The U.S. Senate has passed legislation to provide relief to individuals, governments, and businesses reeling from the economic shutdown. Negotiations are ongoing, though it appears this bill will be close to the final product. The Tax Foundation has a good analysis of key elements of the bill. Below we clip parts of the analysis and encourage you to read the whole thing.
The bill includes:
- Expanded unemployment insurance (UI) for workers, including a $600 per week increase in benefits for up to four months and federal funding of UI benefits provided to those not usually eligible for UI, such as the self-employed, independent contractors, and those with limited work history…
- $350 billion allocated for the Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Notably, small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year. Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25 percent or greater reduction in employee compensation.
- Recovery Rebate for individual taxpayers. The bill would provide a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income for recipients, as the rebate is a credit against tax liability and is refundable for taxpayers with no tax liability to offset. The rebate phases out at $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers at 5 percent per dollar of qualified income, or $50 per $1,000 earned. It phases out entirely at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children…
Some crucial business provisions:
- Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000 during the crisis. It would be available to employers whose businesses were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
- Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with 50 percent owed on December 31, 2021 and the other half owed on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period.
- $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020. Loans also come with terms limiting employee compensation and severance pay for firms taking loans. Emergency lending will be overseen by a Congressional Oversight Commission and a Special Inspector General.
Much more in the report. The Seattle Times reports on what the $2 trillion bill may mean for Washington. The story includes a state budget warning.
The full effect of the shutdowns of business and daily life on state government coffers won’t be known until the next revenue forecast in June, but the state’s budget director said an employment and tax-collection crash is surely coming.
“We know that coming up we are going to have tremendous problems. We are likely going to lose billions of dollars in the revenue forecast that is coming,” said David Schumacher, director of the state Office of Financial Management. “We have about $3 billion in reserves, thankfully, but we have to plan for a day when we spend through that just to keep current services.”
Separately, the news from the Federal Reserve is encouraging.
Jerome Powell says the Federal Reserve would provide essentially unlimited lending to support the economy as long as it is damaged by the viral outbreak…
The economic rescue bill approved by the Senate early Thursday includes $425 billion that the Treasury could use to backstop the Fed. That would allow the Fed to boost its lending programs to an astronomical $4.25 trillion.
An article from Harvard Business School’s “Working Knowledge” makes clear just how vital cash is to small business.
Small-business owners trying to weather the coronavirus pandemic will face a financial blow that’s likely to be worse than what they experienced during the Great Recession more than a decade ago, says Karen G. Mills, senior fellow at Harvard Business School.
“This is going to be orders of magnitude worse than the financial crisis,” says Mills, who led the United States Small Business Administration from 2009 to 2013. “Many small businesses will not survive more than a month.”
The article draws heavily on a report from the J.P. Morgan Chase Institute analyzing small business cash reserves. It’s a graphic-rich, clearly-written report that paints a stark picture of businesses operating on a financial tightrope.
We find that, despite the importance of cash reserves, most small businesses hold a level of cash reserves that would provide an insufficient cushion in the face of a significant economic downturn or other disruption. Using a new data asset constructed from over 470 million transactions conducted by 597,000 small businesses from February to October 2015, our analysis shows that half of all small businesses hold a cash buffer large enough to support 27 days of their typical outflows.
As this graph from the HBS piece shows, restaurants operate on the knife edge, with just 16 days of reserve.
Financial support for small business has emerged as a critical component of the Congressional recovery package. More from HBS,
After all, small businesses generate almost 2 million net new jobs a year and employ 47 percent of the workforce. Even though macroeconomists rarely give them their due, Mills says, small businesses contribute 44 percent of US gross domestic product. Helping them withstand a brutal cash crunch will support the broader economy, Mills says. [That’s Karen G. Mills, senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.]
“This is the number one thing that we can do to keep our economy going during this particular crisis,” she says. “This is about helping small businesses, but it’s also about helping their employees and their families. They need to know that there will be a job and a paycheck when we get to the other side of this crisis.”
We’ll give Mills the conclusion:
“Small businesses are the very fabric of our communities, all across the country,” Mills said. “Days matter at this critical time. If we lose these small businesses, our communities are going to look very different when all is said and done, and it will take a long time to bring back the businesses we will have lost.”