percent equals 80,000 workers. For comparison, a 2019 Brookings report about the potential economic development benefits of relocating federal agencies listed 19 greater D.C.-based agencies and sub-agencies as potentially able to be relocated. They collectively employ a similar number in the same three states: 89,000 workers. But remote work would also be available to the federal government’s other 1.4mn US-based federal workers, many of whom are also based in expensive urban centers.
Addressing Some Potential Fears of Remote and Distributed Work
Like any policy change, dispersing the federal workforce may entail some costs as well as benefits. In this section, we address two major concerns and conclude they are not significant enough to outweigh the benefits discussed above.
Does Remote Work Really Work?
A primary reason that remote work was not more widespread prior to Covid-19 was a perception that it was not as productive as a traditional office. Even if this was true, it would not necessarily mean remote work is undesirable, since any disadvantages associated with productivity might be more than offset by cost savings and access to a larger labor market. Fortunately, for a wide variety of job types, no such trade-off is necessary: for many positions, remote work appears to be just as productive as traditional office-based work.
A review of the economic literature about the efficacy of remote work prior to Covid-19 found little evidence that it results in any reduction in worker productivity for a wide variety of positions. Indeed, plenty of evidence —including a particularly relevant study from the US Patent and Trademark Office’s work-from-anywhere program —found remote workers were more productive than those in a traditional office environment. The fact that modern remote work is productive is the likely explanation for the steady rise of full-time working from home before Covid-19 from under 3 percent to 5 percent over 1980 to 2018 (with a marked acceleration after 2010). Even 5 percent understates the true extent of remote work prior to Covid-19, since it excludes work away from both the home and the office, such as in coworking spaces. Including these raises the share of full-time remote workers prior to Covid-19 to 10 percent. Even without Covid-19, businesses were (slowly) learning that remote work worked.
Extensive experience with remote work during Covid-19 has accelerated that process. It is now clear that in a wide variety of contexts, there really is no question that remote work can be at least as productive as traditional work. A number of high-profile companies have made the switch to permanent remote work after several months of experience with it (e.g., Microsoft, Facebook, Twitter). This is not limited to a few anecdotes either; in a survey of 1,000 hiring managers by Upwork, 60 percent planned to increase their use of remote work in the future, as a result of their experience with Covid-19.
Within the federal government, experience has also been broadly positive as workers gained experience. Whereas an April poll of federal workers working remotely found just 15 percent reporting minimal or no disruption due to the shift to remote work, a follow-up poll in September saw this number rise to 53 percent. A November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before.
Systematic evidence on the longer-term viability of remote work is unfortunately limited at the moment. While there are examples of organizations that have successfully organized in a distributed manner for many years (the USPTO has had a work-from-anywhere program since 2012, WordPress since 2005), any evidence about the long-term efficacy of remote work necessarily predates the recent transition to remote work due to Covid-19. It may be that longer term challenges to successful remote work will yet emerge. At the same time, it is likely that new organizational and technological solutions will emerge (indeed, the number of patent applications related to remote work technology has increased dramatically since February 2020), so that remote work is just as likely to function better in the long run than in the short run. The experience of remote work is also likely to improve once widespread vaccination allows children to return to full time childcare and social gatherings outside of work are viable.
Nonetheless, given long run uncertainty one possibility would be to implement a multi-year trial for remote work. To realize most of the benefits of remote work, such a trial needs to be sufficiently long, because if workers feel they will be required to return to a D.C. office in the near term, they will be unwilling to relocate. As an example, the U.S. Patent and Trademark Office’s work-from-anywhere program began as a five-year pilot program in 2017.
Benefits of Agglomeration
Another critique of remote work focuses not on the level of individual workers and businesses, but on the broader ecosystems in which they operate. Physically clustering a large number of workers in a particular industry has traditionally led to at least two major benefits: more efficient matching of workers to positions, and learning. One concern may be that these benefits will be lost if an organization goes remote, even though at the level of individual workers productivity is unaffected. Fortunately, the internet and cheaper travel has significantly eroded both of these advantages of physical proximity.
First, clustering workers together can make it easier to match the right worker with the right job. Physical proximity makes it easier to share information and form informal social networks (which can be just as important for helping people find jobs that are good fits). While these effects no doubt continue to exist, their relevance may be fading with the advent of online job markets, the use of algorithms for matching workers to jobs, and the growth of online social networks (which allow people to maintain geographically distributed networks of informal friends).
Second, economists frequently point to learning via “local knowledge spillovers” as another reason why organizations choose to cluster together. A variety of evidence shows innovative businesses learn from each other, borrowing and improving on the ideas and inventions of their neighbors. But here too, there is a lot of evidence that these effects are shrinking —possibly to the point of irrelevance in some sectors — as the internet and cheap travel makes it no longer necessary to physically reside near each other to learn from each other.
Moreover, it is unclear if these kinds of knowledge spillovers are relevant in the context of the federal government. Furthermore, while keeping the majority of federal employees clustered together in Washington, D.C. makes it easy for them to share knowledge with each other, it makes it harder to learn from the policies and processes of 50 state governments and thousands of local ones.
In sum, it is true that a more distributed federal workforce might find it benefits less from matching and learning than it would if it remained in D.C. But, at a minimum, the internet and cheaper travel have eroded the importance of these factors. And for learning, it may in fact be the case that a more distributed government would benefit more from learning than one clustered in DC. At any rate, the challenges associated with remote work are likely smaller than they have ever been, while the benefits remain as large as ever.
Conclusion
The Covid-19 pandemic has shown us that for many more positions than previously suspected, remote work has come of age. It is now possible for a significant share (perhaps 20 percent) of federal positions to be done effectively by a distributed workforce of full-time remote workers residing where they choose. Moving the federal workforce in this direction would have myriad advantages. It would make working for the federal government more attractive, both by giving workers the autonomy to work in the place and manner they prefer, and by potentially allowing for increased real wages for workers who choose to live in places with a lower cost of living. Combined with access to a larger national labor market, this would facilitate hiring and retaining quality employees. This is especially important given the expected retirement wave that will come in the years ahead. A more distributed federal workforce would also likely lead to lower costs for the government, in terms of office space and possibly wages. It may also benefit workers who continue to reside in Washington, D.C., through its beneficial impact on congestion and property prices. Lastly, a more distributed workforce would be a tool for economic development of lagging regions and allow the government to better achieve its goal of hiring a workforce that is representative of the population it governs.
For all these reasons, the government should give current workers the choice to continue to work remotely full-time if they were able to perform their job effectively during the crisis. Going forward, the government should start with the assumption that new positions will offer workers the same choice, opening up federal positions to people living anywhere in the country.
Acknowledgments: Matt Clancy wishes to thank Nicholas Rada for a conversation that sparked this piece.
ABOUT THE AUTHORS:
Matt Clancy is a progress studies fellow (Emergent Ventures) and assistant teaching professor at Iowa State University, and formerly a research economist on science policy for the USDA. He is the author of The Case for Remote Work. He currently lives in Des Moines, Iowa.
Adam Ozimek is the chief economist at Upwork, the world’s work marketplace, where he leads research on labor market trends. Upwork encourages remote work for the private sector but has no contracts with the federal government.
Colin Mortimer, the Director of the Center for New Liberalism, is joined by two special guests. First is Adam Hartke, the co-owner of a music venue in Wichita, Kansas, and the co-chair of the advocacy committee at the National Independent Venues Association. We talk about what it has been like to be a music venue owner during this pandemic, suffering the brunt of the economic fallout. Second, PPI’s Chief Economic Strategist Michael Mandel comes on to talk about how an obscure tax cut that expires in December might make the recovery for music venues, bars, restaurants, brewers, and others even more difficult than it was already expected to be.
A promising bipartisan compromise for another round of covid relief ran into two roadblocks yesterday that threaten to derail the effort. Senate Majority Leader Mitch McConnell has called for $160 billion in critical assistance for state and local governments to be dropped from the proposal. Meanwhile, populists such as Sen. Bernie Sanders on the left and Sen. Josh Hawley on the right have threatened to oppose the $908 billion compromise if it doesn’t contain another round of $1200 stimulus checks. Both positions undermine the most important components of the next relief bill and should be rejected by those looking to get a much-needed relief bill across the finish line.
After several months of gridlock, lawmakers offered two competing frameworks yesterday for giving the American people another round of much-needed economic relief from the covid pandemic. The first is a $908 billion compromise with support from 16 members of both parties in the U.S. House and Senate, while the second is a $553 billion partisan proposal from Senate Majority Mitch McConnell. McConnell has called his plan a “targeted relief package,” but this framing is deceptive: policymakers should not conflate penny-pinching with proper targeting. Amidst the worst economic crisis since the Great Depression, the appropriate response is guaranteed to be expensive even if it is well-targeted.
Our country is entering the most dangerous phase of the pandemic yet. As we head into the winter, the number of new covid cases in the United States is at the highest level it’s been since the pandemic began. Consumer spending growth is slowing right as we enter the holiday season, imposing a further drag on the economy. Although there had been strong job growth in the first few months of recovery, the number of people applying for unemployment benefits each week is starting to rise again after having never fallen below 700,000 since the pandemic began. Four months after most relief programs from the CARES Act expired, and less than one month before millions of people get kicked off of life-saving unemployment benefits, it’s urgent for the federal government to step in and provide fiscal support.
Republicans were somewhat justified in their concerns that the $3 trillion HEROES Act, which House Democrats introduced in May, was poorly-targeted. But the same cannot be said of yesterday’s compromise framework. For example, whereas the HEROES Act would have increased weekly unemployment benefits by $600/week, allowing many laid-off workers to receive more in benefits than they lost in wages, the compromise framework would only increase them by $300/week – a level many Republicans, including President Trump, have supported in the past. The HEROES Act would have given almost $1 trillion in aid to state and local governments, which is several times more than the budget shortfalls created by the pandemic. But the compromise framework offers $250 billion, a figure that is closer to their estimated needs for the current fiscal year and will help prevent the deep cuts to essential services. The coalition of leaders who put together this proposal, including Sens. Joe Manchin, Mark Warner, and Susan Collins, deserve praise for working to find a commonsense approach to break the fiscal impasse.
The explosive revelations that self-proclaimed billionaire Donald Trump paid just $750 in federal income taxes – a tiny fraction of what he paid the Chinese government through his secret bank account – in recent years have focused overdue public attention on U.S. tax laws that seem designed to protect wealthy Americans. With our national debt approaching the highest level in history, it is incumbent on federal policymakers to make sure that Trump and other wealthy Americans are paying their fair share of what it takes to run our country.
The working poor are burdened with some of the most complex tax returns in the country as they annually claim Earned Income Tax and Child Tax refundable credits. In the coming months, low- and middle-income Americans who received unemployment insurance payments during the Covid-19 pandemic may also face a “tax trap” that unexpectedly reduces their EITC benefits. At the same time, some have advocated that the IRS core mission be substantially expanded beyond their traditional role in society. But the emerging environment tells us something important about the complexity of our tax system, and the societal costs of pushing the IRS to do too much.
October 15th is the final tax deadline for the 2019 Tax Season, but it also the last normal Tax Day that Americans will have for a while. Someone who filed for an extension to their 2019 taxes will have their return due on that day. But next year’s tax return, for Tax Year 2020 when it comes due in 2021, will reflect the utter chaos of our collective 2020 experience.
Many Americans will be dealing with a much different tax situation than they expected at the beginning of 2020. If they worked remotely from a different state than their office, it’s entirely possible that many workers may end up paying taxes to two jurisdictions. If they lost their job, their earned income from work might be less, while their unemployment benefits might be higher. For too many unfortunate people the pain of a Covid diagnosis will be accompanied by much higher medical expenses. All of these factors, and more, will lead to a 2021 Tax Day more painful and burdensome, and carrying greater risk, than usual for millions.
Facing particularly big problems in their Tax Year 2020 returns are the low- and moderate-income Americans who might qualify for the earned income tax credit (EITC). The EITC, along with the Child Tax Credit (CTC) is one of the nation’s most important anti-poverty programs. The EITC refundable credit alone provides as much as $6660, depending on income and number of children. As of December 2019, the EITC paid out $63 billion to 25 million Americans. Roughly 85% of that total went to taxpayers with adjusted gross incomes (AGI) of less than $30,000.
The importance of the EITC and the CTC cannot be overstated. In 2018, the EITC alone lifted about 5.6 million people out of poverty, including about 3 million children. But the problem is that the EITC has an extremely complicated set of rules and requirements about who is eligible and how much money they can receive, based on a combination of earned income, adjusted gross income, number of children, familial relationships, who lived with whom for how long, the composition of the family unit, and more. Individuals who violate any of these rules can have the tax credit taken away and may be banned from getting the credit for years.
Beyond this tax complexity that is always faced by working poor and moderate-income taxpayers, the returns due in 2021 are looming on the horizon as a daunting challenge for this population. A September 2020 report from the Tax Policy Center argues that recipients of the EITC will face a potentially large and unexpected Covid-related tax trap when they do their Tax Year 2020 returns. It turns out that the hundreds of billions of special unemployment insurance benefits received during the pandemic––so needed by those affected by pandemic loss of jobs—count towards overall income for tax purposes, but do not count as “earned income” for EITC purposes. Because of the complex EITC rules, observes the TPC report, “receiving UI benefits can decrease the EITC, but cannot increase it.”
This Covid tax trap may unexpectedly reduce the EITC credit for many low-income families when it comes time to file their next taxes—an unwelcome surprise for people that are already struggling with the financial and health impacts of this pandemic. That’s a special problem, says the TPC report “since research shows low- and moderate-income families plan for that annual tax refund.”
Advocates of a return-free tax system have long contended that the IRS already has all the information it needs to prepare the returns for low- and moderate-income taxpayers. So in this real-world scenario, could the IRS use the information that it already has to help low- and middle-income Americans figure their EITC refund in this very complicated pandemic year, without the taxpayer having to struggle through all the rules and calculations to prepare their own return, or get professional help to qualify for refundable credits and determine the refund due to them?
The short answer is no. The IRS does not have the necessary information in its databases to accurately determine a low-income taxpayer’s eligibility for EITC and/or correctly calculate the amount of credit due to the taxpayer—indeed, far from it. The EITC is based on a stew of residency, family relationship, and income limits, with complex tie breaker rules. And like a giant puzzle, it requires deep knowledge of the personal lives of people living in the same household or family unit, with who else, for how long, and what their relationships and incomes are, just for a start. If a child qualifies to be claimed for EITC purposes by more than one person, there are six tie breaking rules. Single parent households, and the non-traditional makeup of today’s household relationships, have also evolved in modern society faster than government regulations can keep up.
And especially when there are dramatic shocks to the economy—such as the health crisis of 2020, or a severe natural disaster or climate change event, or a future large-scale economic dislocation—there’s no way to use the previous year’s information as an accurate guide. Moreover, no information return is automatically generated that says whether a child is living with their grandparents while their parents do essential jobs around the clock. And unique household or family circumstances are equally challenging given the velocity of domestic changes in today’s society, or in coping with crisis as we have in 2020. For example, the IRS does not automatically receive reports of split custody divorces where the children spend more than half of 2020 at the one parent’s house which had better broadband connections for school purposes or had broadband at all.
Suppose the next administration wanted to help out low- and middle-income Americans by estimating their EITC for 2020 and 2021. It would be a massive and costly undertaking for the IRS to go out nationwide to even try to collect and process the necessary extensive personal data on individuals, households and families to even begin to have enough information to even attempt to accurately determine eligibility for EITC and calculate the credit payment. To put this in perspective, the ten-year cost of conducting the 2020 Census is in excess of $15 billion. However, calculating the EITC actually requires collecting annually much more personal information than even the decennial Census. Moreover, part of the reason that the Census is so expensive is to track down precisely the low-income population that is eligible for the EITC.
Why so expensive and mammoth an undertaking? The rules for which taxpayers get to claim a child for EITC purposes depends crucially on who the child lived with during the year, and for how long. In other words, the IRS would need to know for each potential claimant—including grandparents and aunts and uncles in a multigenerational household, and whether and how household or family makeup changed or evolved during the year—and how many months each child lived there and with whom. In addition, the rules require information on adjusted gross income (AGI) per potential claimant.
The IRS already has a Dependent Database which helps it determine if two or more taxpayers have claimed the same child after they have filed, as part of tax administration. But the database does not have the prospective information to determine which person is the right one to make a claim for EITC before filing, much less accurately determine the amount of refund credit that the taxpayer will be due.
The only place this information can come from is the potential EITC recipients themselves. The data would have to be voluntarily submitted by the taxpayers themselves in advance of the government being able to attempt to accurately prepare the tax return for the taxpayer. That means they would have to fill out new data collection forms in January, either online or on paper, which would compile the necessary information about where the child or children resided, with whom, for how long, the relationships to the children and among household or family members, and the varied incomes of those individuals in the household. Indeed, expansion of the IRS into the function of annual collection of extensive personal nonfinancial data about individuals, households and families might very well receive bipartisan outcry, for any number of public interest reasons ranging from fiscal cost to the impact on personal privacy. The task each year would be huge.
Oddly enough, low- and moderate-income taxpayer returns that claim the EITC have been repeatedly described as “simple” returns by advocates of having the IRS take over tax preparation. But a study by the Tax Policy Center highlights the sheer complexity of low-income tax returns, noting that
…eligibility for child benefits has increasingly relied on the concept of a tax unit, which has not evolved with families…. The income tax law is based on annual filing and bases the definition of a filing unit primarily on legal relationships, child residency, and support. Consequently, families that change throughout the year may have difficulty correctly determining their filing status and who can properly claim a child for the purpose of receiving child-related benefits.
As the TPC study observed, “[b]ecause of these changes in family structure, tax filing has become more complex for many and will likely continue to grow more complex.”
The reality is that the IRS already collects 3.5 billion information returns each year, but most of them are generated automatically in the course of doing business by companies, such as employers and financial institutions. Out of the 3.5 billion, for example, 2.3 billion are 1099-B forms for reporting securities transactions, which are tracked by brokerage firms as part of doing business. These forms are then delivered electronically to the IRS ready to be processed.
In contrast to the billions of electronic reported information forms, the IRS only processed 40 million paper information forms in FY 2019 and has been trying to drive down that number even more, as it continues its long-term modernization toward electronic tax operations originally begun back in 1998 as result of the work of President Bill Clinton’s National Commission on IRS Restructure and Reform, and its implementing Act. Shifting resources to a massive new data collection function to obtain the kind of personal data required to establish eligibility for the EITC, would require the IRS to go in the opposite direction and set up an entirely new set of workstream and systems for electronic and paper submission of “pre-return” personal information returns. In the best-case electronic scenario, that would include creating and maintaining a significant new online user interface for entering details of children, residency, relationships, and potential claimants.
Indeed, the United Kingdom offers a real-world case study of exactly this problem, based on their difficult experience with the UK version of the EITC, the Working Tax Credit, introduced in 2003. According to a study by the All-Party Parliamentary Taxation Group, a non-partisan committee of the UK parliament, the government figured out the hard way that it simply did not have enough information to accurately determine family tax credit eligibility, despite the fact that Her Majesty’s Revenue and Customs (HMRC) had long run a classic ‘return-free’ tax system for blue-collar taxpayers.
In response, the HMRC mandated the annual preparation and filing of a multi-page “pre-return” by taxpayers to establish their eligibility for the Working Tax Credit. This pre-return, resembling an old-fashioned, multi-page American 1040 tax return, provides the government the extensive personal information it needs for the government to prepare the taxes for the taxpayer– so the taxpayer doesn’t have to file a return. This tortured logic illustrates the problems that low- and middle-income taxpayers in the U.S. would face if the IRS followed the UK example, held up by return-free advocates as the state-of-the-art model to follow to reduce taxpayer burden.
How much would it cost to expand the IRS Dependent Database on short notice, in order to collect the significant additional information necessary, process it, to accurately establish whether EITC claimants are eligible or not, and then correctly calculate the tax benefit? There’s no way of knowing the total overall cost for this data collection undertaking, but we can analyze the problem.
The IRS processed roughly 250 million personal,business, and related tax returns and 3.5 billion financial information returns in FY 2019, and handled 650 million online visits to IRS.gov. Against that backdrop, 25 million EITC recipients don’t seem like much of an extra burden.
But as noted above, the vast majority of those information returns are electronically generated and low-cost to handle. And the vast majority of the website visits are queries about the status of refunds and tax return transcripts, rather than the sort of interactive data entry that the EITC and CTC would require.
The Taxpayer First Act of 2019 did require the IRS to develop an internet portal by 2023 that allows taxpayers to electronically file 1099 forms for reporting income and other financial data, which are vastly simpler than the personal information collection that would be needed for the EITC. However, that process of development of a 1099 financial reporting portal is just starting, with Deloitte just recently receiving a 3-year contract to set up a project management office.
So we can reasonably expect that the EITC information return would have to be supplied via paper form submissions, at least for the foreseeable future, just as took place in the United Kingdom when the requirement was mandated there. One 2009 estimate by the Treasury Inspector General for Tax Administration put the cost of processing a paper tax return at $2.87 per return. But greatly complicating this type of undertaking is the fact that the IRS has gradually dismantled its paper return processing capacity over the last 20 years, with a residual capability that is a shadow of the legendary IRS paper processing operation in the first century of the IRS’s existence.
The Broader Context
This analysis, driven by the crisis of 2020 and the tax year to follow, raises the obvious question of why the IRS would set up an expensive new process to collect substantial personal information from EITC recipients, separate from the citizen’s actual tax return, which would have otherwise been submitted by the taxpayer in the normal voluntary compliance process. More generally, it does provide some insights into the costs of adopting return-free filing in an uncertain world and rapidly changing society. Return-free filing has often been thought of as a free lunch, where the IRS makes use of information that it already has to make life easier for low- and middle-income taxpayers and to save money. But the reality is starkly different from the rhetoric, and the often-claimed benefits for the working poor could in fact turn into another burden.
The IRS estimated that 25.3 percent ($17.4 billion) of the total EITC payments made in FY 2019 were “improper.” However, the IRS also estimated that approximately 21% of eligible taxpayers did not claim the credit that they deserve. That leads people to jump to the conclusion, as one journalist wrote, that “….Automatic filing would provide EITC payments to many of that 20 percent not getting them, and would spare taxpayers from doing complex calculations that sometimes lead to errors.”
But there are no secret troves of free data that are being hidden that would immediately translate into return-free filing, with fair and equitable treatment for the working poor and disadvantaged. One issue is that the United States has no official resident register that tracks where people are living. By comparison, many of the countries that have “return-free” filing are already tracking where people live through an official resident register. In Germany, often held up as a return-free filing example, the Federal Ministry of the Interior, Building and Community supervises an official resident register:
“Anyone who moves into a residence in Germany must register within two weeks of moving in. To register, you have to go to the registration authority of your municipality and present a valid ID card, passport or passport substitute document and a certificate issued by the person providing the residence.”
The U.S. does not maintain such official government requirements for registration of domicile. Drivers’ licenses, school records, healthcare records, and tax records could be used to assemble a partial picture, but not enough to fulfill the needs of the EITC.
Proponents of return-free filing argue that the IRS can use data already submitted by the taxpayer in the past. For example, Austan Goolsbee in 2006 proposed a Simple Return that “would use the taxpayer’s tax return information from the previous year.”
However, the 2020 example shows it’s just not possible to assess today’s residency from last year’s reports due to rapidly changing household units and relationships, and now especially with remote work and remote learning. The research by the TPC demonstrates that even in ‘normal’ times the increasing velocity of change in the makeup, location and relationships of American households, particularly among the working poor, is significant and government’s regulatory frameworks and definitions cannot keep up.
Moreover, these changes interact with the tricky rules for EITC eligibility. The Center for Budget and Policy Priorities notes that:
families’ living arrangements can be complicated, with working grandparents or aunts and uncles living with working parents and their children. More than one working adult in such families may potentially qualify to claim a given child for the EITC. Neither they nor, in many cases, their tax preparers may fully understand the complex rules that determine who is entitled to claim the EITC in such circumstances.
In the same vein, a report from the Tax Foundation observes that “improper payments are largely a result of the same child being claimed multiple times due to shared custody agreements or other complex living situations.”
Of course, the deeply layered complexity of the tax system doesn’t help either. The analysts at the Tax Policy Center write “If an income tax system were simple enough, the government could withhold taxes owed and do its own accounting at the end of the year without much help from taxpayers.” But what they mean by simple enough is a massive and comprehensive overhaul of the tax code, including a myriad of such fundamental changes as making the unit of taxation the individual rather than the family, and simplifying eligibility requirements for refundable credits.
The EITC and similar tax benefits such as the Child Tax Credit are hard cases for return-free filing just as a practical matter, because they require so much information which the IRS does not currently have. And prior year tax returns are no cure for ensuring accurate payment of future refundable credits, or avoidance of improper payments (either too little, or too much, or correct determination of eligibility for payment at all). The essence of accurately establishing annual eligibility is in its recognition of the greatly increased velocity of societal changes in the family unit, household makeup, human relationships, job changes, moving and other changed housing circumstances, and more, But they are also the cases that make a difference, because they directly affect the lives and economic well-being of so many low- and moderate-income Americans, because they are so complicated, and because there are so many mistakes, in both directions. And getting it right directly affects the economic condition of the people for whom refundable credits are intended as an anti-poverty lifeline.
There are no shortcuts. Precisely the people who need the help are those who would not benefit from return free filing. What 2020 shows us is that rather than giving these Americans extensive new forms to complete and file as a pre-return, or alternatively, to establish an intrusive new government national program of annual personal information collection, it is better to take that money and use it to improve the whole rickety IT infrastructure of the IRS in the performance of its core mission, which has been underfunded and woefully behind the IT and performance curve for decades.
Indeed, in a recently released paper PPI estimated that the federal government has an accumulated software investment deficit in excess of $200 billion. That is the extra amount that the federal government would have needed to invest in software to keep up with the private sector. Under these circumstances it’s difficult to justify diverting the IT funds to set up a “return-free” system that is actually not return-free for the low- and middle-income taxpayers who carry the burden of its complexity.
At its heart, this analysis of the Covid tax trap raises the broader question of the true societal cost for low- and moderate-income Americans in mandating a fundamental change in the nation’s voluntary compliance tax system that is touted as “reform”, “burden reduction,” and “cost reduction.” As we have shown here, the reality is quite different, and those adversely hit by the “return-free” proposal––making the government tax collector also the nation’s tax preparer––are the working poor and other low- and moderate-income Americans. These are the people with the least means, voice or resources to advocate for themselves, turning tax fairness and societal equity on its head.
At every turn, the Trump administration and Republicans in Congress have bungled the coronavirus pandemic and shortchanged our recovery. For the first month after most programs created by the CARES Act – the last major stimulus bill passed by Congress back in March – expired, the GOP wasted valuable time on half-measures that could not pass and executive orders that do not help. Washington Republicans have now completely abandoned work on further relief measures so they can focus on a partisan gambit to pack the Supreme Court with yet another right-wing justice before voters have a chance to make their voices heard in just five weeks.
It didn’t have to be this way. Back in May, House Democrats passed the $3 trillion HEROES Act that they intended to be a follow-up to the CARES Act. Although the bill had many flaws, it offered a starting point for negotiations. Their Republican counterparts in the Senate, on the other hand, spent two months doing literally nothing to advance any additional relief legislation. It was only a full month after the major provisions in the CARES Act had expired that the Republican-controlled Senate voted on a partisan $500 billion “skinny” stimulus bill, which then failed to pass the chamber. Negotiations have now stalled due to GOP’s insistence on penny-pinching for a critical stimulus bill that, it should be noted, would almost certainly be less expensive than the wasteful $2 trillion tax cut the party enacted at the height of our most recent economic expansion.
In an attempt to cover for his party’s fecklessness, President Trump issued a series of executive orders ostensibly designed to fill the needs for further relief unmet by Congress. But as is too often the case with Trump, these actions were almost entirely superficial – and in some cases, actively harmful to the people supposedly helped. Rather than playing these pointless partisan games, Republicans need to join Democrats at the negotiating table and deliver a real solution for the millions of Americans struggling to survive amidst a global pandemic and the worst economic crisis since the Great Depression.
Anyone at Risk of Contracting Coronavirus
The first priority for policymakers must be controlling the pandemic, as our economy cannot fully recover until people feel safe going in public to work or spend money. Adequate testing and tracing are essential to preventing the virus from spreading until a vaccine is found, but delays in test results have already undermined our COVID response. Democrats proposed $75 billion for coronavirus testing and contact tracing as part of their stimulus proposal in the HEROES Act, while Republicans proposed a much-smaller $25 billion investment, including just $16 billion of new funding not reallocated from CARES Act programs. But without a deal, neither side gets any investment – and the virus continues to spread through our communities.
People Who Have Lost Their Jobs
Up to 26 million Americans remain unemployed thanks to the pandemic. In normal times, unemployment benefits typically only cover 34-54 percent of lost wages for a limited period of time. These benefits, however, are woefully insufficient during a prolonged period when few job openings are available to be filled. The CARES Act sought to address this problem by increasing UI benefits by $600/week through the end of July and extending the maximum number of weeks someone could claim unemployment benefits until December.
Democrats proposed to continue the full $600/week until January (or tie the extension of benefits to real economic indicators), while Republicans wanted to replace it with a $300/week supplement through the election). There was a very reasonable middle-ground here, as both sides agreed that supplemental unemployment benefits should not be allowed to expire in their entirety – but because no agreement was reached, that is exactly what happened.
Trump claimed to resolve the problem with an executive order letting states use Federal Emergency Management Agency (FEMA) money to establish a supplement for unemployment insurance. But this approach was riddled with problems: it depended on state unemployment offices, which are already burdened with crushing caseloads and obsolete information technology, to set up new administrative structures, delaying the receipt of benefits. The new supplement was worth only half as much as the one authorized by the CARES Act, and was not made available to low-income workers who receive less than $100/week in normal unemployment benefits. Finally, the FEMA fund only had enough money to fund benefits for six weeks – and required drawing upon funds that will likely be needed to fight wildfires out west and repair damage from hurricanes in the south.
Landlords and Lenders
Failure to adequately support unemployed Americans will have cascading effects throughout the economy. Because the unemployed then cannot spend as much money as usual, the businesses that rely on their patronage also lose income, which hurts workers throughout the broader economy and deepens the recession. They are also more likely to fall behind on payments for rents, utilities, or mortgages. The CARES Act included a temporary moratorium on evictions, but now that it is expired, millions of American families are at risk of losing their homes by the end of the year. Democrats have proposed imposing an even broader moratorium than was included in the CARES Act. The Trump administration, meanwhile, ordered the Centers for Disease Control to enact a limited moratorium on evictions until the end of the year for low- and middle-class renters.
Although a moratorium may give at-risk renters some temporary relief, it fails to resolve the underlying issue: lost income. Trump’s moratorium simply delays the inevitable for any renter who is behind on rent and would otherwise face eviction. Meanwhile, smaller landlords will lose out on income they need to pay for mortgages and property taxes, which puts them at risk of default. Lenders may also face significant losses from landlords and homeowners unable to make their required payments. If Congress were to instead provide adequate income support for people who have lost their incomes in the pandemic, they would ensure people can afford to remain in their homes without creating these new burdens.
Small Businesses and Their Workers
The CARES Act included a Payroll Protection Program (PPP), which gave small- and medium sized-businesses money to retain their workforce. That funding dried up when the program ended on August 8th. Here, Congressional Republicans actually want to be more generous, proposing almost $360 billion in small business support, loans, and employee retention provisions, while Democrats proposed $290 billion. But without a deal, small businesses – many of which are operating in industries, such as dining and hospitality, that have been particularly hurt by the pandemic – have not gotten any more support.
The only support for small businesses in President Trump’s executive orders was a counterproductive payroll tax holiday. Neither party in Congress supported Trump’s previous proposals to temporarily cut the payroll tax, so instead he used his limited authority to defer collection of some payroll taxes until next year. But since workers will still owe that money in 2021, many employers are just withholding the tax anyway. Meanwhile, federal workers – including those in the military – who cannot opt out of deferral are being advised not to spend the money so they aren’t financially flattened by the massive tax bill for back taxes they will receive next year.
State and Local Governments
The coronavirus pandemic has blown a massive hole in the budgets of state and local governments: income and sales taxes are drying up while spending on safety-net programs, such unemployment insurance and Medicaid, have increased dramatically. Because most state and local governments are required to balance their budget, this fiscal squeeze will compel them to cut their budgets right when people and businesses need government support the most.
Although Congress included some aid for state and local governments as part of the CARES Act, it only allowed this money to be spent on new coronavirus-related expenses, not to replace lost revenues. Republicans have proposed to loosen rules on how states could spend this aid, but offered no additional funding. Democrats, meanwhile, included almost $1 trillion in new funding for state and local governments in the HEROES Act.
Many on the right have argued that providing further aid would be a “bailout” for the finances of poorly-managed states, but this criticism is at best deeply misguided. PPI projects that state and local governments will need at least $250 billion in additional support beyond what was already appropriated before the end of 2021 just absorb the pandemic’s financial impacts without making deep cuts to essential services – and this figure could be even higher if the economic impact of this unpredictable crisis is worse than current projections. Rather than argue over an arbitrary dollar amount, Congress can easily address the concerns of both Democrats and Republicans by designing programs that provide aid to state and local governments based on the real pandemic-induced shortfalls realized on their balance sheets.
Parents and Families
The pandemic has taken a particularly brutal toll on parents who are unable to send their children back to school this fall. It is difficult for workers to do their jobs, either remotely or in-person, when they are unable to access child care that they usually could depend on at this time of year. It also poses a special burden on students from low-income families who lack the internet access necessary to participate in online classes.
The good news here is that both parties have proposed about $100 billion in additional support for schools. But they disagree on what it should be used for: the Trump administration would use this money to pressure school districts across the country to return to in-person classes, the even though doing so would be unsafe without the proper public health safeguards in place. The Democrats’ proposal, on the other hand, would also enable schools to stand up high-quality remote learning to keep their students learning while school buildings remain closed.
Unfortunately, these nuances don’t even matter at the moment: because Congress failed to reach a broader agreement, schools have received no additional federal support. Even worse, the looming shortfalls facing state and local budgets are likely to result in deep cuts to education spending (as they did following the 2008 financial crisis), further jeopardizing the long-term opportunities for children and families.
Voters
State and local governments face an unprecedented challenge administering a national election in the midst of a pandemic, made even worse by foreign governments threatening to interfere again like they did in 2016. The HEROES Act included $3.6 billion to support election integrity and vote-by-mail operations to make sure every vote is counted, while the Senate bill included nothing. As we enter the final stretch of what is perhaps the most contentious presidential election in modern history against the backdrop of several overlapping national crises, the failure of federal policymakers to support election infrastructure jeopardizes the bedrock of our democracy.
Conclusion
Although neither party’s proposals have been perfect, only one is making any serious effort to find common ground and support our economy in a time of unprecedented crisis. While House Democrats prepare to vote this week on a new package of proposals that is more moderate than the HEROES Act they passed four months ago, President Trump and Senate Republicans are leaving millions of Americans in the lurch by prioritizing partisan court packing over any further fiscal relief. Democratic candidates for office and all stakeholders, from the worker who is at risk of losing her home along with her unemployment benefits to the parent who cannot save his small business and give his child a decent education at the same time, should pressure Republicans to return to the negotiating table and work in the public interest – or face severe consequences in November.
While House Democrats and Senate Republicans remain at an impasse over how generous unemployment benefits should be in the current recession, a potentially greater problem is looming: millions of unemployed Americans will see their benefits terminated prematurely unless Congress takes additional action in the next three months. What’s more, many workers are forced to clear bureaucratic hurdles to qualify for extended benefits Congress approved last spring to help them ride out the pandemic.
This piece explains why jobless Americans are entangled in red tape and on course to lose their benefits at the end of this year. Congress should fix these problems by tying the duration of unemployment benefits to actual economic conditions rather than arbitrary deadlines, streamlining the transition from regular benefits to extended pandemic benefits, and requiring the states to do a better job of informing workers about special pandemic extensions.
Not All Unemployed People Are Eligible for the Same Number of Weeks
People who lose their jobs through no fault of their own can typically draw unemployment benefits for 26 weeks. When unemployment spikes, the Extended Benefits (EB) program automatically extends the duration of benefits, usually for 13–20 weeks. But to buy unemployed people more time to find work amid the pandemic recession, Congress created a new program that offered 13 additional weeks of benefits for job seekers to draw before EB, called Pandemic Emergency Unemployment Compensation (PEUC). (Since some states offer unemployment benefits for fewer than 26 weeks, Congress also let people who exhausted all available benefits in fewer than 39 weeks make up the difference through the new program otherwise meant for self-employed workers, Pandemic Unemployment Assistance.)
However, it turns out that many people who lost their jobs as a result of the pandemic will not receive all 39 weeks of unemployment benefits. Why? Because the pandemic-specific unemployment programs expire at the end of this year. That means that anyone who began receiving benefits after March 28 will have their pandemic benefits cut off before they receive 39 weeks of benefits.
Leaders may have hoped back in March that the pandemic would subside and the unemployed would not need an extension after December. But we now know that’s not likely. Instead of “going away” as President Trump said that it would, the pandemic became worse than ever, which hurt the economy and caused even more layoffs. Over 80 percent of all initial normal unemployment claims filed during the pandemic were filed with fewer than 39 weeks to go before the end of the year. While some of those recipients are repeat claimers who might still get the full benefit, evidence from California suggests most were newly unemployed people who cannot. Republicans’ refusal to negotiate seriously with House Democrats now risks undermining the stimulus that Congress has already passed by prematurely kicking millions from pandemic unemployment programs.
Even Eligible Beneficiaries Face Hurdles to Claiming Benefit Extensions
The looming cutoff isn’t the only problem facing unemployed people. To get however much of a benefit extension they do qualify for, recipients must also run a bureaucratic gauntlet through state unemployment offices already saddled with outdated technology and unprepared for the flood of applications. The U.S. Department of Labor has told states to require beneficiaries who have exhausted their normal benefits to actively apply for PEUC benefits, rather than receiving the benefits automatically. Some states are automatically enrolling beneficiaries in the program anyway, but PPI has only identified 14 such states, while 29 states indicate beneficiaries must specifically apply for PEUC in some way (several states have not yet set up their PEUC programs, and others do not indicate on their websites how beneficiaries transition from normal benefits to PEUC). This new application is simple in some jurisdictions, but onerous in others. Jobless people in Arkansas, for example, must physically go to a state unemployment office to apply for these benefits, even though they can apply for normal benefits online.
These extra barriers could deter some recipients from getting the benefits they are entitled to. And beneficiaries who may have already survived onerous wait times to get their normal benefits may once again face delaysas states struggle to process PEUC applications. Kansas warns people transitioning from normal unemployment benefits to PEUC to expect delays in their payment, which can be brutal on cash-constrained people struggling to pay their bills.
Federal policy requires states to notify people who are likely eligible for PEUC, but many are not doing so until after a recipient exhausts their normal benefits, which risks leaving people confused as to whether they are entitled to more benefits. Although I have found no good data on how common this is, anecdotal evidence from my experience suggests the problem is real. My mother, who is furloughed, did not understand what the benefit extensions would entitle her to, and those extensions made gave her a better alternative to accepting an early retirement offer from her employer. Another close friend, who is unemployed, was planning to move to his parents’ house hundreds of miles away before he found out about PEUC through his own research. States should inform all recipients of everything they are entitled to when they begin receiving benefits (or as soon as new information becomes available) so no one makes life-changing decisions based on incomplete information.
Longer Benefits Could Support the Economy Even More Than Larger Benefits
Spending more on unemployment benefits helps more than just the recipients themselves — it helps the economy in which that money is spent. And while Congress can and should do both, extending the duration of unemployment benefits might do even more to stimulate the economy than increasing the size of benefits. This is because money put into circulation by the government only stimulates the economy if it gets spent on goods and services by those who receive it. Beneficiaries are likely to spend every dollar of a small benefit to pay for necessities, but every additional dollar is slightly less essential to maintain their standard of living. As the size of the benefits grows, recipients are more likely to save rather than spend a greater share of those benefits. Accordingly, the jobless population is more likely to spend money they receive from a benefit extension than they are a bigger weekly benefit with a similar cost.
Further, the long-term unemployed are less likely to have savings or other resources to support themselves, making it even more likely they will spend a large share of their benefit. And contrary to GOP Senator Rand Paul’s claim that said “If you give people money and you make it less painful to be in a recession we can stay in a recession longer,” research on the Great Recession found that extending benefit duration did not create a strong disincentive to work. Because people can only draw unemployment benefits if they are looking for a job, extending unemployment benefits can give recipients a vital lifeline without holding back the economic recovery.
To strengthen this safeguard for job seekers and the economy, Congress should return to the negotiating table and take three immediate actions:
Second, direct the Labor Department to let states automatically enroll beneficiaries who exhaust their normal benefits in PEUC.
Third, require states to notify all beneficiaries about the full slate of benefits available to them, with immediate updates should those benefits change.
For more information on how states say people can apply for PEUC, see below.
State, How are Normal Beneficiaries Transferred to PEUC:
The coronavirus pandemic has opened some gaping holes in our nation’s social safety net, especially where hunger and malnutrition are concerned. Millions of low-income workers have lost their jobs (and will soon lose expanded unemployment benefits if Congress fails to extend them) and millions of children in low-income families have lost access to school meals because the K-12 system has shutdown. These twin blows have triggered a dramatic rise in hunger and food insecurity in America.
Even before the pandemic hit, an estimated 37 million people, including 11 million children, reported experiencing food insecurity or hunger. Unless Covid-19 is contained, that estimate could reach 54 million by the end of 2020.
America’s most vulnerable populations – poor families with children, Black Americans, Hispanics and those living in rural areas and the South – are disproportionately affected by food insecurity and hunger. Their school-aged children also are more likely to rely on free and reduced-price school meals to meet their nutritional needs.
In March, Congress passed the Families First Coronavirus Response Act, which provided emergency food assistance and authorized the U.S. Department of Agriculture and the states to adapt the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps) to meet the needs of the hungry during the crisis. According to a Center on Budget Policy Priorities report, almost all states have taken advantage of the flexibility the Act provides to maintain SNAP benefits to households with children missing school meals.
Before Covid-19, the national school lunch program on average served nearly 29 million students, and the school breakfast program served nearly 15 million students. When the schools closed in March, many school districts scrambled to keep feeding their students, by establishing “Grab and Go” sites for picking up meals, or establishing daily meal delivery routes using buses to deliver food rather than transport students.
Despite these improvisations, however, most school aged children apparently are not receiving as much food as they did before their schools closed. For example, a survey of school nutritional professionals found that 80 percent of school districts reported serving fewer meals since school closures. Of those districts, 59 percent have seen the number of meals served drop by 50% or more.
In response to the K-12 shutdown, the Families First Act created the Pandemic Electronic Benefit Transfer program that provides food to families that have lost access to free and reduced-priced meals. This one-time meal replacement benefit is added to an existing electronic benefits transfer card for families already receiving SNAP. Families with school-age children that don’t receive SNAP can also get a card.
SNAP historically has proven to be one of the nation’s most effective programs for providing low-income households with food during economic downturns. That makes it a powerful counter-cyclical policy tool. Research shows each $1 of SNAP benefits generates between $1.50 and $1.80 in total economic activity. Yet when Congress in April passed its next pandemic relief measure, the CARES Act, it increased more operational funding for SNAP operations but failed to increase SNAP direct benefits.
There are compelling moral and economic reasons why U.S. lawmakers should make offering more food aid a top priority as Covid-19 infections climb in most of the states, slowing economic recovery and causing more workers to file for unemployment. In the first place, hungry and malnourished people are more vulnerable to disease. There’s also a strong possibility that many K-12 students will not be able to go back to school in September, despite President Trump’s ill-considered calls for a general reopening. Additionally, by supporting food consumption by low-income families, more aid stimulates demand and keeps our stricken economy afloat.
To meet the immediate crisis, PPI endorses anti-hunger provisions of the HEROES Act that House Democrats passed in May, but is now blocked by Republican Senate Majority Leader Mitch McConnell. These include:
• Increasing the SNAP maximum benefit by 15 percent through September 30, 2021, which translates into an additional $25 per person each month;
• Raising the minimum monthly benefit from$16 to $30;
• Adding $3 billion for child nutrition programs; and,
• Extending the Pandemic Electronic Benefits program through the fall of next year.
MODERNIZING THE SAFETY NET
This is also the right time to look beyond the current crisis and ask how our country can build a more resilient system of social supports that can better protect our most vulnerable citizens against future pandemics and other emergencies.
“While it’s true that government safety net programs help tens of millions of Americans avoid starvation, homelessness, and other outcomes even more dreadful than everyday poverty, it is also true that, even in ‘normal times,’ government aid for non-wealthy people is generally a major hassle to obtain and to keep,” notes Joel Berg, CEO of Hunger Free America.
“Put yourself in the places of aid applicants for a moment,” Berg added. “You will need to go to one government office or web portal to apply for SNAP, a different government office to apply for housing assistance or UI, a separate WIC clinic to obtain WIC benefits, and a variety of other government offices to apply for other types of help—sometimes traveling long distances by public transportation or on foot to get there—and then once you’ve walked through the door, you are often forced to wait for hours at each office to be served. These administrative burdens fall the greatest on the least wealthy Americans.”
A survey of low-income households by Hunger Free America found that 42 percent said it was “time-consuming and/or difficult to apply” for Unemployment Insurance, and nearly a quarter said the same about applying for SNAP. In addition, “40 percent of respondents said they had problems reaching government offices while applying for SNAP, with 36 percent stating that they never received a call back after leaving
a message.”
To reduce the high “opportunity costs” of being poor in America, the federal and state governments should adopt modern digital technologies that help low-income families apply once for public benefits without having to run a bureaucratic gauntlet of siloed programs for nutrition, housing, unemployment, job training, mental health services, and more. Specifically, as Berg proposed in a 2016 report for PPI, governments at all levels should cooperate to create online accounts from which families can apply remotely for all the benefits they qualify for, and into which they can deposit their public assistance.
This proposal is the centerpiece of a new bill introduced by U.S. Reps. Joe Morelle (D-NY) and Jim McGovern (D-Mass) and Senator Kirsten Gillibrand (D-NY). The Health, Opportunity, and Personal Empowerment (HOPE Act) would fund state and local pilot projects setting up online HOPE accounts to make it easier for low-income people to apply for multiple benefits programs with their computer or mobile phone. In addition to saving them time, money and aggravation, HOPE accounts enable people to manage their benefits – effectively becoming their own “case manager” – and easing their dependence on often inefficient and unresponsive social welfare bureaucracies.
In keeping with former Vice President Joe Biden’s “Build back better” theme, expanding food aid now to stem a surge in hunger, while deploying digital technology to give low-income Americans more control over their economic security, can help us weave a stronger and more resilient social safety net, rather than simply plugging holes in the old one.
The federal government is on track to run a record-shattering $4 trillion budget deficit in 2020, in large part due to its aggressive fiscal response to the pandemic-induced recession. Some on the right have raised alarm about this borrowing, despite their support for budget-busting tax cut and border-control policies over the last three years. The hypocritical chorus will likely only grow louder if Democrat Joe Biden is elected president in November.
But temporary deficits are an invaluable tool for mitigating the damage caused by economic downturns, as government spending replaces a drop in demand from the private sector. The long-term fiscal costs of failing to support an economy with a double-digit unemployment rate would far exceed those of even the most overzealous stimulus measures. Necessary fiscal support should therefore continue as long as the economy remains hobbled by the coronavirus, no matter the cost.
However, Washington also faces structural deficits that will persist long after the pandemic has been contained. Thanks to the Trump administration’s reckless borrowing binge at a time when the unemployment rate was below 5 percent, the federal government was already projected to spend over $1 trillion more than it raised in revenue even before the pandemic hit. This structural deficit will only grow worse in the coming years because our nation’s aging population is causing federal spending on health-care and retirement programs to grow significantly faster than the revenues needed to finance them. The Trump administration did not create these problems, but it did make them significantly worse with its pre-pandemic fiscal policy and its disastrous handling of the public health crisis.
In the two years following the 2008 financial crisis, the national debt grew from less than 40 percent of gross domestic product to more than 60 percent of GDP. In 2020 alone, the debt will likely surpass the all-time high it reached following the end of World War 2 (106 percent of GDP). The rising cost of servicing this growing debt threatens to crowd out critical public investments that lay the foundation for long-term growth after the recession ends.
The federal government spent more money servicing the national debt last year than it spent on critical public investments in education, infrastructure, and scientific research combined. Although interest rates are low now, they eventually will rise as the economy recovers. Allowing interest payments on our debt to further crowd out these investments – which have already fallen by nearly 40 percent in real terms since the 1980s – would have disastrous consequences, including lower incomes, fewer high-quality jobs, and reduced economic mobility.
It is therefore essential to pay down the debt during expansions to create fiscal space for the necessary surge in short-term borrowing during recessions. Unfortunately, Washington has often waited too long to enact sufficient stimulus in response to recessions, and then failed to summon the will to narrow the structural gap between taxes and spending when the economy rebounds.
To make our economy more resilient against downturns, PPI proposes the federal government adopt a “fiscal switch” that automatically balances out the business cycle by increasing spending during recessions and recouping the cost during subsequent periods of economic growth. This switch would trigger based on economic variables such as the unemployment rate and operate through three mechanisms: a rebalanced relationship between federal and state governments, a more dynamic and progressive tax code, and phased-in reforms to mandatory spending programs driving our structural deficits. Implementing these automatic mechanisms, as recommended here and in PPI’s Emergency Economics report earlier this year, takes politics out of these decisions and ensures stimulus or deficit reduction will be implemented as warranted by economic conditions.
The first step is to better leverage the federal government’s unique borrowing capacity, which is unavailable to the vast majority of state and local governments required by law to balance their budget each year. Many government programs, including Medicaid, infrastructure, and education spending, are partnerships in which the federal government provides matching grants for state and local spending.
Some of these partnerships could be improved by allowing matching rates to adjust up or down automatically based on a state’s unemployment rate. This would prevent state and local governments from having to cut essential services during a downturn while asking them to shoulder a greater share of program costs when their budgets are healthy.
Other programs that currently function as a federal-state partnership but whose costs fluctuate significantly with the business cycle would benefit from becoming more nationalized. For example, when Congress tried to ensure that unemployment insurance replaced a minimum percentage of lost wages for everyone who was laid off in the early days of the coronavirus recession, lawmakers found they were unable to do so because of outdated operational infrastructure in a messy patchwork of 50 different state programs. As a result, policymakers were forced to settle for a controversial across-the-board benefit increase of $600 per week that gave some laid-off workers even more income from unemployment benefits than they lost in missed wages, while failing to make others whole. Even worse, Congressional squabbling over how long to maintain this benefit increase allowed them to lapse temporarily in the midst of an economic crisis.
Moving the operations of unemployment insurance and similarly-situated safety-net programs off state balance sheets and onto the federal government’s, in addition to automatically making benefits more generous during downturns and phasing them out in recoveries, would leverage Washington’s fiscal firepower in recessions when it’s needed most.
The second step is to make the income tax code more progressive, which serves as a strong automatic fiscal stabilizer by boosting average tax rates when incomes rise in expansions and lowering them when incomes fall in recessions. This objective could be accomplished by closing tax preferences for the wealthy, such as lower tax rates on inherited income and income from capital gains, while expanding the Earned Income Tax Credit and other pro-worker tax incentives. PPI also favors replacing the antiquated payroll tax with a dynamic value-added tax – which has a rate that automatically falls during recessions and rises during expansions – to encourage hiring and consumption when the economy needs it most and reclaim substantial revenues during economic expansions.
Finally, lawmakers must take additional measures to rein in the drivers of underlying structural deficits automatically when the fiscal switch calls for a pivot away from stimulus. Social Security and Medicare – the two largest programs in the federal budget – both face the prospect of becoming insolvent within the next decade, potentially leading to sudden and across-the-board benefit cuts for millions of seniors if lawmakers take no action to close the growing gap between dedicated revenue and scheduled benefits. Significant deficit reduction that takes effect in the middle of a recession could be catastrophic, but lawmakers should put in place a process now to develop and phase in a balanced package of revenue increases and benefit changes as the economy recovers. PPI’s Progressive Budget for Equitable Growth offers policymakers a model for how they can modernize these programs to strengthen work incentives, retirement security and financial sustainability in a way that is fair to both younger workers and older beneficiaries.
The right fiscal policy in a recession is not the right fiscal policy for an expansion, and vice versa. Washington politicians are often too slow or ideologically beholden to react sufficiently swiftly to changing economic circumstances. Taking these steps and creating a two-sided fiscal switch will give our government the tools it needs to manage the economy through both the ups and the downs of the business cycle.
Millions of America’s smallest businesses have been severely affected by the COVID-19 crisis. They’ve seen revenue evaporate and have been forced to lay off millions of workers. Over two million small businesses had simply disappeared by June 2020. The U.S. economy now finds itself in a deep hole, with millions of small businesses gone for good—and a dried-up pipeline of new business creation.
By the end of June, the American economy also was without tens of thousands of new “employer” businesses (those with employees) that normally would have been started. The pandemic and economic crisis have wreaked havoc on existing small businesses and the new start-ups that the economy depends on for job creation and innovation.
Meanwhile, the Trump administration’s implementation of the Paycheck Protection Program (PPP), authorized by Congress to provide billions in loan guarantees through the Small Business Administration (SBA), has been flawed. The Treasury department has provided insufficient, and constantly changing, guidance to lenders and businesses. The SBA’s own Inspector General found that the administration did not adhere to Congressional intent in deploying PPP funds.
Even before COVID-19, the Trump administration had proven itself incapable of inspiring entrepreneurial confidence. Business formation had trended steadily downward over the previous two years. According to a PPI analysis of Census Bureau data earlier this year, new business applications fell steadily from the middle of 2018, after rising more or less interrupted since 2012. Business applications that have a “high propensity” of turning into employer businesses had also fallen since the middle of 2018.
The picture gets worse the deeper you dig. The pandemic recession has disproportionately affected female, Black, and Latinx business owners. By April, the number of female-owned businesses had fallen by 25 percent (compared to 20 percent for male-owned businesses). The number of Black- and Latinx-owned businesses had shrunk by, respectively, 41 and 32 percent (compared to 17 percent for white-owned businesses).
These are astonishingly high losses and they come on top of a small business landscape already tilted against minorities and women. According to Census data, going into the crisis, Blacks owned just two percent of employer businesses in this country, despite comprising 13 percent of the population. Latinos and Latinas, making up 18 percent of the population, owned six percent of businesses. Male-owned businesses were larger and with higher revenues than female-owned businesses.
What’s needed now is a major national push to reinvigorate business creation and address underlying demographic disparities in business ownership. For women and minorities, when it comes to entrepreneurship, returning to the pre-crisis status quo is simply not an option. It shouldn’t be an option for the country, either. Greater business creation and ownership among women, Blacks, Latinx, and others will accelerate recovery and strengthen resilience.
Over the last 40 years, new businesses have, on average, created about six jobs per year, per company. If one million new Black and Latinx businesses opened (replacing the ones that have closed permanently) and were joined by half a million additional new businesses, we could see about nine million new jobs created. Not all these companies would survive—in the “normal” course of economic activity—but a significant subset of them would not only survive but also thrive. Young companies that survive and grow drive the lion’s share of net new job creation each year.
Public policy should seek to help stimulate new business creation and support the survival and growth of young businesses. The focus of this effort should be on women- and minority-owned businesses. Vice-President Joe Biden has proposed renewing the State Small Business Credit Initiative (SSBCI), an Obama-era program, to focus on these businesses. Evaluations of the SSBCI found positive effects in terms of investment and job creation, but a much larger effort is likely needed. The federal government has many tools at its disposal to be leveraged in support of new business formation and to aid specific types of entrepreneurs.
PPI believes the federal government should launch a National Start-Up Initiative that aims to spur creation of at least two million new businesses as our country recovers from the pandemic recession. It would include the following key actions:
Create a startup visa for founders of new companies. These would include foreign students graduating from a U.S. university, those transitioning out of Optional Practical Training, or any H1B visa-holder after three years. The foreign-born start companies at disproportionately high rates; encouraging them to do so would give a significant boost to overall business creation. This could be accompanied by incentives for business creation in specific geographic areas or neighborhoods.
Leverage federal research funding to reform technology commercialization processes at universities. America’s research universities are the best in the world at knowledge creation, yet their ability to turn knowledge into innovation and new companies has been declining. Many promising entrepreneurial ventures get stuck in bureaucratic processes. The federal government, which provides billions of dollars to support university research, should create new incentives for those institutions that devise more effective commercialization practices and generate new businesses for their communities.
Create a new “Start-Up Tax Credit” to encourage new businesses to grow into large businesses. Modeled on the Earned Income Tax Credit, the Startup Credit is designed to help these businesses avoid the scale-up trap unintentionally posed by tax breaks and regulatory exemptions for new enterprises. For example, businesses with fewer than 50 employees are exempt from the employer shared responsibility payment of the Affordable Care Act and providing unpaid leave. While these “carveouts” certainly help small businesses get off the ground, they impose an implicit tax when those companies grow past a certain threshold. The Startup Tax Credit would mitigate that tax.
As proposed by PPI economist Elliott Long, the Startup Tax Credit would be tied to the number of employees and payroll at a small business. Firms that have been operating for fewer than five years would be eligible for a credit equal to half the employer-side payroll tax they pay on their first 100 employees, up to a maximum credit of $1,200 per employee in 2020 (indexed to inflation). The proportion of payroll taxes offset by the credit and the maximum credit per employee would then gradually phase down as businesses grow until phasing out entirely once the business reaches 500 employees. PPI estimates this proposal would cost roughly $150 billion over 10 years.
PPI has also supported the New Business Preservation Act, introduced by Sen. Amy Klobuchar (D-MN). This would allocate $2 billion in federal funding to match private investments in areas of the country bereft of startup equity investments.
These steps would help seed the ground for new business creation, just as our country needs to create millions of them to provide jobs to U.S. workers whose previous jobs vanished in the pandemic shutdown. They would also create conditions that would make America’s entrepreneurial culture more vibrant and resilient against future public emergencies of all kinds.
As Covid-19 wreaks havoc in Southern and Sunbelt states, America’s battered economy faces a new round of shutdowns, bankruptcies and layoffs. Yet one sector seems strangely buoyant – the financial markets. From its all-time high in mid-February, the S&P 500 plummeted 34%, only to recoup all its losses by mid-June.
What explains Wall Street’s remarkable resilience while Main Street endures a punishing pandemic recession?
Although the three economic relief packages Congress has passed since the crises began no doubt have played a supportive role, the answer mainly lies in bold intervention by the Federal Reserve. The Fed played a similar role in staving off a financial collapse following the 2007-08 housing crisis. With a robust toolkit at its disposal, from slashing interest rates, purchasing securities, lending money directly and backstopping unstable markets, the Fed allayed investor fears about the impact of the Covid-19 lockdown on corporate profits and debts.
While Fed action to keep capital markets afloat is essential to prevent a wider economic implosion, it does have the unfortunate consequence of aggravating economic inequality. Only about 55% of Americans own stocks, and the top 1% percent own 50% of all equities. Pushing up stock prices, in other words, helps the rich get richer.
The progressive response to this distributional dilemma is not to let financial markets crash, but to democratize capital ownership in America.
U.S. policymakers therefore should emerge from the Covid-19 crisis resolved to tackle a growing “wealth gap” that is largely defined by race and ethnicity. According to the Urban Institute, the median wealth of white families in 1963 was $45,000 higher than the median wealth of nonwhite families. By 2016, the median wealth of white families had climbed to $171,000, or $132,600 more than the median wealth of black families ($17,400) and of Hispanic families ($21,000).
The strategy for narrowing the nation’s wealth gap has three key parts: Reduce racial and ethnic wage disparities, expand home ownership, and create new opportunities for Americans now locked out of capital markets to build financial assets that allow them to take advantage of the power of compound interest.
Focusing here on the third element, PPI endorses a radically pragmatic idea for democratizing capital ownership: Create lifetime savings accounts for all newborns, tied to voluntary national service. Here’s how these new “America Serves” investment accounts would work:
At birth, the federal government would stake every U.S. child to a $5,000 investment account similar to a government Thrift Savings Plan or a 401k. The money would be invested in a market index or target date fund to ensure the high average returns of investing in equities rather than low-return T-bills. With one stroke, this action would put America on the road toward universal capital ownership.
Families could also contribute post-tax earnings to their children’s accounts. No one could touch the funds in the account until the children turned 18. An “asset waiver” would also protect the account, preventing the income from being counted toward means testing for financial aid, food stamps, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) or Medicaid.
Upon turning 18, account owners would face a choice. If they agree to perform a year of national service before they turn 25, they would be deemed 100% vested and could tap their funds after serving for specified purposes at tax advantaged rates. These include: post-secondary tuition, down payment on a first home, or starting a business.
Our goal is to start by engaging one million young adults in qualified domestic and international service programs (including active military), out of the roughly four million who turn 18 every year. Those who choose not to serve would be entitled to only the returns (and principal) on half the original stake — $2,500. The other half of their accounts would revert back to the taxpayers via the U.S. Treasury.
Although the governments’ upfront investment is considerable, over the long-term costs of America Serves accounts will likely decline. We estimate that the first 10 years would cost $230 billion, and a 25-year timeline sees total outlays of just under $700 billion.
It’s even possible that after 25 years, the program could become self-financed, depending on how many people choose to serve. Our projections are based on the assumption that one in four newborns will receive the full government contribution via service.
We use a historic average return rate on the S&P 500 of 8% for our assumptions. That means the $5,000 initial taxpayer contribution invested in the market grows to $34,250 after 25 years (See tables below). Assuming that one in four account holders choose to serve, the rest will be required to return to the U.S. Treasury half their savings – $17,125 (half the original government contribution plus market earnings.) That would be enough to stake three newborns with $5,000 contributions.
By creating a strong incentive to serve, this proposal – in the spirit of the World War II G.I. Bill — would link the opportunity to start building significant financial assets to civic responsibility. It would help to scale up voluntary national service and make it a more potent tool for public problem solving. Volunteers, for example, could assist in contact tracing during future pandemics, provide services to the swelling population of older Americans, help tutor low-income children, clean up public spaces, and much more.
A large national service program would also help our divided society bridge its class, racial and cultural divisions by bringing together youths from all backgrounds to engage in a common civic enterprise.
The organizing framework already exists: AmeriCorps and Peace Corps and other volunteer programs that operate under the aegis of the Corporation for National and Community Service (CNCS). The 75,000 yearly volunteers in these civilian service programs are in addition to the approximately 180,000 Americans who join the active duty military each year, and who would also qualify for full “America Serves” investment accounts.
The idea of expanding national service already enjoys bipartisan support in Congress. Senators Chris Coons, (D-DE), Roger Wicker (R-MS) and Cincy Hyde Smith (R-MS) recently introduced the CORPS ACT, which would increase from 75,000 to 150,000 in year 1, and up to 300,000 in years 2 and 3, the number of civilian national service slots.
“As we work to recover from the dual challenge of a public health crisis and an economic crisis, national service presents a unique opportunity for Americans to be part of our response and recovery while earning a stipend and education award and gaining marketable skills,”
Sen. Coons has said. “Expanding these programs to all Americans who wish to serve should be a key part of our recovery effort.” Another sponsor of the bill, Sen. Tammy Duckworth (D-IL), a Purple Heart military veteran gravely wounded in action, notes that “Just as picking up a rifle to defend our country is ‘American Service,’ so is helping out a food pantry for those at risk of hunger, assisting students with remote education and helping patients make critical health care decisions.”
WHY INVEST FUNDS IN THE MARKET?
Simply put, stock markets have been the most reliable generator of long-term wealth accumulation in history, and financial capital grows traditionally faster than wages. There have also been a series of innovations that have helped underpin the ability to efficiently and safely invest for the long term.
These include Index based, passive investing in target date ETF’s (Exchange Traded Funds), which essentially invest in a diverse basket of stocks or other assets such as commodities or bonds, and manages risk according to a future “target date” – usually when someone plans to retire. This passive investment approach diversifies the risk of any single stock plunging in value, and uses the ETF structure with minimal fees as opposed to active management models that assess much higher fees. Small investors get access to higher returns with less risk and keep more of their money as it grows.
To illustrate how “America Serves” investment accounts could grow, consider these projections of possible returns over 18, 25, and 65 years from an initial $5,000 contribution:
Let’s look at the standard market benchmark of the S&P 500, which since adopting 500 stocks to the index in 1957 has produced an annual return of 8% (through 2018). Yet, since stocks and bonds fall as well as rise in value, it is worth looking at the largest “drawdown” (market pullback) since that time. According to S&P Dow Jones Indices:
“the most significant market downturn occurred in the early 1970s, coinciding with the U.S. economy reeling from double-digit inflation courtesy of a quadrupling in oil prices. During this period, the S&P 500 declined by 45% over a 21-month period and took three and a half years to return to its previous local peak.”
This means that should the market be down in any given year, history shows us the largest pullback only took about 5 years to regain all its lost value. What that means is that by ensuring that every American has an opportunity to build a significant financial asset, this proposal would enhance their economic security and resilience in economic downturns from whatever sources.
CONCLUSION
The pandemic has thrown a harsh light on America’s economic and racial inequities. The government’s otherwise commendable efforts to keep the comatose U.S. economy from flatlining have had the unintended effect of making these disparities worse. By giving every newborn child a capital stake in America’s future, we will put our economy on a higher growth trajectory while also making it fairer. And by linking the accounts to service, we will create a powerful new incentive for young Americans to give back to their communities and their country.
(Note: The author would like to thank Alan Khazei, a longtime PPI friend and co-founder of Boston’s City Year voluntary service program, who with the late Harris Wofford and other leading national service advocates originally envisioned the link between “service bonds” and service.)
PPI President Will Marshall and Ben Ritz from the Center for Funding America’s Future are joined by Congresswoman Sharice Davis (KS-3) and Congressman Scott Peters (CA-52) for a conversation on the fiscal health of the United States, priorities for the upcoming stimulus bill, the election, and their perspective on how America’s economy can return with a resilient recovery.
Conservatives call the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act a “gigantic political scam.” Senate Republicans say HEROES, passed by the House on May 15th, is “dead on arrival when it reconvenes. As they negotiate with Democrats, Republicans should think carefully about certain student loan relief provisions in the bill.
Even in good times, a substantial portion of 45 million Americans’ paychecks go to student loan payments rather than to goods and services that keep our economy churning. There’s little doubt that this debt contributes to suppressed consumer consumption, which stifles economic growth. In this bad time, Americans collectively owe $1.6 trillion in student debt. This debt burden is now dramatically heavier with the economic shutdown and coming diminished post-pandemic employment opportunities.
Some say no additional student loan relief is needed because the Coronavirus Aid, Relief and Economic Security (CARES) Act that Congress passed in March temporarily suspended student loan payments. That would be a decent argument if CARES applied to everyone, but it doesn’t.
The U.S. House of Representatives is moving ahead with plans to vote today on the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act: the fifth – and potentially final – a piece of major legislation addressing the coronavirus pandemic and its economic effects. The 1800-page bill is estimated to cost roughly $3 trillion and contains a mix of both good policies and bad but is perhaps most notable for what it leaves out: automatic stabilizers.
The biggest flaw with previous relief bills was that aid was limited by the availability of funds appropriated by Congress or arbitrary calendar dates it chose instead of being based on the real needs of our economy. As a result, measures like the Paycheck Protection Program (PPP) were exhausted within three weeks and many eligible businesses couldn’t get needed financial relief until Congress took additional action. The best way to prevent this problem in the future is by adopting “automatic stabilizers” — policies that cause spending to rise or taxes to fall automatically as predetermined economic or public-health benchmarks are met. For example, a proposal by Congressman Don Beyer and Senators Jack Reed and Michael Bennet would change the expansion of unemployment benefits included in the CARES Act to gradually phase out as the economy recovers instead of expiring arbitrarily on July 31st. The centrist New Democrat Coalition has also been vocal in calling on leadership to adopt automatic stabilizers in future relief bills.
Unfortunately, the HEROES Act doesn’t include any new automatic stabilizers – reportedly because House Speaker Nancy Pelosi is concerned about the bill’s $3 trillion price tag. On the one hand, Speaker Pelosi is right to be concerned about wasting taxpayer money on unnecessary expenses given our nation’s serious long-term fiscal challenges. But the unfortunate reality is that supporting our economy during the worst public health crisis of our lifetimes is a large and necessary expense. It is no less fiscally responsible to pass one $3 trillion bill than three $1 trillion bills if the money is efficiently targeted to support our economy throughout this pandemic. Moreover, there are a number of costly provisions included in the HEROES Act that are a poor trade-off for sacrificing automatic stabilizers.
