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Unsanitized: The COVID-19 Report for Dec. 17, 2020

The Tax Time Bomb Congress Can Defuse

And how McConnell suddenly needs a bill to save his Senate majority

 

Unemployed individuals owe taxes on benefits, at the federal level and
in 34 states. (John Morgan/Creative Commons)

First Response

With Mitch McConnell at the negotiating table for the first time,
amazingly, in nine months, talks are creeping toward a deal

on a coronavirus relief package of around $900 billion. Because of the
rigidity of that $900 billion number, the reintroduction of $600
stimulus checks
-half
the size of the first round in March-has caused a four-week cut to the
extension of enhanced unemployment-also half the size of the first
round in March. The extra $300 per week was supposed to go for 16 weeks,
now it's targeted at 12.

It's wrong to pit targeted relief for the unemployed against broader
relief for the working class, especially as Republican desperation to
secure a deal grows (more on that in a minute). But there's another
difference between the two types of relief: stimulus checks are not
taxed, but unemployment benefits are.

This has been largely forgotten by the media and is assuredly unknown to
most unemployment recipients. But the mass of unemployment benefits
delivered this year-about $130 billion through October
-are
all taxable. One of the hidden reasons that poor people who were
unemployed did so well under the CARES Act is because nothing was
withheld from their unemployment benefits, including the $600/week
federal boost. But all of those taxes are due, at the federal level and
in 34 states that tax unemployment benefits
,
and the government will start asking for it in tax returns next year.

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This is targeted anti-stimulus, on precisely the people hit hardest by
the pandemic economically. But Congress has an option. In this relief
package, it can make unemployment benefits during the pandemic
non-taxable, and prevent a snap-back that will stunt economic recovery
at the worst possible time, in the early months of next year, before
vaccine takeup brings the economy back to life.

The more you collected from unemployment without taking taxes, the more
you'll owe after the fact. This means that the most vulnerable people
in America, the 3.94 million

who have been out of work for over six months, have the most tax
liability. The IRS does instruct people

to withhold a portion of their unemployment insurance to "avoid a
tax-time surprise," but almost nobody does that. People in that position
need all the money they can get.

One thing to note here is how this will manifest itself. As Howard
Gleckman of the Tax Policy Center explained to me, the standard
deduction was raised in the Trump tax law to $24,800 (NOTE: that's for
married couples filing jointly. For single filers, the standard
deduction for 2020

is $12,400). That's likely to cover much of what even long-term
unemployed people received in benefits during the pandemic. "If you lost
your job in March, and your income was only unemployment insurance,
you'll still be paying no income tax on this and in many cases very
little," says Gleckman. Of course, if you had a higher-paying job that
you lost, or if you earned above the standard deduction, you will owe
money, perhaps a substantial amount.

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The bigger problem is this. Typically, with the Earned Income Tax Credit
and Child Tax Credits, the working poor would receive substantial money
back in a refund. This has become an economic expectation for millions
of people. Refund checks are often used to replace durable goods, like
refrigerators or washers and dryers, or pay off credit card bills.
"People have a system in their heads, they run up credit cards until
February, then get the refund and pay them off," Gleckman says.

That familiar trajectory will not exist in 2021, however, because of the
looming unemployment tax bomb. Those living on unemployment will not get
a refund, and depending on their earnings from early in the year may owe
some money. Income from unemployment is not "countable" toward the EITC
or CTC.

Combine that with another problem. Thanks to the $600/week boost, some
poorer Americans may have higher income through unemployment this year
than in years past. Because of the way the U.S. ties income levels to
federal benefits, and because unemployment counts as income, some people
may have to pay back things like tax credits to purchase health
insurance
,
or nutrition assistance

(commonly called food stamps). That will begin to hit people in the tax
returns they file as soon as February. Keep in mind that these people
will already see a gap in their benefits

in January because Congress is so late with the extension. So it's
month after month of economic blows.

(A side note is that a similar situation applies to federal workers who
were forced to take a payroll tax deferral that they will have to pay
back starting in January. Almost no business adopted this, but federal
workers had to
.
This will have the effect of double withholding for four months, after
having no withholding since September. Those who didn't plan will have
to deal with smaller paychecks.)

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This is significant anti-stimulus at the worst possible time. In effect,
the one-time stimulus check and unemployment boost will be offset, for
millions of people, by the lack of an expected refund and even tax
liability. That blunts the impact of those relief measures. "This will
not only affect individual households, but have some effect on the
economy," Gleckman says. "It's taking money out of one pocket and
putting it into another."

That doesn't have to be the end of the story. Congress has the
authority, of course, to exempt all unemployment insurance since the
beginning of the pandemic from federal taxation. It could also change
the terms of various work-based tax credits

for 2020 to ensure a similar level of benefit for those who were
involuntarily unemployed in the pandemic. This has not been part of the
negotiations thus far, and I'm sure the cost is a big hurdle.

But that's just the point. Those costs will be borne by the
unemployed-easily the people screwed the most in the pandemic.
Somebody should stand up for them, or else they'll get a rude
awakening come tax season.

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The New Democratic Leverage

Democratic leaders might protest that removing tax liability for
unemployment benefits and increasing the length of the unemployment
extension or the size of (and eligibility for) the stimulus checks
increases costs, and Republicans have set a hard line at $900 billion.
But Mitch McConnell let his slip show a little bit on why he ended up
back at the bargaining table, without his cherished corporate liability
shield, nine months after the CARES Act. On a private caucus call with
GOP Senators, McConnell said direct payments were needed in the package
because "Kelly and David are getting hammered
."

Kelly and David refers to Sens. Kelly Loeffler and David Perdue,
contestants in runoff elections on January 5 in Georgia. McConnell is
implicitly saying here that the outcome of those races, and consequently
the Republican Senate majority, depends on passing a relief bill. So
think about what that means: if about 13,700 votes shifted to Perdue in
the November election
,
guaranteeing Republicans a 51st Senate seat, there wouldn't be a
relief package at all. Unemployment programs propping up over 13 million
Americans would expire, evictions would resume, and the skyrocketing
poverty rate

would just keep going.

The second part of that is that McConnell is desperate. He sees his
Senate majority slipping away, and needs to throw a bone to the public
in order to secure it. That gives Democrats more ability to set terms
than they might recognize. The relief package on the table is too small
to produce broad relief. The direct payments and unemployment boost is
at half the level of March. The lack of state and local fiscal aid

will produce brutal austerity. And because it's wrapped into an
omnibus spending package that puts off the next must-pass bill until
next September, it heralds a new normal of austerity
.

Democrats don't have to accept the austerity doom loop
.
McConnell is refreshingly blunt. He's telling his caucus that he needs
this bill to retain power. So how much is that worth to him? Enough to
kill the corporate tax "double dip
"?
Enough to make unemployment non-taxable? Enough to add state and local
back in? This really is the last train leaving the station, so
Democratic leaders need to think hard about what they want, and what
McConnell needs.

Days Without a Bailout Oversight Chair

265
.  

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Today I Learned

* I was on Democracy Now this morning
talking about the COVID relief bill. Here's a clip
.
(Democracy Now)

* Winter is a worst-case scenario

for the spread of the virus. (Wall Street Journal)

* There are extra doses in the Pfizer vaccine vials

that could allow 40 percent more vaccinations. That actually offers more
economic relief than Congress. (CNBC)

* Of the 50 biggest U.S. companies, 45 have turned profits

in the pandemic, while laying off workers. (Washington Post)

* Young adults are absolutely at risk from COVID
.
This was a deadly misimpression. (New York Times)

* The Main Street Lending Program is an oil and gas lending program
. Nothing
about the Fed lending facilities will be missed. (Bailout Watch)

* Dumping chemicals throughout the White House is safety theater

that won't do anything. (Stat News)

* Why are these antibody drugs that could cut hospitalizations going
unused

during a surge? (CNBC)

* Speaking of which, it looks grim in California

right now. (Los Angeles Times)

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