Eight Bad Ideas That Have No Place in Future Stimulus Bills
Policymakers in both parties should keep taking bold action to fight this historic pandemic without embracing these counterproductive or wasteful policies.
by Ben Ritz, Director, and Brendan McDermott, Fiscal Policy Analyst, of the Progressive Policy Institute’s Center for Funding America’s Future.
The enormity of challenges posed by the coronavirus pandemic, and the speed at which crises can take root, demand that our leaders act boldly and quickly. But the need for decisive action also gives leaders an unfortunate opportunity to “not let a good crisis go to waste” by slipping unrelated policies into must-pass legislation. Congress has largely avoided this temptation to date, and it should continue to avoid it while preparing the next rounds of investment, relief, and stimulus.
Unfortunately, some of President Trump’s proposals for the next comprehensive relief bill would not meet this standard. Instead, these ideas risk exacerbating the spread of the disease while recklessly giving money away to those least in need. Although significantly less harmful, some Democrats have also put forth proposals that would do little to mitigate the current crisis and have no place in stimulus legislation. Policymakers in both parties should keep taking bold action to fight this historic pandemic without embracing these counterproductive or wasteful policies.
- Limit Business Liability for Employees Who Contract the Coronavirus: Among the worst ideas proposed by the administration and its Republican allies in Congress is offering businesses immunity from legal liability if they make decisions that cause their employees to get sick. These decisions could include opening their business too quickly or failing to abide by social-distancing guidelines. There is no debate among top economists that social distancing should continue for as long as is necessary for the good of public health, including partial or full business closures. Liability protection would incentivize businesses to take risks with their employee’s health, likely exacerbating the spread of the disease. Moreover, it may not even achieve its goal of hastening the recovery — if consumers do not think it is safe to shop, then businesses will not thrive even if they have legal protections. This proposal would only double down on the public health blunders Trump has already made, such as cutting staffing and financing for vital public health offices, downplaying the virus’ threat, and neglecting states who tried to buy lifesaving equipment.
- Restore the Food and Entertainment Deduction: President Trump has also proposed bringing back the full business deduction for food and entertainment expenses, which he claims would encourage people to patronize restaurants struggling for business amid the pandemic. Restoring this deduction, which has been curtailed over the years to prevent businesspeople from reducing their tax burden through extravagant purchases, will do nothing to encourage diners to eat out as long as they believe it is unsafe to do so. The main beneficiary would be someone like President Trump, a hotel owner with a financial interest in encouraging businesspeople to travel and dine at high-end destinations.
- Cut Payroll Taxes: The Trump administration has repeatedly championed cutting payroll taxes as a preferred form of stimulus. Unfortunately, doing so would provide the greatest assistance to those that need it least. Workers who are laid off or otherwise unable to earn a paycheck would receive no benefit from a payroll tax cut, while someone earning six figures would receive a tax cut more than double the size of what a median-wage earner would receive. Moreover, cutting employer-side payroll taxes would give little benefit to businesses in the short-term as half of their tax payments have already been suspended until the end of 2021, and the other half until the end of 2022. If policymakers nevertheless choose to cut or suspend payroll taxes, these reductions should only apply to the first $15,000 of a worker’s earnings or the earnings of workers whose production capabilities have been idled by the coronavirus. They should also consider replacing the payroll tax with more-efficient tax policies to better meet our economy’s needs in both good times and bad after the current crisis has passed.
- Cut Capital Gains Taxes: The administration has also proposed cutting the income taxes that investors pay on the gains they make from selling stocks and other assets that have appreciated in value. Income from capital gains is heavily tilted towards high-earners: households in the highest-income 1 percent make 22 percent of their income through capital gains in 2016, while less than 2 percent of income that went to all other households came from capital gains. Accordingly, cutting capital gains taxes would be extremely regressive. Additionally, temporarily incentivizing investors to sell their assets would only accelerate the recent crash in market prices.
- Repeal the SALT Cap: The Trump administration has not been alone in using the coronavirus crisis to push for wasteful tax cuts. Some Democratic leaders have floated the idea of retroactively rolling back the $10,000 cap on the amount of state and local tax (SALT) liabilities households can deduct from their federal income taxes. Proponents argue any such proposal would target the benefit towards the middle class, but the SALT cap affects very few middle-class families. The only people affected by the cap are those who earn enough to both benefit from itemizing their deductions and have a large enough state liability to exceed the cap, so repealing the cap would mostly benefit the very wealthy. Ninety-six percent of the benefit of fully repealing the SALT cap would go to the highest-earning fifth of American households, and 56 percent of the benefit would go to the highest-income 1 percent. Further, making this change retroactive obviously would not affect taxpayers’ past decisions about where to live and pay taxes, and would simply offer a windfall to wealthy people in high-tax states.
- Forgive Student Loan Debt: Some Democrats, echoing presidential campaign ideas from Sens. Bernie Sanders and Elizabeth Warren, have also proposed forgiving up to $10,000 of every student loan holder’s debt burden. There is no question that policymakers should be giving borrowers flexibility at a time when a short-term cash crunch will prevent many from making their required payments. But Congress has already addressed this need by suspending required minimum payments and additional interest accrual on public student loans for six months. Forgiving future debt won’t provide any economic benefit until long after the crisis and need for stimulus have passed. Further, untargeted student debt forgiveness would be a regressive policy. Students take on debt to increase their earning potential, and high-income people are more likely to have student debt than low-income people. The steps Congress has already taken achieve the same short-term financial relief as student loan forgiveness in a far more effective way.
- Create Costly Permanent Programs: Some have argued that the government’s ability to spend trillions of dollars fighting the coronavirus and its economic impact now somehow proves that fiscal discipline in normal economic times is unnecessary. Although the government can pay back a one-time cost in future years, permanently large deficits will compound rather than fall over time. The federal government is fortunate to fight this battle against the pandemic at a time when interest rates are low, but those rates may well rise in the future if structural deficits are not brought under control. Rising interest costs threaten to crowd out critical public investments and reduce future economic growth. Accordingly, lawmakers should not accept policies that permanently increase deficits just because debt-financed stimulus is necessary to address temporary problems.
- Enact Other Unrelated Policy Riders: The urgency of action to support the economy unfortunately makes it easy for leaders on both sides of the aisle to attach unrelated riders to emergency legislation. The CARES Act, although generally focused on the task at hand, included some policies that have nothing to do with the coronavirus pandemic, such as extending abstinence-only sex education programs and requiring the Food and Drug Administration to consider approving new kinds of sunscreen. The Trump administration has used the crisis as a pretext to weaken important environmental regulations and suspend applications for green cards. Democrats have also proposed including other policies, such as a permanent $15 minimum wage for workers at businesses that benefit from relief funds, that would not help mitigate the current crisis. These policies and others that do not relate to the immediate health and economic crisis could slow down the passage of much-needed support and should be debated separately on their own merits.
There is no shortage of good ideas to fight the coronavirus and mitigate the economic damage it’s doing to businesses and families. Lawmakers should reject inferior alternatives that would waste important public resources or otherwise exacerbate the crisis.