Don't Mess With Taxes

Donald J. Trump announced on Aug. 8 four executive actions to provide COVID-19 relief in the wake of the stalled Congressional talks. (White House photo via Twitter)

By now everyone knows that Donald J. Trump decided to literally take COVID-19 relief into his own hands yesterday. Sitting at table in a meeting room at his Bedminster, New Jersey, golf club, surrounded by media and club members who served as a smaller surrogate rally crowd to cheer him and boo the reporters, Trump sign four executive actions.

One was a formal Executive Order. The other three were memoranda.

He and his White House staff who worked on the documents say they will provide assistance to the millions who saw their extra federal $600 a week unemployment benefits end on July 31 (or sooner). They also address people who are facing eviction due to coronavirus pandemic financial troubles, students struggling to pay loans and increase a bit the paychecks of those folks who still have jobs.

Those claims are debatable and the Democrats immediately did so. At issue from the get-go is whether a president can legally make such financial pronouncements.

The U.S. Constitution gives the power of the purse to Congress, not the executive branch, and even some in his own Republican Party were not happy with the unilateral moves.

Here's a closer look at the added unemployment benefits and payroll tax executive proposals. They are the two areas that have generated the most interest — and controversy — and are the more tax-related of the four weekend actions.

Unemployment help returns, in part: There is an argument that a president can move around money that's already been legislatively awarded. That's the plan with Trump's unemployment proposal.

The memorandum he signed yesterday, Aug. 8, directs the use of funds from the Federal Emergency Management Agency's (FEMA) Disaster Relief Fund (DRF) to cover an additional $400 per week in unemployment benefits. The disaster aid that could be used would be capped at $44 billion; the DRF has a balance of $79 billion.

But the extra unemployment relief also requires that states pay a quarter of the benefit, i.e., $100 before Uncle Sam would add another $300. Some states are struggling financially, having already been paying out the benefits while losing revenue due to pandemic business closures and employees not making taxable money or buying taxable items. There's concern, since the mechanism is not clear, that if the states don't pony up the $100 residents in those states would not get even the $300.

Many also are worried about the source of the additional unemployment benefits. We're heading into the heart of an already historically active 2020 Atlantic hurricane season and forecasters this week revised upward their predictions, predicting more and more severe tropical systems before the season ends on Nov. 30.

If that new, scarier outlook holds true, FEMA would have reduced funds to use to help those who sustain natural disaster damages.

A quasi payroll tax holiday: The White House and most of the GOP Senators and Representatives agree with a reduction in additional unemployment benefits. They contend that the generous $600 add-on caused many who had low-paying jobs to stay home rather than return to work.

Others, however, say the continuing unemployment claims is because people don't have jobs to which they can return. After an initial hiring spurt in early summer, a COVID-19 resurgence led to another round of business closures, layoffs again and now some companies say they won't be reopening even after the pandemic is under control.

But Trump is insistent that given adequate financial rewards, people will go back to work and spur a quick economic turnaround. To encourage them to return to their jobs, he's opted to defer collection of the employee portion of the payroll tax.

This tax, created as part of the Federal Insurance Contributions Act, is the amount paid equally by employers and employees to fund Social Security. It is 6.2 percent from both parties of workers' salaries. 

The other component is the similar Medicare tax, which is 2.9 percent, again with boss and worker each paying that amount for each paycheck. That means that workers and employers separately put in 7.65 percent of employees' pay to the retiree and medical funds each check period.

The memorandum Trump signed suspends the payroll tax for Social Security from Sept. 1 through the end of 2020. The employee deferment would be for those making $104,000 or less. The Coronavirus Aid, Relief and Economic Security (CARES) Act already suspended the portion that companies pay. 

If the employee payroll tax cut does take effect, the change would give, for example, a worker making $400 a week another $24.80 each weekly paycheck.

Note, however, that this tax break is a suspension, not an elimination of the payroll tax. At some point, theoretically, the tax would have to collected, meaning that workers would then see more than 6.2 percent come out of their checks.

But Trump says not to worry. "If I'm victorious, Nov. 3 I plan to forgive these taxes and make permanent cuts to the payroll tax and to make them more permanent," he said during Saturday's press-cum-political event.

UPDATE: Trump apparently heard from GOP allies as well as political strategists. Today, (Sunday, Aug. 9), the White House backtracked on a "permanent" payroll tax cut. 

Social Security worries: Tinkering with payroll taxes, however, is problematic, both financially and politically.

Payroll taxes go toward the Social Security Trust Fund, which covers the cost of the federal retirement benefit. Any delay in collection could pose up a potential funding gap if reductions are made permanent and the money is not replaced from other sources.

When Congress and the Obama Administration enacted a 2 percent payroll reduction of the Social Security portion (4.2 percent instead of 6.2 percent) for 2011-2012 to spur the Great Recession's sluggish economy.

But during the COVID-19 fiscal chaos, lawmakers on both sides of the political aisle oppose a payroll tax deferral or elimination. Many in the GOP are reverting to their budget hawk/Tea Party roots and might not be inclined to go deeper into debt, even for the popular Social Security program.

And in addition to the Social Security funding and political concerns, they don't share Trump's belief that a few more dollars will get more people working.

Keeping roofs over heads and easing student debt: The other presidential actions, an Executive Order directing Housing and Urban Development to take appropriate action to help renters and homeowners to avoid eviction or foreclosure, and a memorandum to continue the temporary cessation of student loan payments and the waiver of all interest on student loans held by the Department of Education until the end of this year, were not as contentious.

However, there still is some question as to their legality, too. Trump noted during the even at his suburban New Jersey golf club that he expects lawsuits challenging this COVID-19 relief actions. Such legal maneuvers could slow down any benefits from the president's solo moves, but also provide his with some political cover as Nov. 3 nears.

Or the House, which in mid-May passed its continuing coronavirus relief bill, the HEROES Act, and the Senate, where the majority GOP had to deal with infighting before coming up with its HEALS Act as an answer to the House bill, could get together, work out the differences in the two bills (there are 7 major ones), send a compromise deal to the White House and make Trump's proclamations moot.

As noted, it's an election year. Stranger things have happened.

No stimulus…yet: One financial assistance measure Trump did not address was another economic impact payment, aka a COVID-19 stimulus check. It's also what could get the House and Senate back to the bargaining table.

I did mention it's an election year, right?

The House HEROES and Senate HEALS bills each call for another base $1,200 per person coronavirus relief payments. There are differences on how much more would be provided for dependents and which dependents would qualify.

A you can see, there are a lot of figures from the Capitol Hill and White House coronavirus pandemic relief proposals. Percentage and dollar amounts related to the payroll tax, added unemployment benefits, dates when such actions would take effect and end.

But for this week's By the Numbers honor, I'm going to keep it simple. This weekend the featured figure is four for the four executive actions issued on Aug. 8 by Trump.

If only the rest of the time and taxes in this pandemic were that simple.

You also might find these items of interest:

• Payroll taxes: who pays, how much and how if self-employed
• Social Security payroll tax cap change could boost struggling benefits program
• What a COVID-related payroll tax cut could mean to you now and your retirement later

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