Now It's the Senate's Turn on Stimulus

Now It's the Senate's Turn on Stimulus

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Plus, how much aid do state and local governments really need?
Monday, March 1, 2021

Stimulus Update: Now It's the Senate's Turn

Democrats’ sprint to pass a $1.9 trillion Covid relief package ahead of the March 14 expiration of enhanced unemployment benefits is more akin to a relay race. The House of Representatives, as expected, approved the plan early Saturday morning, passing the baton to the Senate, where the legislation will face a fresh set of hurdles.

The final vote in the House was 219-212, with two Democrats, Kurt Schrader of Oregon and Jared Golden of Maine, joining all Republicans in voting against the bill. Democrats can’t afford even one defection in the evenly divided Senate. They’re using a budget reconciliation process that will allow the bill to pass with a simple majority vote, but all 50 Senate Republicans are expected to oppose the package.

To get Democrats on the same page, President Biden held a virtual meeting on Monday afternoon with a group of centrists from his party, including some who have questioned whether the $350 billion provided in the rescue package for state and local governments could be better targeted (see more below on the state aid).

No minimum wage hike … at least for now:
The Senate version of the bill will look different than the House-passed package. The House included an increase in the federal minimum wage to $15 an hour in its version of the legislation and did so even after the Senate parliamentarian ruled last week that the provision doesn’t meet the requirements for inclusion in that chamber under the reconciliation process.

Progressives are urging the White House to have Vice President Kamala Harris, as president of the Senate, overrule the parliamentarian. “Outdated Senate rules and an unelected parliamentarian should not get to decide whether the American people get a $15 minimum wage,” Rep. Mark Pocan (D- WI) said in a statement.

But the White House has made clear it won’t pursue that path. “That’s not an action we intend to take,” White House Press Secretary Jen Psaki told reporters, adding that Democrats don’t have the 50 Senate votes that would be required for the maneuver.

So the Senate will strip out the minimum wage hike, and it also won’t include an alternative proposal from Senate Finance Committee Chairman Ron Wyden that would have taxed corporations that didn't increase wages on their own. Democrats abandoned that Plan B over the weekend after it proved too problematic.

The political reality:
Removing the minimum wage provision probably helps the White House in its efforts to pass the relief package, given that Democratic Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona opposed the increase. But the revised Senate package will get sent back to the House, where the exclusion of the minimum wage hike could still complicate the outlook. House Speaker Nancy Pelosi (D-CA) said Friday she was confident that Democrats could pass a relief bill without the minimum wage hike, but she’ll have to show that she can hold her narrow majority together to do it.

Psaki said Monday that raising the minimum wage remains a priority for Biden but the White House has no plan yet on how to accomplish that goal.

What’s next:
An initial Senate vote on the relief plan reportedly could take place as early as Wednesday.

How Much Aid Do State and Local Governments Really Need?

The $350 billion in state and local aid included in Democrats’ $1.9 trillion Covid relief package is proving to be another point of contention, even among Democrats. Several Democratic senators have reportedly pushed for changes to that portion of the legislation, fueled in part by concerns that states could respond to an infusion of more federal aid by cutting taxes instead of devoting the additional funding to pandemic-related needs.

“We could distribute billions to the states, and they turn around and lower taxes — there are governors talking about that, and it’s not the point here … there should be a prohibition against voluntarily diminishing revenues,” Sen. Angus King (I-Maine), who caucuses with the Democrats, told The Washington Post last week.

State shortfall not as bad as feared:
Nearly a year after the first coronavirus-related lockdowns, data show that the impact on most state budgets has been far less devastating than early forecasts had warned.

“Early in the pandemic, state and local governments appeared to be in danger of losing hundreds of billions of dollars — or by some estimates upwards of $1 trillion — in revenue,” the Committee for a Responsible Federal Budget noted recently. “This worst-case scenario has thankfully been avoided, due in large part to the robust federal response and a relatively strong but uneven partial economic recovery. While some state and local governments are still hurting, others are doing quite well and hardly any are doing as badly as feared.”

As Mary Williams Walsh of The New York Times reports, The Urban-Brookings Tax Policy Center has found that total state revenues from April through December were down just 1.8% compared to the same period in 2019.

An analysis by Moody’s Analytics economist Mark Zandi pegged the state and local shortfall at about $60 billion through fiscal year 2022 (including the federal aid already approved). By contrast, a January analysis by the left-leaning Center on Budget and Policy Priorities said that states, localities, tribal nations and U.S. territories face total shortfalls of about $300 billion through fiscal year 2022 (again, after factoring in previously approved aid).

“Most states (34) still project lower revenues for the current fiscal year than they expected before the pandemic struck, our analysis of these data indicates,” the center’s Michael Leachman and Elizabeth McNichol wrote in a report published last week. “In some cases, the forecasts are much lower.”

Better targeting?
Sen. King and others have proposed directing some of the proposed $350 billion in aid for state and local governments toward investments to improve broadband, and some economists have suggested that repurposing some of the money for infrastructure could be more useful. “Say they would go to $150 billion for state and local aid — that would give them $150 billion for infrastructure,” Zandi told the Post.

Jason Furman, a former top economist in the Obama administration, similarly told the Post that the proposed $350 billion in aid exceeds the immediate need: “It should either be better defined by focusing on what it should be spent on, like infrastructure or broadband; what it should not be spent on (like tax cuts); or the total should be reduced.”

Some Democrats and economists argue that states’ pandemic-related costs are set to jump as they push to reopen schools and provide vaccinations — and that many local governments are hurting worse than states and still need significant help. Those backing a larger aid infusion also warn that the pandemic isn’t over yet, and emerging variants create new uncertainty and risk for budgets. And they note that the unequal economic toll of the pandemic, which has hurt lower-income workers far more than those higher up on the ladder, has both blunted state revenue losses and increased the need to spend, so that focusing only on better-than-expected revenues provides an incomplete picture.

On top of all that, they argue, the goal shouldn’t just be to restore the pre-pandemic status quo but to “build back better,” as President Biden put it — meaning that state and local investment plans should be updated. “They’ll need to hire back teachers, health care workers, and others to support a robust recovery,” CBPP said in its report. “Restoring that level of job loss will require some $40-50 billion alone.”

Read more at the Committee for a Responsible Federal Budget, the Economic Policy Institute, the Center on Budget and Policy Priorities or The New York Times.

Number of the Day: $350 Billion

If private insurers paid the same prices as Medicare, overall health care spending in the U.S. would drop by about $350 billion a year, according to an analysis by the Kaiser Family Foundation released Monday.

“Health care expenditures are projected to account for 18% [of] the United States gross domestic product (GDP) in 2021,” the Kaiser analysts said. “Shifting private insurance to Medicare rates would decrease this by about 1.5 percentage points, making the share of GDP spent on health care 16.5% of GDP.”

Most of the drop in spending would hit hospitals’ bottom lines, and it’s not clear what effect the reduction would have on the overall health care system. And even with the big drop in spending, the U.S. would still be an outlier: The reduced spending as a share of GDP “would still be a far higher amount than comparable countries spend on health care, which ranges between 9% and 12% of GDP.”

Warren Revives Wealth Tax Proposal

Massachusetts Sen. Elizabeth Warren (D) on Monday unveiled a proposal to tax the net worth of the wealthiest Americans, a move she says would raise roughly $3 trillion in revenues over 10 years.

The Ultra-Millionaire Tax Act would impose an annual tax of 2% on net worth between $50 million and $1 billion. Households with assets of more than $1 billion would face an additional 1% surtax, for a total wealth tax of 3%. The tax would apply only to the top 0.05% of households, Warren said, without affecting the taxes of the remaining 99.95%.

The proposal, which was also introduced by Reps. Pramila Jayapal (D-WA) and Brendan Boyle (D-PA), is similar to a plan Warren offered during her run for the Democratic presidential nomination in the 2020 election.

Warren said Monday that the tax would serve a dual purpose, helping fulfill President Biden’s pledge to invest in infrastructure, health care and education while also combatting growing economic inequality.

“We have watched the wealth of the billionaire class in America increase by more than a trillion dollars over the last year,” Warren said Monday. “A two-cent wealth tax would just help level the playing field a little bit, and create the kind of revenue that would let us build back better, as Joe Biden says.”

Beefing up enforcement: The bill would also provide $100 billion for the IRS to hire more personnel, modernize technology and enhance enforcement. At least 30% of those subject to the tax would be audited automatically, and a 40% “exit tax” on net worth over $50 million would be applied to anyone who seeks to leave the country.

Billions from the 100 richest: Warren’s tax would generate $78 billion from the 100 wealthiest households, according to a Bloomberg analysis Monday. Amazon’s Jeff Bezos would see the biggest bill, paying about $5.4 billion this year, while Tela’s Elon Musk would pay about $5.2 billion and Microsoft founder Bill Gates would pay about $4 billion.

Questions about Warren’s approach: Warren released a new analysis from University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman that projected $3 trillion in revenue from the proposed wealth tax between 2023 and 2032. But critics of earlier versions of Warren’s proposal have argued that a wealth tax would be far less effective, due in part to tax avoidance by the super-wealthy.

Some critics have also questioned whether a wealth tax would be constitutional, a complex issue that could produce a serious barrier to creating such a levy in the U.S.

Unlikely to pass: Although the idea of a wealth tax is popular with a majority of Americans and the Warren bill is backed by many liberal-leaning groups, it is not expected to be enacted any time soon. As a candidate in 2020, Biden showed little interest in a wealth tax, and the White House is not expected to back the new proposal.

Still, White House Press Secretary Jen Psaki said Monday that the president is sympathetic with Warren’s effort. “Addressing the inequities in the tax code is something he talked about as part of the Build Back Better agenda and something he remains committed to,” Psaki said at a press conference. “He has a lot of respect for Senator Warren and is aligned in the goal of making sure the ultra-wealthy and big corporations finally pay their fair share.”

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