Congress has passed and President Trump signed into law the $2 T Coronavirus Aid, Relief, And Economic Security or “CARES” Act. It passed overwhelming (96-0 in the Senate) and has been lauded as a necessary step to provide relief to a nation dealing with the coronavirus pandemic. I don’t take issue with that, but some of its details make me scratch my head. This post lists some of the head scratching provisions – I only looked at the tax provisions, which are a small part of the overall package. I’m not competent to evaluate anything else.
I assume that its purpose is twofold:
- Provide aid to front line, public health responders – hospitals, state and local governments, etc. This is a very important part of the law, about which I know little and none of which are tax provisions.
- Provide social insurance-like assistance to individuals and to keep businesses intact they can resume operating when the crisis lessens – Public health responses to the coronavirus have required slowing or shutting down major parts of the economy with social distancing requirements, shelter-in-place requirements, stay home orders, and so forth. As a result, many businesses and other employers (e.g., nonprofits) have shut down entirely or partly, workers have been laid off or are working fewer hours, and so forth. That obviously puts immediate stress on those who have lost their livelihoods, particularly if they have no access unemployment insurance (e.g., they are business owners, contractors, don’t have the necessary employment history, and so forth). The main goals (I assume) are to provide emergency aid to (1) the workers and contractors and (2) for businesses to keep their infrastructures and operations in place so they can return to regular operations when public health consideration permit. The analogy I like to use is we want to keep those businesses’ boats afloat, so we don’t have to waste the time to build new boats when it’s time to sail again.
The point to note about the second bullet (i.e., the safety net purpose) is that we’re doing this for public health reasons – we need to slow down or quasi-shut down the economy to prevent the spread of the virus. Unlike a stimulus bill, such as the ones passed in 2008 and 2009, the goal is not per se to stimulate the economy to operate closer to full capacity by promoting demand and new investment. That will come later when the crisis has lessened or passed; at least, I assume that it will be necessary to prime the pump when public health considerations start to give the all clear. But at this point, the government is shutting down the economy, so it shouldn’t be trying to artificially pump up demand. Explicitly stimulating demand would be like the government stepping on the brake pedal with its public health foot and stepping on the accelerator pedal with its Keynesian stimulus foot. Crazy. Of course, providing social insurance assistance to individuals and propping up businesses so they can later resume operations will stimulate demand (compared with just stepping on the public health brake) but that is not the main purpose. It is to help people to buy necessities – food, housing, etc. – and to prevent businesses from abandoning their operations.
In any case, that is the frame that I used to evaluate the handful of tax provisions in the CARES Act. (It is worth noting that these few provisions add up to almost $600 billion in reduced federal revenues, as detailed here by the Joint Committee on Taxation’s estimate, so they comprise 25% of the bill’s fiscal cost.) As a general matter, it seems difficult to argue that $2 T billion is too thin or parsimonious and I would not make that claim. Rather, I think (as usual) Congress allocated quite a bit of money for stuff outside the basic purposes. Reallocating that money would allow increasing assistance within its purposes. For example, if the slowdown/shutdown runs for several months – I assume highly possible – $1,200/person is not going to permit many people to buy food and pay their rent or mortgage for that long. Anything to increase the rebate amount to those who will really need it makes sense to me and that is the tenor with which I express my criticisms of what Congress did in its fit of bipartisan glory.
In any case, here are the head scratching provisions that I noticed in reviewing the legislation – I didn’t read much of actual bill language, just mainly reviewed the Joint Committee on Taxation’s estimates and other summaries. I did check the text of some provisions, though.
Recovery rebate for those w/o wages or self-employment income. The media has extensively covered the details of the recovery rebate. The final compromise seems generally appropriate and reasonable. My assumption is that the Act’s unemployment insurance (UI) provisions are the cornerstone way that laid-off workers and independent contractors with diminished incomes are being helped – both the expansion to cover the self-employed (contractors) and the $600 increase in the benefit amounts. I don’t know much of anything about the UI system or the CARES Act changes to it beyond the media descriptions. This opinion piece makes the case for approaching the problem the way the Europeans have – essentially mandating retention of employees and having the government pay 80% of their wages (up to some max wage amount). I’m agnostic about that, although it seems unlikely to work in the USA for a variety of reasons (political and practical). In any case, the rebates are intended to supplement the UI changes, but I assume are still largely directed to help the same folks (unemployed or underemployed employees or independent contractors) with extra money, as well as others who do not have access to UI but experience a drop in income (lost new job, between jobs and can’t get a new one, etc.). I assume the rebate is not intended to help those who have not or are unlikely to suffer a drop in income.
In that context, what perplexes me about the design of the recovery rebates is that they will go to many individuals whose income is unlikely to drop as a result of the coronavirus outbreak much, if at all. I’m thinking particularly of retirees who have no wages or self-employment income or those living purely on investment income (interest, dividends, and so forth), pension and retirement account distributions, social security and so forth. It seems unnecessary to me to provide rebates to individuals who have substantial amounts of those types of income (e.g., maybe $25K single and $50K married joint). If my income were not above the income limit, I would be in that category. My four siblings and my MIL will get rebates and their incomes will be largely unaffected. I have no idea how much money would have saved by cutting out people like that, but I think paying larger rebates to the rest of the population would have been better. But then I don’t know how feasible making those types of distinctions would be for the IRS.
A few other observations or asides about the design of the rebate:
- It seems odd to call it a “recovery” rebate, since that implies that it is something closer to stimulus. To me, popular names chosen by Congress are often inane, but I get how they are important for political messaging purposes. But why would Republicans who consistently diss Keynesian stiumulus (almost none of them even voted for the 2009 bill) agree to that?
- With regard to my basic point above, I think it is ironic that Congress has disqualified individuals with very modest amounts of investment income ($3,600) from receiving the earned income tax credit – a wage subsidy designed to encourage work and/or provide assistance to low-income working people – but gives rebates to people with substantial amounts of investment income who are suffering little economic dislocation because of the coronavirus.
- Given Republican ideology, I fully expected that undocumented individuals would be cut out. It still irritates me because many of them have been working and paying taxes in the US for years and are important to the functioning of the economy. I also wonder if putting them under more economic stress won’t contribute to spreading the virus. I’m not saying it will, but I can imagine it might because it will make it more difficult for those folks to respect social distancing rules etc. But ideology rules.
- The rebate eligibility rules further illustrate how Congress must believe that the cost of parental support of college students and high school seniors does not deserve recognition by the tax system. Those folks are the true rebate orphans. A rebate is not paid to either the family or an individual age 17 or older who is or could be claimed by as a dependent (in tax year 2019). In eliminating the dependent exemption (and doubling the child credit), TCJA took a big step in that direction (it did allow the taxpayer a temporary credit one-quarter of the child credit to ease the transition). The recovery rebate is another step down that road. I don’t understand the rationale behind the approach, unless it is the assumption that children 17 and older should, as a social norm, be supporting themselves and if they’re not, their parents don’t need help in doing so. This whole process started with the allowance of the child credit back in 1997; a change proposed and championed by a former Minnesota senator, Rod Grams – to add an item of trivia.
Retroactive allowance of certain losses. This provision is the biggest head scratcher and is the only one that sets off my outrage meter. I’m generally mild mannered regarding tax changes that can be viewed as cynical insider deals. My rule of thumb is to assume the best. But this smells bad to me. It leaped out at me when I first looked through the Joint Committee’s estimate for the bill. Two days later the NY Times ran a story on it providing some confirmation for my outrage.
TCJA made many business base expansion changes to partially “pay for” its corporate rate cuts and other business tax reductions (e.g., the 20-percent QBI deduction). One of these base expansion changes was to prohibit high income individuals actively engaged in conducting a pass-through business from using its losses to reduce tax on other income (such as interest, dividends, capital gains, and wages). These rules only applied to taxpayers whose incomes exceeded $500K ($250K for singles). Similar rules had limited farm losses for many years. The conventional wisdom was that this mainly affected three categories of individuals – hedge fund managers, private equity investors, and real estate developers, many of whom meet the active participation requirements (under the passive loss rules) and have lots of other income.
As an aside, this is the only TCJA change that I thought could justify President Trump’s claim that TCJA would raise his taxes (the other plausible assumption was that his assertion was just another of his falsehoods or exaggerations). It could have done that by prohibiting use of the tax losses from his real estate holdings (depreciation and so forth on the hotels and resorts he owns) from reducing his income from licensing (selling his name to put on other hotels and resorts or his royalties from the Apprentice and so on), as well as any passive investment income he has.
This TCJA provision was not a minor revenue offset. The Joint Committee’s TCJA estimate showed it would increase taxes by $150 billion; because it was an individual tax provision, it was scheduled to sunset in 2025, so that was an 8-year effect. The CARES Act suspends this provision for three tax years, retroactive to its original effective date; that is, its provisions will not apply to tax years 2018, 2019, and 2020. (The affected taxpayers are probably now filing amended 2018 tax year returns to get refunds.) The Joint Committee apparently underestimated the effect of the original provision, since its CARES Act estimate now shows a $170 billion cost of the 3-year suspension – $20 billion more than it was expected to raise over eight years when TCJA passed! (This is an exception to my general rule of thumb (discussed in this post) that estimates of business base expansions are typically too high.)
This $170 billion cost equals 58% of the outlays for the recovery rebate. Skipping this provision probably would have allowed paying two $1,000 rebates, rather than one $1,200 rebate. Given the purposes for the CARES Act (at least based on my formulation), I fail to see how allowing these losses furthers its purpose – how does giving big checks to hedge fund managers, private equity guys, and real estate developers help people deal with the COVID-19? Are we expecting them to otherwise go out of business or to provide rent holidays? I doubt it; this is certainly no strings attached money. Even if this were a Keynesian style stimulus bill, this would be one of the worst ways to stimulate demand that I can imagine. Handing checks to rich guys just doesn’t do much to stimulate demand. The cynic in me assumes that the White House insisted it be included; it appears to have been in the Republican version from the beginning. I’m guessing that dropping it was not negotiable, unlikely cutting out elective officials and their families from the direct relief assistance for businesses. This probably was a bigger deal. Sad.
Charitable contributions for nonitemizers. The Act allows a charitable contribution deduction to nonitemizers for tax year 2020. This deduction is capped at $300 and is limited to cash contributions (no used clothing or food stuffs, thankfully). The sense of this – whether in the context of the purpose of the CARES Act or more generally escapes me. Given the extremely low cap ($300), it will mainly reward people for contributions that they would have made anyway. If the goal is to encourage people to give to COVID-19 relief efforts, the most charitable description of the provision is that it provides a “signal” or tip of the cap to those who do so. The money could have been much better spent on other efforts. The revenue reduction is modest (about $1.5 b), but still.
That said, as I have discussed here and here, I think the charitable contribution incentives (federal and Minnesota) need reform. TCJA’s large standard deduction increased the need for reform, but this isn’t a step in the right direction nor is it the time or way to do it. Layering on an above-the-line deduction on the existing structure makes little sense and a comprehensive reform should be done thoughtfully and deliberatively after public hearings.
The CARES Act also lifts the AGI limit on the itemized deduction for charitable contributions, so individuals who contribute more than 60% of the AGI in tax year 2020 can immediately deduct those contributions, rather than carrying them over to later tax years. I can construct plausible arguments for this – e.g., it will encourage big contributors to contribute even more in this time of need and/or virus-caused, income reductions make the AGI limits more binding – but it also seems a bit unnecessary and the over $1 billion cost could have been better spent (assuming the goal is immediate relief to those in need) in other ways.
RMD holiday. The CARES Act eliminates the required minimum distributions or RMDs from IRAs, 401(k)s, and other retirement accounts for tax year 2020. This follows the similar practice that Congress adopted after the Great Recession (for tax year 2009). I get the appeal of this when the stock market drops by more than 30% as it just has. The RMD amount is set as a percentage of the account value at the end of the prior tax year (i.e., December 31, 2019 for tax year 2020). That can seem painful when one’s account value has since dropped by 25% or more. Suddenly, the RMD has increased relative to the current account value by 25%. Moreover, it must be painful for investors whose accounts/net worth have dropped by a lot take money out to pay taxes when they want to keep as much invested as possible to earn back the drop in value. So, that’s the appeal. But, but – how does that relate to the purposes of the Act (i.e., to provide social insurance, protection for people who are out-of-work or have had to temporarily shutter their businesses because of the virus)? Obviously protecting retirees who are so well off that they have be required to take money out of their retirement accounts does not fit that purpose at all! That’s my first objection. These people do not like RMDs (ever) because they get in the way of using their retirement accounts as estate planning/bequest devices. I guess the thinking must be never let a crisis go to waste – let’s get some relief from this disliked provision, even if it is only for one year?
Moreover, if this really is a problem related to the virus response (it isn’t), Congress could have been much more targeted or surgical in what it did. For example, it could have allowed taxpayers to calculate their RMDs using a later value (e.g., as of July 1, 2020) or, even better, limited the RMD holiday to taxpayers who have retirement accounts with combined values less than some reasonable amount ($250k?). These accounts can be very large – I keep coming back to thinking about Mitt Romney’s jumbo IRA. Disclosures during the 2012 campaign suggested it could be as large as $100 million; now that he is a senator congressional disclosures reveal it is much more “modest,” about $52 million. (Congressional reporting of asset values provide for wide ranges; for Romney’s IRA the 2018 disclosure shows a value range between $26 million and $131 million. However, the disclosures require very precise amounts of income and Romney reported a $1.9 million IRA distribution for 2018. Assuming that was an RMD, which seems very likely, reverse engineering yields an IRA value of $52 million at the end of 2018.) Do we really need to help people like that as part of addressing the coronavirus? I don’t want to pick on Romney (I like him and deeply respect his courage in calling out Trump’s bad behavior, in particular), but his political disclosures make him an easy target. I’m sure there are many more of the top 0.1% with even bigger IRAs.
The revenue loss from this provision is modest (about $8 b), but it could have been plowed into increasing the rebate amount or providing aid to hospitals. Helping well-off retirees use their accounts for estate planning is totally unnecessary. I’m sure it keeps the financial institutions, mutual funds and others that manage the funds happy, because they will be able to keep on charging fees on the taxes that would have been paid. (I assume most people who would prefer not to take RMDs simply reinvest the amounts, net of the taxes they must pay, in taxable account, so it is only the fees on the taxes that are lost. Also, I would not be surprised if the lobbyists assert that RMDs put downward pressure on the stock market by triggering selling, using that as a claimed justification for the provision. That’s a bogus claim, in my judgment. The amounts involved are trivial relative to the size of the stock and bond markets.)
This has a SALT angle, since this provision will automatically flow through to state income taxes. I assume that all states, like Minnesota, do not independently have RMD provisions, but rather rely on the feds to require account owners to make taxable withdrawals. When the feds put that on hold, it automatically reduces state income tax revenues. That is true even for states, like Minnesota, that tie their laws to the Internal Revenue Code as of a fixed date, since federal law does not automatically make the RMD amount part of AGI or FTI, but rather imposes a punitive 50% excise tax on the failure to take the RMD.
Bottom line Congress added a few unrelated and unnecessary ornaments to bill whose purpose should have been to solely to address COVID-19 problems. The result is some combination of less money to address the problem at hand and bigger federal deficits (at some point that is going to matter).
SALT Speak - Joel Michael's Blog 