Last week, House Democrats unveiled and passed the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) Act, a $3 trillion stimulus package to address the effects of COVID-19 on businesses, state and local governments, and individuals. The bill is the House Democrats' starting point for negotiations with the Republican-led Senate. This weekly newsletter outlines the latest developments in Washington, including major tax, small business and financial services developments related to Phase Four negotiations and regulatory guidance from various agencies.
What to Expect in Next Economic Recovery Package
House Democrats’ Opening Bid—The HEROES Act
Only four days after its May 12 introduction, the House narrowly approved the HEROES Act (H.R.6800), 208-199. The legislation contains Democratic policy priorities, including $875 billion in state and local funding, a top priority of Speaker Nancy Pelosi (D-CA) and many other congressional Democrats.
Other major provisions in the bill include:
- Increases to Economic Impact Payments.
- Incentives for working families, including expansions of the Child Tax Credit (CTC), the Child and Dependent Care Tax Credit (CDCTC); Dependent Care Assistance Plan Flexible Spending Accounts (DCAP FSAs); and the Earned Income Tax Credit (EITC).
- A suspension of the $10,000 limit on state and local tax (SALT) deductions through 2021.
- An extension of Unemployment Insurance provisions enacted under previous packages, including an extension of the $600 benefit under the Federal Pandemic Unemployment Compensation program from July 31, 2020 to Jan. 31, 2021.
- The establishment of a $200 billion hazard pay fund for essential workers.
- An expansion of the Paycheck Protection Program, including a repeal of the requirement that 75% of loan proceeds be spent on payroll expenses in order to qualify for loan forgiveness.
- Expansions to the Employee Retention Tax Credit (ERTC) and other funding for various education priorities.
- Various workforce provisions, including changes to eligibility requirements for the Job Corps and YouthBuild programs.
For a detailed review of economic provisions within the HEROES Act, read the Brownstein National Tax Policy Group's analysis here.
Apart from Rep. Peter King (R-NY), House Republicans voted unanimously against the bill. They were joined by 14 Democrats, many of whom cited its high cost as the reason for their opposition. Others asserted the bill was too partisan to pass through the Senate, arguing that more compromise would be needed if another economic response package is to be enacted.
The HEROES Act, which Senate Majority Leader Mitch McConnell (R-KY) has called “a door stop” and “the legislative equivalent of a stand-up comedy," is the House Democrats’ opening bid for Phase Four negotiations. The bill does not contain the liability protections advocated by Senate Republicans. Without liability protections for businesses, McConnell has said Phase Four legislation will not pass the Senate. A compromise bill will likely include liability protections for businesses, in exchange for some state and local funding.
JCT Analysis of HEROES Act
On May 15, shortly before the House approved the measure, the Joint Committee on Taxation (JCT) released an estimate forecasting that the HEROES Act, if enacted, would reduce federal tax revenues by a net $883 billion over the next decade. It is important to note the JCT’s analysis only addresses revenue provisions in the bill; a more comprehensive overview of the bill’s cost will be released by the Congressional Budget Office.
The JCT’s analysis highlights Democratic priorities in the HEROES Act, including helping individuals weather the economic effects of the bill. The bill contains few proposals that benefit businesses, with the exception of an expanded small business Paycheck Protection Program and ERTC, and some other modest proposals. The most expensive item within the HEROES Act, according to JCT, is the individual stimulus payments, which would cost $413 billion, or nearly half of the bill’s total estimate. This is about 1.5 times more than the $293 billion cost of the first round of payments sent to individuals. The difference is largely attributable to the higher amount that the HEROES Act provides for dependents—an increase of $700 from $500 to $1,200.
Also on the individual side, expansions of the EITC, the CTC, DCAP FSAs, and the CDCTC add up to about $147 billion, with a bulk of the cost attributable to the CTC.
Another major cost is the repeal of the state and local tax deduction limitation of $10,000 that was imposed by the Tax Cuts and Jobs Act of 2017. This provision would reduce federal tax revenues by about $136 billion.
The final big ticket item on the individual side is a proposal to provide COBRA subsidies to help individuals who lose employer-provided health coverage with assistance in paying for health insurance. This provision would reduce federal tax revenues by about $106 billion.
On the business side, the expansion of the ERTC would cost about $163 billion—the HEROES Act would expand the credit by increasing it from 50% to 80% of qualifying wages. It also boosts the wage cap to $15,000 from $10,000. Additionally, a payroll tax credit for 50% of qualified fixed expenses paid or accrued after March 12, 2020 and before Jan. 1, 2021 would reduce federal revenues by $30 billion.
Click here for a complete overview of the JCT provisions.
Phase Four Proposals
In the absence of House and Senate negotiations, lawmakers continue to introduce legislation and other proposals for Phase Four. Below are proposals that garnered significant attention last week.
SMART Act. Introduced by Sens. Bill Cassidy (R-LA), Bob Menendez (D-NJ), Joe Manchin (D-WV), Cindy Hyde-Smith (R-MS), Cory Booker (D-NJ) and Susan Collins (R-ME), the State and Municipal Assistance for Recovery and Transition (SMART) Act would allocate $500 billion in emergency funding for states, counties and local communities. The legislation would provide funding for state and local governments facing financial hardship during the COVID-19 pandemic, assisting their effort to avoid layoffs, cutting services and imposing steep taxes as revenues decline. The funding would be trifurcated into the following buckets:
- The percentage of the state or territory with respect to its percentage of the U.S. population.
- The percentage of each state’s share of the U.S. infection rate.
- State revenue loss in proportion to the combined revenue loss of states during 2020.
The House companion was introduced by Reps. Mikie Sherrill (D-NJ), Peter King (R-NY), Josh Gottheimer (D-NJ), Tom Reed (R-NY), Tom O’Halleran (D-AZ), Fred Upton (R-MI), Ted Lieu (D-CA), Brian Fitzpatrick (R-PA), Debbie Dingell (D-MI) and Elise Stefanik (R-NY).
- The Saving Our Street Act. Introduced by Sen. Kamala Harris (D-CA) and Rep. Ayanna Pressley (D-MA), the Saving Our Street (SOS) Act rethinks the federal government’s approach to helping small businesses. Specifically, the bill would:
- Establish a Microbusiness Assistance Fund of $124.5 billion to provide up to $250,000 directly to small “micro” businesses, specifically targeting businesses with fewer than 10 employees. Businesses within a low-income community, or at least half of their employees from a low-income community, may have up to 20 employees.
- Require that business that qualify put people back to work. However, loan proceeds may be used on essentials such as payroll, rent, utilities, insurance, and personal protective equipment (PPE). It also requires employers to maintain pre-COVID-19 levels of health benefits for employees.
- Imposes an income threshold for eligibility. Specifically, businesses earning more than $1 million in revenue would be prohibited from receiving grants. It would exclude publicly traded and hedge fund-owned businesses.
- Rebuilding Main Street Act. Introduced by Sens. Chris Van Hollen (D-MD), Jeff Merkley (D-OR), and Chris Murphy (D-CT), this bill reimagines the current short-time compensation program. Specifically, the proposal would:
- Provide a grant to employers to cover up to 50% of their fixed costs and expenses necessary to reopen and reconfigure their businesses, up to $300,000 per employer.
- Be phased out for employers with less than a 50% reduction in gross receipts, such that employers with less than a 25% reduction in gross receipts from 2019 would be ineligible.
- Increase the current short-time compensation federal limit on hour reductions under a work sharing agreement from 60% to 80% to enable increased payroll support.
- Increase unemployment benefits by $600 per week for the remainder of 2020.
- House Ways and Means GOP Proposals. House Ways and Means Committee Ranking Member Kevin Brady (R-TX) last week lent his support for a number of proposals, which are highlighted below.
- Brady has indicated he wants to use the tax code to incentivize businesses to reconfigure their workspaces and provide testing and protective gear for workers. He suggested last week that tax credits could be used to offsets these costs.
- Brady also suggested tax incentives could be provided to improve domestic supply chains for medical supplies and ingredients.
- He recommended temporarily lifting contribution limits and removing age restrictions on catch-up contributions so as to increase retirement savings.
- He supports the administration’s efforts to reduce payroll taxes.
- Senate Finance Committee. The Senate Finance Committee is currently considering various proposals to help businesses and individuals. This includes:
- Expansions of the ERTC—a modified version of what was included in the HEROES Act.
- Hiring Incentive Tax Credit, modeled after the Work Opportunity Tax Credit that is refundable against payroll taxes.
- Payroll tax credit for fixed expenses, similar to what was included in the HEROES Act.
- COBRA Tax Credit to offset the cost of health insurance for workers that have been laid off.
- Increased DCAP FSA limits; enhanced child and dependent care tax credit; and expanded child tax credit benefits.
- Kudlow: Corporate Rate Reduction. White House National Economic Council Director Larry Kudlow suggested cutting the corporate tax rate in half for companies operating overseas that shift production back to the U.S. He said reducing the 21% rate to 10.5% for these companies “may be … something to look at.”
The Week in Rewind
Much of the focus last week was on the release and passage of the House Democrats’ HEROES Act proposal. This week, both chambers continue to regroup and think through the path forward on the next economic stimulus bill. Below is an update on select additional congressional and administration updates.
Senate Banking Committee Hearing. The Senate Banking Committee held a hearing on May 19 that featured testimony from Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell. The hearing was the first in what will be a series of quarterly hearings intended to provide lawmakers an update on the implementation of the CARES Act, but lawmakers used the opportunity to ask the two economic leaders about potential policy options for future legislation. Some lawmakers pressed Mnuchin and Powell on ensuring transparency into companies receiving CARES Act funding, and others highlighted the need to provide local governments with adequate access to the Municipal Liquidity Facility. Overall, however, Republicans and Democrats generally retreated to their corners--Democrats urged more legislative action and fiscal spending, whereas Republicans were more cautious and would prefer to wait and see the effects of the CARES Act before proceeding.
IRS Struggles to Provide Taxpayer Service During COVID-19. Internal Revenue Service (IRS) Commissioner Charles Rettig has acknowledged that taxpayers are finding it more difficult to interact with the agency as its operations have been disrupted due to COVID-19. At a National Tax Association conference on May 15, Rettig observed that “It’s not lost on us that we need to do more, and we’re trying to do all we can in this current environment.” The virus has forced the IRS to close about 93% of its physical facilitates and require 54,000 employees to telework.
In an attempt to address some of these shortcomings, the IRS announced on May 18 it would be adding 3,500 operators to answer taxpayer calls related to the economic stimulus payments. The assistance, however, would “remain limited,” according to the agency. Thus far, the IRS has issued around 130 million payments totaling about $220 billion.
IVES System Testing. The IRS announced yesterday that it will start accepting a limited number of new requests for a 24-hour period through the Income Verification Express Service (IVES) system to verify a potential borrower’s income. New requests have been on hold since late March due to staffing limitations. On April 27, the IRS began processing backlogged requests made under the IVES system, after recalling about 10,000 employees nationwide. At the time, in an email alert, the IRS noted that it would not accept any new work until the significantly reduced outstanding requests.
On Monday, the IRS conducted a test of the IVES system to allow some staff to work remotely to supplement personnel processing requests at service centers. As part of the test, starting Monday at 11 a.m. EST, the IRS temporarily opened fax lines at four different facilities for 24 hours to accept up to 10% of new work for each IVES participant. The agency will provide updates about accepting new work once they evaluate test results.
As lawmakers rush to enact legislation, agency officials are attempting to keep up by quickly releasing regulations and other guidance. A look at select COVID-19-related implementation guidance and non-COVID-19 related guidance released during the previous week will be published here by the Brownstein National Tax Policy Group.
- PPP FAQs. The Small Business Administration and Treasury Department issued updated FAQs on May 19 related to the Paycheck Protection Program (PPP).
- COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs. The IRS released a set of FAQs on the tax credits. They address questions relating to who can claim the credits, when they can be claimed, how to determine the amount of the credits and how self-employed individuals can claim the credits, among other topics.
- Final Rules on Treatment of Certain Interests in Corporations as Stock or Indebtedness. On May 14, the IRS and Treasury released final rules to determine whether an interest in a corporation is treated as stock or indebtedness or a mix of the two. The regulations adopt rules proposed in 2016 without any major changes.
- Proposed Rules Under Section 162(f). On May 13, the IRS and Treasury proposed rules to limit the deductibility of certain fines and penalties corporations pay to government agencies that are incurred from legal proceedings.
- COVID-19 Tax Tip 2020-58. On May 19, the IRS released additional information on the employee retention credit, which is available for businesses affected by COVID-19.
- COVID-19 Tax Tip 2020-59. On May 20, the IRS released information for taxpayers on why their economic impact payment may be a different amount than they expected.
This document is intended to provide you with general information regarding the federal government's response to the coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.