The Senate's Draft Phase Four Proposal Is a Mixed Bag

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As Congress gears up for Phase Four of coronavirus relief, it must continue to navigate an almost wholly unprecedented situation. Earlier this week, a leaked summary of a Senate proposal for a Phase Four relief package has some hits and some misses.

One significant feature the draft summary did not include is a payroll tax cut. While payroll tax cuts have significant benefits in more normal economic circumstances, they do little to help those most in need in today’s climate — after all, to be liable for payroll taxes in the first place, one must have a job. Though the logic of a payroll tax cut is to stimulate demand by increasing Americans’ cash on hand, the primary barrier to consumer spending at retail outlets, restaurants and other amusements at the moment is fear of the coronavirus.

Payroll tax cuts would do little to address this fundamental problem. However, though Treasury Secretary Mnunchin has stated that a payroll tax cut will not be in the Phase Four relief bill, he did not rule out the possibility of the proposal making it into future legislation.

The Senate bill was wrong, however, to fail to address tax treatment of remote work during the pandemic, such as Senator Thune’s (R-SD) Remote and Mobile Worker Relief Act of 2020 would do. This would tackle the problem of states aggressively claiming the income of commuting workers who work remotely in their states due to their normal offices being closed.

Thune’s bill would establish a higher threshold of 90 days before volunteer health workers could be subjected to state income taxes, as well as clarifying that remotely-earned income is attributable to the normal place of work for state income tax purposes. For businesses, Thune’s legislation would prevent states from taxing a company simply because one of its employees is working there remotely during the emergency. It would also require states to attribute such work to the state the employee normally works in, not their remote location, for business apportionment purposes.

And the heart of the Phase Four relief package, its treatment of federal unemployment bonuses that are set to expire at the end of the month, has some flaws as well. While it attempts to address some of the most glaring incentive issues with the $600 a week plus-up, it creates some other administrative issues.

Until July 31, Americans receiving state unemployment benefits are eligible for a federal bonus of $600 a week. At this level, many Americans received more money from unemployment benefits than they were at their jobs. Extending this level of federal benefit boost would cost taxpayers hundreds of billions of dollars and could potentially provide a disincentive for unemployed workers to return to their old job or seek out new employment.

Reform to ensure that Americans retain an incentive to return to work is logical, but some evidence suggests it may not be a desperate situation. Approximately 70 percent of enhanced unemployment recipients who returned to work in June were making more money on unemployment than at their jobs, suggesting that most Americans still value the stability and financial security of a job more than temporary benefits.

In that context, the Senate’s proposal to eventually implement a requirement that unemployment benefit recipients receive no more than 100 percent of their previous wages may be more of an administrative nightmare than it’s worth. States do not have the infrastructure in place to effectively administer such a requirement, and enforcing it would likely delay benefits and cost states money.

Instead, Congress should consider proposals such as Rep. Brady’s (R-TX) proposal to keep receiving the $600 bonus for two weeks after being hired, or Sen. Portman’s (R-OH) proposal to receive a $450 a week bonus for a short time after returning to work. Either proposal would more effectively address work disincentive issues without creating new administrative challenges.

While the Senate draft bill represents a positive opening effort, it could still be improved to better protect taxpayers. A simplistic payroll tax cut may not be the right fit at the moment, but remote work issues should certainly be addressed now. So too should the Senate consider modifying its unemployment provisions to ensure that unemployed Americans have access to unemployment benefits without unnecessary administrative delays. After all, if there’s anything draft legislation is made for, it’s constructive feedback and improvement.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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