Trump Pushes More Tax Cuts for Coronavirus Stimulus

Trump Pushes More Tax Cuts for Coronavirus Stimulus

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Plus, the cost of painting Trump's border wall
Wednesday, May 6, 2020

As Trump Pushes More Tax Cuts for Coronavirus Stimulus, Lawmakers Push Back

President Trump’s renewed push for a payroll tax cut as part of the next round of coronavirus stimulus is being met with bipartisan resistance on Capitol Hill, with even some Republican leaders questioning how effective the policy would be. As lawmakers debate the shape of the legislation, Trump’s push for a payroll tax cut likely presages a broader fight over the most appropriate next steps to mitigate the damage from the coronavirus recession and encourage a speedier recovery.

Setting up a clash: As lawmakers debate the next package to address the pandemic, Trump on Sunday drew a line in the sand: "We are not doing anything unless we get a payroll tax cut," he said. Congress in March deferred employers' portion of the payroll tax, but Trump reportedly is “passionate” about a payroll tax cut, which advocates argue will give workers ability to spend and businesses more incentive to hire.

House Speaker Nancy Pelosi quickly downplayed the payroll tax cut idea. “Nobody’s putting anything on the table and saying, ‘Unless we have this, we’re not doing that.’ He shouldn’t either,” she told CNN on Monday.

But while some Republicans have come out in favor of a payroll tax cut, or said they’re at least open to the idea, several key Senate Republicans have voiced significant reservations. "I'm not a particular fan of that,” said Senate Majority Whip John Thune (R-SD), the Senate’s No. 2 Republican, adding that a payroll tax cut only helps workers still on payrolls. “I guess I'm open to being persuaded that it is something that could be effective, but I think some of the things that we're currently doing are having a bigger impact," he said, according to The Hill.

Asked what he thought of a payroll tax cut, Sen. Chuck Grassley, the Republican chair of the Senate Finance Committee, said: "Right now, not much," Politico reports. Sens. John Barrasso of Wyoming, Roy Blunt of Missouri and Susan Collins of Maine were among the other Republicans who expressed skepticism about a payroll tax cut this week.

And, of course, Senate Majority Leader Mitch McConnell made it clear this week that shielding businesses from coronavirus lawsuits is his top priority. “I think I can safely say for our team here, the Republican Senate majority, if there’s any red line it’s on litigation,” McConnell said when asked about a payroll tax cut.

Eyeing other tax cuts, too: The president and administration officials have also discussed and publicly floated some other tax cut ideas. As Jim Tankersley of The New York Times reports:

“Mr. Trump’s advisers are considering several measures that so-called supply-side conservatives have long proposed as a means to accelerate economic growth. In many cases, those measures would expand or make permanent provisions of the sweeping tax overhaul Mr. Trump signed into law in 2017. They include making permanent a provision that allows businesses to immediately deduct the full cost of their investments in equipment and other relatively short-lived assets, which is currently set to begin phasing out in 2022.

“In some cases, the proposals would reverse provisions tucked into the 2017 overhaul to help pay for the overall package, such as limiting deductions on research and development investments in 2022.”

Trump on Tuesday tweeted about a cut in the capital gains tax and allowing business spending on meals and entertainment to be deducted:

“Well run States should not be bailing out poorly run States, using CoronaVirus as the excuse! The elimination of Sanctuary Cities, Payroll Taxes, and perhaps Capital Gains Taxes, must be put on the table. Also lawsuit indemnification & business deductions for restaurants & ent.”

Those proposals come as Republicans increasingly question the need for additional spending measures to counteract the coronavirus recession. “‘No more spending’ has really become the rallying cry of the right,” Stephen Moore, an informal adviser to the president, told the Times, adding that the spending done so far didn’t work. “[N]ow we need to try something else,” he said. “There is going to be civil war in Congress over this.”

Are tax cuts the answer? Democrats aren’t likely to support the tax proposals being developed by the administration. “It’s extraordinarily naïve to think that tax cuts are going to bring this economy back faster,” Democratic Rep. Don Beyer of Virginia told the Times. “I have not talked to a single economist yet who says tax cuts are a viable solution here.”

Economic analysts on the left have similarly slammed Trump’s list of policy proposals. “If you are one of the 30 million people who lost their job last month, you should know that not a single one of these proposals would help you at all. Not one,” Michael Linden, executive director of the Groundwork Collaborative and a fellow at the Roosevelt Institute, wrote in response to Trump’s tweet.

Beyer and two Democratic senators, Michael Bennet of Colorado and Jack Reed of Rhode Island, released a plan Tuesday that calls for extending enhanced unemployment benefits and tying them to economic and labor market conditions. “Passing emergency relief legislation that incorporates automatic triggers would have the enormous benefit of ensuring assistance continues to flow to workers even if Congress itself is unable or unwilling to act,” Beyer said in a statement.

Fiscal Flashes

An Off-Budget Account for Pandemic Spending? Some key lawmakers expressed interest in creating off-budget accounts to pay for pandemic defense, similar to the Overseas Contingency Operations accounts that budget watchers have decried as a gimmick. (The Hill)

Treasury’s Borrowing Details Surprise Wall Street: “Staring down a budget deficit approaching $4 trillion, Treasury Secretary Steven Mnuchin unveiled a plan Wednesday that starts to focus overall issuance increases on longer-term debt. The U.S. will auction $32 billion of 10-year notes, more than the consensus expectation for $29 billion, and $22 billion of 30-year bonds, more than the forecast of $21 billion. In perhaps the most stunning move of all, the Treasury will revive the 20-year bond for the first time on May 20, with an initial offering size of $20 billion, blowing away Wall Street calls for somewhere between $12 billion and $14 billion.” (Bloomberg)

Nine states will borrow to cover unemployment claims: Nine states have told the federal government they plan to ask for $36 billion in advances to cover the surging cost of unemployment insurance payments. Illinois will seek $11 billion in May and June, while California plans to ask for $8 billion for those months. Texas will ask for $6.4 billion in advances to cover three months, while New York will ask for $4.4 billion for three months. (Politico)

Painting Trump’s Border Wall Could Cost $500 Million or More: President Trump still wants a border wall, and he wants it painted black, despite doubts among border officials that such a move is either necessary or wise. Administration officials thought they had talked Trump out of the paint job, which he says will make the wall look more formidable and be hotter to the touch, but the president recently told senior adviser and son-in-law Jared Kushner to get cost estimates for the job. Documents reviewed by The Washington Post show costs ranging from $500 million for two coats of acrylic paint to $3 billion for powder coating the steel bollards that make up some sections of the fence. (Washington Post)

State Budget Cuts Will Deepen Recession: Report

As tax receipts plunge, state and local governments will likely cut back on spending if they don’t receive additional federal aid, making the current recession worse than it would be otherwise, according to a report out Wednesday from Capital Economics.

The analysts estimate that state and local tax revenues will drop by more than 20% in the second quarter, and balanced budget rules that exist in most states will force a reduction in spending to bring budgets in line with receipts. Along with income taxes, sales taxes — which account for about a quarter of state revenues — have been particularly hard hit by widespread shutdowns, and the sharp reduction in travel is reducing fuel tax receipts.

For the 2020 fiscal year as a whole, which ends on June 30 in most states, tax revenues will be down by about 3.5%, the analysts say, followed by a 2% drop in the 2021 fiscal year. In stark contrast to earlier expectations that revenues would grow this year and next, Capital Economics says the total shortfall in state revenues could now come to roughly $350 billion.

A bad precedent: A big drop in tax revenues in during the last recession forced state and local governments to make cutbacks that hurt the economy for years. “In real terms, state & local government spending contracted [after 2009] for the next four years, subtracting an average of 0.4% points from annual GDP growth in 2010-2012,” the report says. “In 2010, the drag from falling state & local spending more than offset the boost from higher Federal government spending. Those cutbacks exerted an even longer-lasting drag on the labor market, with state & local government employment falling by a cumulative 660,000 between 2009 and 2013.”

A quick recovery will limit the damage: Many economists are predicting a steep but short-lived slowdown, followed by a rapid return to something like normal economic levels toward the end of the year. Capital Economics estimates that state tax revenues will return to previous levels in about 12 months, much faster than the three-and-a-half years it took after the last recession. In addition, states have some money in their rainy day funds, and the federal government is already providing support worth more than $150 billion through the CARES Act and extra Medicaid funding.

But the stakes are high: State and local government spending accounts for 11% of GDP and 13% of employment, Capital Economics says, and lower spending could have a powerful negative effect, as we saw a decade ago. States have already begun to announce layoffs and cutbacks, and there’s always a chance that the prevailing economic outlook could prove too optimistic. Ultimately, states will likely need more federal aid, the analysts say. Without it, “states could quickly find themselves in an even larger fiscal hole, in turn resulting in a more severe drag on economic growth.”

Worst Job Losses in History: ADP

The private sector lost 20,236,000 jobs in April, according to the ADP national employment report released Wednesday.

"Job losses of this scale are unprecedented. The total number of job losses for the month of April alone was more than double the total jobs lost during the Great Recession," Ahu Yildirmaz of the ADP Research Institute said.

The report likely underestimates the job losses during April, says CNBC’s Jeff Cox, since it’s based on sampling from the week of April 12, and many more job losses were announced in subsequent weeks.

Still, some economists say we should be reaching bottom soon. “The worst of it is at hand,” Mark Zandi of Moody’s Analytics told CNBC. “We should see a turn here relatively soon in the job statistics. At least for the next few months, I would anticipate some big, positive numbers.”


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