Amid virus aid divide, parties find common ground on tax breaks

From direct payments to employer credits, only argument is over how much to commit

“We ought to honor corporations that are doing everything they can not to lay off people,” Senate Finance Chairman Charles E. Grassley says of expanding employee retention tax credits.  (CQ Roll Call)
“We ought to honor corporations that are doing everything they can not to lay off people,” Senate Finance Chairman Charles E. Grassley says of expanding employee retention tax credits. (CQ Roll Call)
Posted July 30, 2020 at 5:00am

There are big-ticket funding and philosophical differences between the parties on the next round of coronavirus relief, including on tax policy. 

But there’s a surprising amount of common ground on a handful of provisions that are likely to serve as the basis for eventual agreement, including on another round of direct payments to individuals, tax credits for companies to keep workers on payroll and aid to families with children.

The nearly $3.5 trillion House relief bill that chamber passed in May and Senate Republican legislation unveiled Monday would provide bigger rebate checks to U.S. households and beefed-up employee retention tax credits. Those two programs alone add up to more than $600 billion in the House bill. 

Also, both bills would waive “use it or lose it” rules for health care and dependent care flexible spending accounts, which allow workers to save a limited amount of pre-tax dollars each year for such purposes. The IRS has loosened some requirements, but households across the country could still be on the hook for thousands of dollars in losses for unused child care services and doctor visits during the pandemic lockdown unless Congress acts.

“You’re going to get a lot more focus on where there’s disagreement,” said Garrett Watson, a senior policy analyst at the Tax Foundation. “But on a good chunk of the bill, you’ve largely got agreement.”

The two parties seem to have concluded it’s a good idea to pump money into the hands of consumers to spur demand and pay employers to keep workers on payroll to keep up supply, Watson said. 

For instance, both chambers’ legislation includes the same basic direct payment, $1,200 for single filers and $2,400 for joint filers, that was in the roughly $2 trillion March aid package. Those amounts would phase out above $75,000 in adjusted gross income, or income before certain deductions and credits, for individuals, and $150,000 for couples filing jointly.

There are substantive differences between the two chambers on direct payments that will need to be worked out, however.

The original March law enabled households with children under age 17 to receive an extra $500 for each child. The new Senate bill would eliminate that age limit and include any college students and disabled or out-of-work dependents, which would sweep 26 million more people into the count for computing payments, according to an American Enterprise Institute estimate. 

The House bill takes a different approach: It would remove the age limit as well, but the number of eligible dependents would be capped at three. However, each dependent would qualify for the full $1,200 per person payment, making a family of five eligible for up to $6,000, versus $3,900 in the Senate bill. 

Those are numerical differences, and probably subject to haggling over cost; somewhere between $300 billion and $400 billion, based on prior estimates.

There is, however, a major political difference in approaches, as the House bill does not require a Social Security number for someone to claim a rebate check as the March payments did, instead allowing the use of a Taxpayer Identification Number.

Republicans say the switch would allow undocumented immigrants and noncitizens to get the direct payments, and they nearly got the provision struck from the House bill on a procedural motion. That 198-208 vote saw 13 Democrats, mainly vulnerable members in districts that backed President Donald Trump in 2016, join with Republicans to try to remove the language.

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Retention credit

Meanwhile, both chambers want to greatly expand employee retention tax credits to encourage employers to hire and retain workers during the pandemic. The March law provided for a 50 percent credit on up to $10,000 in wages paid to a retained employee in the second quarter. So the maximum credit was $5,000. The Joint Committee on Taxation estimated the tax credit would cost $54.6 billion.

Both House and Senate bills would expand the credit to cover the third and fourth quarters as well. The Senate measure would triple the maximum credit to $19,500 per employee, and the House version set a $36,000 limit. The House bill’s provisions for the tax credit were estimated to cost $164 billion. The Senate version would be less because of the lower maximum and also because it would apply only to companies with 500 or fewer employees. The House version would cover companies with up to 1,500 employees.

“I think we ought to honor corporations that are doing everything they can not to lay off people,” said Senate Finance Chairman Charles E. Grassley, R-Iowa. “This is a major step forward,” Rep. Stephanie Murphy, D-Fla., author of the House tax credit, said of the beefed-up Senate credit. 

On these tax policy matters, the argument isn’t over whether they are a good idea, it’s over the amount of dollars to commit, said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center. “You go down the whole line, and the Senate Republicans said, ‘Our opening bid is a trillion dollars,’” Gleckman said. “Think about that, that’s where they’re starting. It’s only going to go north from there.”

Even one of the biggest nontax disputes, on unemployment insurance, is over dollars and not philosophy, Gleckman said. The divide is whether to stick with the March bill’s generous $600 a week in added unemployment benefits, or to cut it temporarily to $200 a week while states figure out how to tailor benefits for each individual to 70 percent of that person’s working wages.

Flexible spending accounts

Both chambers also largely agree on temporarily loosening restrictions on flexible spending accounts. FSAs are used for both health care expenses, up to $2,750 a year, and child and dependent care expenses of up to $5,000 a year.

It can be guesswork how much to put in, and can be a costly guess, because the employee loses what he or she doesn’t spend. There's a typical option to roll over $500 of unused money into the following year, though that only applies to health care expenses, not dependent care.

But there’s a recognition in both chambers that the pandemic has “significantly disrupted” the delivery of health care services this year as well as families’ child care expenses, Watson said. Both bills would allow FSA holders to carry over any unused balances up to the annual limits into 2021. 

The House-passed bill also contained provisions that would allow plan participants to make midyear changes, including reducing their contributions so unused balances don’t keep piling up. The IRS announced it would implement that proposal in May, so it wasn’t included in the Senate GOP bill. 

The IRS also extended the grace period to allow the use of funds set aside for plan years ending in 2020 for expenses incurred through Dec. 31; usually the grace period is two-and-a-half months after the plan year ends. The House bill would go a little further and extend the grace period to 12 months after the end of the plan year.