Congress faces several critical choices before departing for their August recess. Should the $600-per-week additional unemployment insurance (UI) benefit (which has resulted in five of six workers earning more in unemployment benefits than wages) be extended, modified, or allowed to expire at the end of July? Should the Paycheck Protection Program (PPP), which has almost $130 billion of unspent money, be reformed? How much aid, if any, should be provided to state and local governments, which are experiencing significant budget pressures?
Congress may also consider revamping the Employee Retention Tax Credit (ERTC), a CARES Act policy that has the potential to significantly aid the ailing labor market. The current ERTC, which is available for the remainder of 2020, is a refundable tax credit that is worth up to $5,000 per worker for eligible firms. Businesses are eligible if they are shut down by government order or have a 50 percent decline in quarterly revenue from a year ago. Qualifying firms with fewer than 100 workers can claim the credit for all workers while larger firms may claim the credit only for employees still on the payroll who are not working because of the shutdown.
The ERTC is intended to encourage businesses to keep workers on the payroll even if they are not immediately necessary or fully utilized. Like the PPP, the credit helps preserve the employer-employee connection, allows workers to return to work more quickly as the economy reopens, and prevents interruptions in health insurance coverage for affected employees. However, the credit is limited by the strict eligibility criteria and the $5,000 per worker cap. Moreover, firms that obtain PPP loans are ineligible for the credit.
Multiple legislative proposals (see here, here, here, and here) would ease those limitations. They would strengthen the ERTC by expanding its scope (more firms), generosity (a larger per-worker credit), and duration (generally until January 31, 2021, or, in the case of one bill, until the unemployment rate drops to 7 percent).
The narrowest proposed expansion, part of the House-passed HEROES Act, would cost $164 billion, roughly half the cost of extending the generous expanded UI program. The HEROES Act would raise the maximum credit to $36,000 (80 percent of qualified wages up to $45,000) for businesses experiencing a 50 percent revenue decline, make the credit partially available for businesses who experienced a revenue decline of 10 percent to 50 percent, and allow firms with up to 1,500 employees or $41.5 million of revenue to claim the credit for all workers.
It is critically important that a robust ERTC be considered a substitute for, rather than an addition to, the $600-per-week extra UI benefit. The Congressional Budget Office recently warned that extending the expanded UI benefit would probably reduce employment in the second half of 2020 and calendar year 2021. Curtailing the generosity of UI benefits while increasing the generosity of the ERTC could help both push workers toward employment and encourage employers to pull workers back onto the payroll.
Many other developed countries have adopted policies similar to a robust ERTC. By subsidizing the cost of keeping workers on the payroll during the pandemic, the policies have helped to keep a lid on rising unemployment. As the OECD wrote in a recent report:
About 60 million workers across the OECD have been included in company claims for job retention schemes, such as the German Kurzarbeit or the French Activité partielle. Such schemes allow preserving jobs at firms experiencing a temporary drop in business activity, while providing income support to workers whose hours are reduced due to a shortened workweek or temporary layoffs. The use of these instruments plays a major role in explaining why most other OECD countries did not experience the massive surges in open unemployment that were registered in Canada and the United States.
It is not too late for US lawmakers to exchange the generous temporary UI program for a reformed ERTC and help get people back to work.
This article by Alex Brill first appeared at the America Enterprise Institute.