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Need for Stimulus or Relief Will Shape Congress’ Next Virus Bill

May 26, 2020, 8:46 AM

The contents of the next coronavirus relief package will hinge on a central question—whether the goal should be to provide another tourniquet for the economy or a crutch to help return it to normal.

House Democrats planted their flag for the upcoming negotiations by passing a $3 trillion relief package (H.R. 6800). Republican leadership and the White House are taking a more cautious approach, calling for some time to measure the impact of previous relief bills and determine what else is needed to get the economy on track.

The tension over whether the next package should aim to provide more aid or stimulate a reopening economy is evident in two of the key areas of disagreement: whether unemployment benefits and further federal aid to states should be extended in the next bill, which could rival or exceed the size of the third law, (Public Law 116-136), known as the CARES Act.

“Republicans know CARES was not the end of the congressional response, but they clearly don’t feel the same urgency as their blue state counterparts,” said Liam Donovan, a principal at Bracewell LLP in Washington. “You might think of this ongoing pause as walking away from the legislative bazaar—blithely dismissing what they deem a liberal wish list, winding down the clock, and lowering the price on the inevitable next phase.”

Aides on both sides of the aisle expect talks to gain steam in June. By that time, the effectiveness of the Federal Reserve’s new emergency powers and the return to operations of some nonessential businesses could weigh heavily on the next steps.

There appears to be bipartisan momentum behind certain provisions in the House-passed response bill, including tweaking the employee retention credit to make it more usable, providing further financial assistance through the tax code to help businesses cover fixed costs during shelter-in-place orders, and loosening IRS rules on deductions related to loans issued under the Paycheck Protection Program. Less clear is whether Republicans would agree to another round of direct payments to Americans, something they viewed as an emergency bridge to increased unemployment benefits.

“It does strike me that there’s room to compromise as they move to the next bill,” said Andrew Grossman, chief tax counsel for House Ways and Means Democrats, during a May 22 panel discussion.

‘Pre-Negotiation’ on Unemployment

Aides agree that the parties are in a ‘pre-negotiation’ phase, trying to build consensus within their own ranks.

A $600 weekly increase in unemployment insurance, set to expire at the end of July, will be critical to those talks. It is popular among Democrats, but Republicans see it as disruptive to the labor market in re-opening states.

Two influential Senate Finance Committee members have launched opening bids in an effort to reach compromise.

Sen. Rob Portman (R-Ohio) is calling for a $450 weekly “back-to-work bonus” for people who can go back to work before the end of July. The proposal, which he intends to include in the next bill, would use funding from the increased unemployment benefit to fund the bonus, but keep that beefed up insurance in place for those who don’t have a job to return to.

Sen. Ron Wyden (D-Ore.) is drafting a proposal that would extend the benefit by tying the benefit increase to the unemployment rate. The idea would be to sidestep the politics of extending the subsidy by automating it.

“If you can tie things to economic indicators that can be helpful, it just has to be done right,” a Senate Republican staffer told Bloomberg Tax when asked about Wyden’s idea, though the aide said there is concern that the increased benefit would fuel continued high unemployment.

The aide said a setting a sunset date for the provision might help convince Republicans.

The Next Deadline

There is a closer deadline when it comes to aid for states and localities. Most state and local fiscal years end June 30, and early data on lost tax revenue could drive action on more federal aid.

But for now Republicans are gambling that the authorization Congress gave the Fed to extend credit to state and local governments—yet to be fully implemented—will lessen the need for more direct federal help.

A key area to watch is how states assist smaller counties, cities, and towns, since many of those smaller governments won’t be able to access the Fed’s emergency program.

“Currently we still have additional funds to probably the tune of over a trillion dollars that’s yet to actually be put out into the market from the last CARES Act,” Rep. Patrick McHenry (R-N.C.), the top Republican on the House Financial Services Committee, told Bloomberg Television last week. “So let’s make sure that those dollars are effective before we spend again.”

The more gradual approach towards the next bill also applies in the other direction: Republicans don’t want to pare back existing relief measures like a CARES Act provision allowing businesses to carry back net operating losses as far back as five years. H.R. 6800 would reduce that benefit.

Mark Warren, chief tax counsel for Senate Finance Republicans, indicated during a May 22 panel discussion with Grossman that Republicans wouldn’t be open to passing something that they would view as a retroactive tax increase.

“Especially when economists all say that increasing taxes in a recession—it hasn’t been declared yet, but it’s hard to imagine we’re not—that that’s just really the wrong policy for a recovery,” Warren said.

—With assistance from Lydia O’Neal.

To contact the reporter on this story: Colin Wilhelm in Washington at cwilhelm@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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