By Robert Pozen
One of the major provisions of the CARES Act was an additional $600 per week in unemployment benefits through the end of this month. Although these additional benefits helped sustain the unemployed through the depths of the recent recession, they have likely discouraged many workers from taking jobs as businesses have begun to increase their hiring. Because of the additional $600 per week, more than half of the unemployed received more in unemployment benefits than they were earning in their previous jobs.
With these additional benefits about to expire, Congress is considering a new dose of fiscal support in the Heroes Act, which has passed the House and is being debated in the Senate.
The House version would extend the $600 per week in additional unemployment benefits through the start of next year, and would greatly expand the refundable tax credit for employers rehiring or retaining employees.
But the Senate Republicans will not go along with all the provisions in the House package, which would cost more than $3 trillion. As a legislative compromise, Senate Republicans should offer a lower level of extra unemployment benefits together with the House’s expanded version of the employer tax credit.
The House version of the credit would cover up to 80% of the cost of employing workers in firms suffering a 10% or greater revenue loss from the corresponding quarter of 2019. By heavily subsidizing labor costs, the credit would encourage businesses to retain and bring back more staff. Thus, the credit would help reduce layoffs for workers and help firms to quickly restart their operations.
The additional unemployment benefits in the CARES Act were overly generous. For instance, a study by CNBC showed that unemployed workers in the accommodation and food service industry would on average receive 182% of lost wages, equivalent to a wage increase from $13.45 per hour to $24.50.
The qualifications for these additional benefits in the CARES Act were also too broad. Under the applicable rules, individuals claimed as dependents on their parent’s tax returns were eligible for these additional benefits. Also eligible were seasonally employed students who hadn’t worked, or sought employment, since the previous summer.
Although such broad qualifications may have been initially needed to support those out of work, these additional benefits have now begun to deter the unemployed from applying for job openings. For example, job postings were up 5.4% at the end of June as compared to January of 2020, yet unemployment claims were seven times higher than they were in January .
By contrast, the employer tax credit in the CARES Act was too stingy. The payroll processor Paychex stated that just 1% of its clients — a few hundred businesses — opted to use this credit . The main reason for this low level of participation — acceptance of a Paycheck Protection Program loan disqualified an employer from receiving this tax credit.
To qualify for tax credits under the CARES Act, an employer must have experienced at least a 50% decrease in revenue from the same quarter of 2019. Yet, according to Track the Recovery, revenues of the average small business were down 19% over last year, and 44% on average for the hospitality industry — one of the hardest hit industries . Moreover, these tax credits were worth only a maximum of $5,000 per employee.
The House version of the Heroes Act greatly expands the scope of the credit.
To increase the use of this tax credit by employers, the House version of the Heroes Act greatly expands the scope of the credit. A business with a decrease of 10% or more in revenue from the same quarter of 2019 would qualify for a credit worth up to $36,000 per employee. Most importantly, an employer would qualify for tax credits even if it received a PPP loan.
As compared to boosting unemployment benefits, the expanded tax credit would better address the current economic circumstances by encouraging employers facing revenue losses to retain employees, or even rehire them. By contrast, the cost of rehiring staff is significant — estimated at $4,000 per employee by Deloitte .
On the cost side, the employer tax credit would be fiscally more prudent. According to the Congressional Budget Office, extending $600 per week in additional unemployment benefits would cost $437 billion — the second-largest cost item in the Heroes Act . The expansion of the employer tax credit would cost far less — an estimated $163 billion over the next 10 years.
Senate Republicans have expressed strong reservations about the high cost of the House version of the Heroes Act, which would exceed $3 trillion. If Senate Republicans want to reduce that cost, they should pass the broader employer tax credits in the House version. Senators from both parties have already submitted proposals for expanded employer tax credits.
To garner further Democratic support and help workers who still can't find employment, the Senate should also include a lower level of additional unemployment benefits — perhaps $300 per week. Even better, the Senate could gradually scale back these extra benefits according to a preset schedule as the U.S. unemployment rate declines.
Robert Pozen is a senior lecturer at the MIT Sloan School of Management and a former president of Fidelity Investments. Research assistance for this article was provided by Peter Hoffman, a MIT undergraduate.