On March 30, Tom Nichols and Brian Reardon held an S-Corp Member call covering essential parts of the Phase II and Phase III bills passed by Congress in response to the COVID-19 pandemic, including:
- The new mandated leave provisions;
- The delayed income tax deadline and payroll tax holiday; and
- The new small business loan program
Tom Nichols is a shareholder at Meissner Tierney Fisher & Nichols in Milwaukee and the long-time Chair of the S Corporation Association Advisory Board. Brian Reardon is the President of the S Corporation Association.
It appears Washington is coalescing around a set of policies to help families and businesses while the economy is effectively shut down. California’s “stay home” order is illustrative of the challenge – how do businesses survive when the government is telling everybody to stay home?
Just a week after states and localities began aggressively telling people to stay home, most businesses are confronting an indefinite period of sharply reduced demand or, in some cases, no demand at all. For those businesses, the key question is how much cash do they have and how long can they keep their workers on payroll with little or no revenue coming in, and no sense of how long the crisis will last?
Andrew Ross Sorkin grasped this challenge fully in his op-ed piece earlier this week calling on the government to make bridge loans available to all businesses. Here’s his key paragraph:
The fix: The government could offer every American business, large and small, and every self-employed — and gig — worker a no-interest “bridge loan” guaranteed for the duration of the crisis to be paid back over a five-year period. The only condition of the loan to businesses would be that companies continue to employ at least 90 percent of their work force at the same wage that they did before the crisis. And it would be retroactive, so any workers who have been laid off in the past two weeks because of the crisis would be reinstated.
Those who know Andrew from his day job on CNBC’s “Squawk Box” know his politics are left-of-center and that he’s typically skeptical of businesses seeking benefits from government, but this crisis is different. The goal here isn’t to bailout this industry or that industry – it is to help all businesses to survive so that, once the crisis is over, we can all go back to work. As Andrew argues, “…the plan’s entire aim is to return the economy to the state it was in before the crisis with as little change and interruption as possible.”
The good news is that this idea of restoring cash flow to businesses while the crisis continues is catching on in DC. Earlier this week, more than 100 trade groups wrote to the President and congressional leaders requesting them to make bridge loans available to businesses in all industries and all sizes, as well as suspending all filing and tax payments to the federal government. It simply makes no sense for the government to drain businesses of money at a time when they have so little revenue coming in. Here’s what the letter says about making credit available to employers:
Immediately provide readily accessible, unsecured credit to businesses of all sizes to ensure they have the cash to pay their workers, rent, and other costs during this crisis. While Congress, Treasury and the Federal Reserve have recently announced policies to increase the availability of credit to some businesses, these policies need to be expanded to make certain they are comprehensive and that the credit is readily available to all operating businesses in the short term.
Yesterday, Senator Majority Leader Mitch McConnell introduced legislation called the “CARES Act” that includes four key components, all sizable and all of them focused on increasing the cash resources for families and businesses in the short term. These policies track very closely with the priorities outlined in the business community letter and while the loan programs should be expanded — the cash crunch is being felt by businesses of all sizes — their structure is well designed to get money to employers quickly so they can keep people employed. The Parity for Main Street Employers coalition issued the following statement in support of the legislation:
The Parity for Main Street Employers (PMSE) coalition strongly supports the McConnell CARES Act. The bill’s provisions are big enough to address the challenge created by shutting down large parts of the economy, and they are well designed to help families and their employers weather this crisis. PMSE intends to work to see this legislation enacted, including expanding the loan provisions to help employers of all sizes readily access much needed credit.
Some politicians reacted to the McConnell bill by arguing that any response to the crisis should focus on workers. We agree, but the best way to take care of workers and their families is to pass policies that help them keep their jobs. As Sorkin points out in his op-ed:
Some politicians have argued that bailouts should be directed only toward individuals and families, rather than companies. After all, we don’t want a repeat of 2008, when so much of the country felt the bailouts benefited Wall Street banks but not Main Street businesses.
But the truth is that sending checks directly doesn’t solve the problem: People want a paycheck and a sense of confidence that when the crisis subsides they will still be employed. And one-time check writing — or even a series of checks — won’t restart the economy when the crisis is contained because so many companies would be forced to file bankruptcy without immediate loans.
So the crisis continues, but the good news is that policymakers on the right and left are looking at the same solution – move quickly and give employers the resources necessary to stay solvent and maintain their work force now, so that when the crisis is over, they can pick up where we left off — when nobody had ever heard of a coronavirus.
Yesterday, over 100 business groups wrote to the Congress and the Administration requesting that the response to the economic crisis confronting us is on the same scale as steps being taken to respond to the virus itself. Entire portions of the economy have been shut down, and already businesses are closing their doors and laying off workers. For the economic response to be effective, it needs to be broad and it needs to be in place quickly.
Here’s the text of the letter. You can access the pdf and the signatories here.
Did you miss Saint Patrick’s Day? We did too. It isn’t even mentioned in our third podcast where we talk to Jim Capretta, former OMB official and resident fellow at the American Enterprise Institute. Topics we do cover include the policy response to the coronavirus and what health policy will look like leading up to the election. Recorded on March 17, 2020 — 22 minutes.
You can access the podcast on Libsyn by clicking here.
How the coronavirus plays out in the public health sphere is anybody’s guess, but its current progress all but demands a response from Congress. What might that look like? Here’s what some of the experts are saying:
Cornerstone Macro – “Investors expecting a loud, bipartisan “amen” to calls for a massive bipartisan fiscal stimulus are not likely to hear it today. Something is likely to happen, but the timing and size are uncertain. Right now almost no one knows what they support, including President Trump.” March 10th
Capital Economics – “Coronavirus outbreak to prompt fiscal response. It looks increasingly likely that the escalating coronavirus outbreak will be met with a larger fiscal response, which should help to offset some of the economic damage.” March 10th
IPI – “IPI rejects such Keynesian-based stimulus plans. Economic growth comes from savings and investment, not from borrowing and spending. If the government is determined to do something, the best option is to reduce taxes in a way that encourages business investment.” March 10th
Washington Analysis – “Last week we mentioned the possibility of a consumer-led stimulus focusing on a potential payroll tax cut of somewhere around 0.5% of GDP. That now seems far too small, and we’d expect something in the $300-$500 billion range. We would also expect a multifaceted approach, including: 1) a consumer-led stimulus in the form of a payroll tax cut, checks sent to individuals, or potentially targeted tax cuts, which should benefit Wal-Mart (WMT), Dollar Tree (DLTR), Dollar General (DG); 2) some form of paid sick leave, especially for workers whose employers don’t provide the benefit; 3) expanded unemployment insurance; and 4) assistance to companies negatively impacted by the virus, including potentially paying hospitals for the care of infected individuals with no insurance, assistance for airlines, and potential small business loans, which could be beneficial to SBA lenders.” March 9th
Jason Furman – “Given the mounting economic risks posed by the spread of the novel coronavirus, Congress should act swiftly but thoughtfully to pass fiscal stimulus. This would be in addition to continuing to provide ample funding for medical research, testing, prevention and treatment. The stimulus’s total cost would be about $350 billion, but could be larger or smaller depending on how the economic situation unfolds. Congress should design it to be accelerated, big, comprehensive and dynamic.”
Heritage Foundation – “The economic effects associated with the coronavirus epidemic are potentially significant. Moreover, in the United States, these effects represent an economic shock to an otherwise healthy economy. The response to the coronavirus should be targeted, temporary, and transparent. Any emergency fiscal policy response should link directly to the coronavirus in order to address the source of the economic shock while limiting any political abuse that can develop in moments of crisis. The epidemic tax credit outlined in this paper would achieve these purposes. Should policymakers want to improve the underlying fundamentals of the economy, they should look to other pro-growth policy tools.” March 11th
And here’s where the policymakers stand:
- Administration – The President has been true to form – he speaks off the cuff, gets ahead of his staff, and floats ideas that are obviously not thoroughly considered. It’s a unique MO that should come with a “Don’t Try this at Home” warning. Yet it also creates a dynamic where the policy discussion is accelerated dramatically. There’s no confusion that the President wants to go big. His preferred response is to zero out the payroll tax through the end of the year. That would reduce worker’s tax payments by thousands, but also add a trillion dollars to the deficit. The President has floated industry-specific relief as well.
- Senate – While there is no “Senate” position, it is easy to see Senate Republicans rallying around a package of policies over the next couple weeks if the crisis continues along its present course. Doing nothing would not really be an option. A package put together by Senator Steve Daines looks about right – a smaller payroll tax cut, 14 days of paid leave for impacted workers, suspension of tariffs, and increased insurance coverage for virus testing. Industry has already taken action on the last item, but a package built around this core should have legs in the Senate.
- House – House Democrats are putting together their own response. They don’t like the payroll tax approach, but its all but certain they will target employees with paid sick leave, enhanced unemployment insurance, tax credits for low-income workers, etc. As Politico noted, their focus is to “give priority to workers’ needs over corporate interests.”
So what should folks expect? The Treasury Secretary is meeting with the Speaker today, which could help shape what the House produces, but that’s not the base case. Instead, we expect the process to proceed along more traditional lines, with the House releasing a package this week and seeing how the Senate and Administration to respond. The Senate could develop its own package, or skip that step and initiate negotiations with the House and Administration immediately.
Whatever package is considered by Congress won’t be as large as what the President has proposed, but it will still be substantial and include 1) relief targeted at workers and the unemployed and 2) relief targeted at the health care sector response to the virus. The Senate or Administration might push for very limited and very targeted industry relief as well.
How quickly anything happens, and the ultimate size of the package, depends on the course of the virus. If it continues at its present pace — with daily reports of new infections, school closings, businesses asking workers to stay home, cancelled conventions, and high volatility in the stock market — expect something by the end of the month. The worse the news, the faster Congress will come together and pass something.
What this all means for Main Street employers is unclear. Helping workers and the health care sector makes sense, but the challenge for many businesses will be to support their workers, pay their suppliers, and stay current on their taxes, all in an environment where supplies are constrained and demand is depressed. If it’s just for a few weeks, that’s a tough juggling act. If it lasts longer, it’s an existential threat. For that reason, Congress might want to consider the approach taken by other countries and suspend the collection of certain taxes while expanding access to credit during the crisis. The virtue of this approach is it lets everyone hit “pause” until the crisis passes.