Overview: Many Americans are recovering after the economic destruction that started in March from the COVID-19 pandemic and lockdowns by state and local governments. While the economy and labor market continue to improve, the policy recommendations outlined here would help speed up that process so America can quickly return to the prosperous conditions of February.
The Texas economy is recovering, but there’s much room for improvement. The Texas Workforce Commission recently released the Texas jobs report for August 2020. While there have been improvements in the state’s labor market, there are challenges to return to the robust situation of February 2020 before the COVID-19 pandemic and lockdowns by state and local governments. The U.S. Bureau of Economic Analysis recently reported that in Texas in the second quarter of 2020 on an annualized basis GDP growth declined by 29% and personal income increased by 34.1%.
In May, U.S. Senators Bennet (D-CO) and Young (R-IN) introduced the RESTART Act (S. 3814) to provide increased flexibility to the Paycheck Protection Program (PPP). It also would establish a new lending program for small and medium-sized businesses to cover up to six months of operating expenses for those hit hardest by the economic fallout due to COVID-19 and lockdowns by state and local governments. This bill is bipartisan with 56 cosponsors in the Senate and 163 cosponsors in the House (H.R. 7481) as of Sept. 27.
TPPF proposes adding an amendment to include rehire grants to cover 120% of up to six months of the costs of rehiring employees terminated since the beginning of the COVID-19 crisis. While the economic damage continues from governments not ending lockdowns, congressional discussions are progressing towards moving the RESTART Act to the floor for a vote. In lieu of other congressional action, TPPF supports the passage of the RESTART Act and recommends adding the rehire grant amendment while reallocating CARES Act unspent dollars to fund it.
The Tax Foundation recently published a map of the country illustrating the property taxes paid in each state as a percentage of owner-occupied housing value in 2018. Of all 50 states, Texas had the seventh highest property tax burden in the country, with an effective rate of 1.69% of occupied housing value. This burden is something that Texans across the state know too well.
The article accompanying the map acknowledges that Texas to some extent relies on high property taxes in lieu of other tax categories – i.e., income taxes – though other states without an income tax do not necessarily have a high property tax burden (e.g., Florida). Regardless, in an economy hampered by COVID-19 and government lockdowns and with homeowners under substantial financial and mental stress, local governments have a responsibility to reduce the burden on taxpayers.
The Texas Public Policy Foundation has put forward proposals to reduce burdensome property taxes by focusing on Texas embracing final sales taxes over property taxes and governments implementing sound budget practices.
A final sales tax system is a more attractive alternative to a property tax. Property taxes are calculated on oftentimes subjective property values, which can rise without a change in homeowners’ ability to pay; Texans can adjust their spending habits to a sales tax, however. This results in a compounding effect of property taxes on holders of property every year that reduces their ability to pay them, forcing many to lose their property and to never truly own it.
One way to ease the property tax burden across Texas is to buy down school districts’ maintenance and operations (M&O) property taxes, which is about half of the property tax burden. This could be done by limiting state spending and using any surplus funds to cut the local property tax until it is eliminated, which could take roughly a decade, moving Texas towards sales taxes as they are the state’s top revenue source. However, this could be difficult to maintain session after session with the limitations on state and local government spending to achieve this in a timely manner, if at all.
Another way is for the state to immediately replace school M&O property taxes with higher sales taxes. An immediate swap would eliminate the risk that the switch to a final sales tax would be only temporary, a failure common to past property tax relief efforts. However, an immediate switch may be politically challenging to implement, so a way to mitigate this is to limit state spending and use surplus funds to cut the sales tax rate over time.
Switching M&O costs to sales taxes is not the only measure local (or state) governments should adopt. The other, and possibly even more fundamental to reducing barriers for opportunities to let people prosper, is implementing sound budgetary practices.
By reducing government spending through things like freezing new hires and pay raises and placing a moratorium on incurring any new taxpayer-funded debt, there are plenty of opportunities to cut taxes.
Local governments should volunteer for third-party audits to determine where areas of waste can be eliminated along with expensive lobbying contracts and longevity pay. Ultimately, practicing zero-based-budgeting, whereby local governments must justify every expenditure, could help achieve setting budget priorities that support effective government programs.
Any government approach to supporting an economic recovery in the wake of COVID-19 must begin with easing the burden on Texas taxpayers, and that approach must include reducing the burden of soaring property taxes and implementing sound budgeting at all levels of government.
Today the Texas Public Policy Foundation released the threshold number for the 2022-23 Conservative Texas Budget in a live event and released a paper on the topic. The Conservative Texas Budget is an approach to the state budget limiting its growth so spending doesn’t outpace Texans’ ability to pay for it. Measured in terms of population growth plus inflation, the Conservative Texas Budget establishes a maximum threshold for growth in the state’s initial appropriations.
For the 2022-23 state budget that percentage is 5% for a total appropriation of $246.1 Billion.
“The Conservative Texas Budget is an effective maximum threshold for prioritizing the taxpayer in the state budget process as every dollar spent comes out of the pocket of Texans,” said TPPF’s Chief Economist Vance Ginn, Ph.D. “Since this approach was implemented ahead of the 2015 legislative session, budgets have grown less than half the rate of the five prior state budgets. This trend should continue for the 2022-23 Texas budget especially as many families are recovering from the recession due to COVID-19 and government lockdowns.”
The 2022-23 Conservative Texas Budget sets a maximum threshold for the state’s budget that will be passed during the 2021 Legislature so government grows by less than taxpayers’ ability to pay for it.
Production of crude oil and natural gas has historically fluctuated based on many market-driven and geopolitical factors. Because the Texas Legislature collects severance taxes from this volatile production to primarily fund the state’s rainy day fund, the purpose for and use of the ESF must be worthy.
The U.S. Bureau of Labor Statistics recently released the U.S. jobs report for August 2020. The labor market has been improving but families continue to struggle compared with the robust situation at the peak in February 2020, which was before the COVID-19 pandemic and subsequent lockdowns of society by state and local governments.
Texas’s economy took a major blow in March from COVID-19 as it reduced Texans’ activity across the state. Then lockdowns by state and local governments in response to the novel coronavirus further exacerbated the economic fallout. The economic data are clear that the labor market, economic outlook, and social mobility remain well below where it was in February. These weaknesses tell the story of how many Texas families and employers are struggling in their lives and livelihoods during this trying time without hope until government reopens the economy.
I provide options for how to substantially reduce the high property tax burden in Texas by limiting government spending with either a buydown of property taxes over time or a swap with sales taxes immediately so that Texans have more opportunities to prosper.
Overview of the President’s Executive Order on Regulatory Relief to Support Economic Recovery & Path Forward
On May 19, 2020, President Trump signed the Executive Order on Regulatory Relief to Support Economic Recovery. In Section 6 of the EO, titled the “Fairness in Administrative Enforcement and Adjudication,” it includes ways to improve the institutional framework of how federal regulations are enforced. The EO should help empower people to be protected from undue, expensive, unclear regulatory overreach by the federal government that costs Americans trillions of dollars over time.
Overview: The U.S. Bureau of Economic Analysis recently released the second estimate of real (inflation-adjusted) gross domestic product (GDP) in Q2:2020. The latest figures show GDP contracted by 5% (annualized) in Q1:2020 and 31.7% in Q2:2020 for a total GDP loss of $2 trillion this year. The Federal Reserve Bank of Atlanta’s GDPNow running estimate of real GDP indicates it could increase by 28.9% in Q3:2020 (as of August 28) depending on COVID-19 responses. The U.S. private economy has lost $2 trillion this year from COVID-19 and resulting lockdowns by state and local governments, but it will keep improving as states reopen.
Overview: The Texas Workforce Commission recently released the Texas jobs report for July 2020. The report highlights improvements in the state’s labor market but there are challenges to get back to its peak in February 2020, which was before the COVID-19 pandemic and subsequent lockdowns of society by state and local governments. Texas’s private employment in July during the government-induced recession due to COVID-19 is at the lowest level since December 2016.
Top Stat: U.S. private employment in July remains down 11.9 million compared with peak in February but is up 7.8 million since April.
Texas is not immune to the problems that trouble pension systems across the country. In Texas, state and local governments employ about 16% of workers. Most of them have a defined-benefit pension plan that promises a regular payment to retirees based on guaranteed formulas and irrespective of investment returns. Underperforming investments and generational accounting issues are exhausting these plans leaving them with mounting, unsustainable liabilities. In fact the Texas Pension Review Board (PRB) noted in its 2019 report to the Legislature that “despite a nearly 10-year bull market following the 2008 market downturn, the unfunded liabilities of many public retirement systems both across the country and in Texas continue to rise.”
Since March, when the lockdowns ordered by state and local governments began due to the novel coronavirus, Congress has passed $3.8 trillion in four COVID-19 response bills. While the economic damage continues from these lockdowns, Congressional discussions about more action is at a stalemate. In lieu of other Congressional action, the Foundation’s proposed Recovery Act would narrowly target resources temporarily to aid businesses operating and workers working.
More here: https://files.texaspolicy.com/uploads/2020/08/25143156/082420-Overview-of-Recovery-Act.pdf
Lawmaker: At least 38 local government in Texas have attempted to raise property taxes above state cap
(The Center Square) – Several Texas counties have chosen to not raise county property taxes this year, keeping rates the same or lowering them in some cases. But 38 taxing entities have tried to increase property taxes over the state-mandated cap requiring taxpayer approval, state Sen. Paul Bettencourt said.
At a Texas Public Policy Foundation (TPPF) panel discussion last week, the Houston-area senator who serves as the Senate Property Tax Committee Chair said 16 counties and 23 cities attempted to increase taxes over the limit set by the legislature.
Austin was among them. The Austin City Council recently voted to increase taxes above the limit enacted by the legislature last year, and voters will either approve or reject it this November. Several cities rejected increases in property taxes, including Dallas and Longview.
For the fifth year in a row, Collin County announced it was lowering its property tax rate in order to keep homeowners’ bills roughly unchanged from the previous year. In the past decade, the county has adopted no increased revenue rates nine times.
Previously referred to as the effective rate, the no-new-revenue rate collects the same total amount of property tax revenue as it did the previous year. However, what homeowners owe might go up depending on their property’s value increasing. A static or lower rate on a higher value still results in a higher tax bill for some.
In Denton County, the new tax rate is below the current tax rate and the no-new-revenue tax rate. Plano County’s budget is based on a “no-new-revenue” property tax rate.
Tarrant County also kept its property tax rate the same, which is slightly below the no-new-revenue rate. But because of rising home values, the average property tax bill will increase by roughly $9.
“The problem with Texas property taxes has always been as property values go up, tax rates never came down," Bettencourt said. "So values inched up and in some cases increased by 10 percent each year and were never offset by taxes going down.”
Bettencourt helped pave the way for property tax reform in the last legislative session. SB2 reduced cap on potential property tax increases for the first time in 30 years, from 8 percent to 3.5 percent. HB3 placed a hard cap of 2.5 percent for school districts. Both were combined in the property tax bill signed by Gov. Greg Abbott.
Any attempt to increase taxes over the caps requires approval by voters.
Dr. Vance Ginn, chief economist at TPPF, said that the rollback rate was established in 1979. In 1981, it was raised from 5 percent to 8 percent when inflation was running double digits. But over the past 25 years, inflation hasn’t been above 4 percent.
In 2019, it was time to adjust the rates, Ginn said, to protect homeowners from ongoing increased taxation. It couldn’t have been more timely, he said, since within less than a year more than 4 million Texans filed for unemployment during COVID-19 restrictions and state and local governments were seeing less revenue.
It’s problematic that local governments “need to expand their budgets in some capacity by more than 3.5 percent,” Ginn said, “when Texas families are often times seeing their incomes fall dramatically from having some sort of income down to zero, [… receiving unemployment], and some of these local taxing entities are saying, ‘You know what, we need to raise our taxes more. By the way, the way we are going to do that is spending more along the way.’”
In Harris County, property taxes increased by 29 percent from 2014 to 2018, whereas population growth and inflation increased by 11 percent, Ginn said. The comparison between taxes and population growth and inflation is often used as a metric to determine how much the burden of government should grow to stay within the means of taxpayers, he said.
According to a recent WalletHub study, Texas ranked 32nd highest among 50 states for its overall tax burden of 8.2 percent. Texas property owners paid 3.95 percent in property taxes and 4.25 percent in sales and excise taxes.
It took a decade to get tax relief on both sides, Bettencourt said, adding that, “The pressure to spend more taxpayer money is ingrained in government.”
President Donald J. Trump recently signed four executive actions in response to a congressional stalemate on the next round of COVID-19 relief, drawing praise from a Texas economist.
Texas Public Policy Foundation (TPPF) Chief Economist Vance Ginn provided brief overviews on the use of federal Disaster Relief Funds (DRF) to boost state unemployment insurance funds, the payroll tax issue and enhanced unemployment insurance.
“The goal of President Trump’s four executive actions on Aug. 8 is to provide financial assistance at a time when Congress hasn’t acted to help struggling families due to the disruptions caused by COVID-19,” Ginn wrote. “Currently there is uncertainty regarding these actions that could weigh on employer and employee decisions until further clarity is provided.
While these actions may increase uncertainty that hinders economic activity, they can help American families in the short run by providing additional aid until state and local governments, hopefully soon, safely fully reopen society.”
TPPF Chief Economist Vance Gin | Photo courtesy of the TPPF Ginn offers an informed perspective, having recently served more than a year as the associate director for economic policy for the Office of Management and Budget (OMB). His role was to advise the OMB’s director on economic and fiscal policy matters, manage a team that sought evidence of good government and modeled the economic assumptions in Trump’s fiscal-year 2021 federal budget, which proposed a record of $4.6 trillion in cuts to the national debt over a decade.
Ginn said the Aug. 8 executive actions do not increase the deficit directly.
“The $44 billion for the federal enhanced unemployment insurance is paid from the funds available in FEMA’s disaster relief fund," he said. "And the deferral of payroll taxes is just a deferral so doesn’t add to the deficit unless Congress forgives those taxes through legislation later. Also, the Social Security Trust Fund won’t take a hit as money will be transferred from the General Fund to it until the payroll taxes are paid or forgiven, which is what happened after the 2010 tax bill under the Obama administration cut the payroll tax by 2 percentage points.
"Regardless, there is a need to get businesses operating and workers working again by reopening society so problems related to the lives and livelihoods of Americans along with our fiscal solvency aren’t put further at risk.”
Ginn said Trump's moves could put more money in taxpayers’ pockets as well as helping people find jobs as state and local governments loosen their lockdowns.
“This could happen by deferring the payroll taxes and employers not withholding it to possibly pay it later and then by the $300 per week in enhanced [unemployment insurance] not being so high that 68% of Americans who make less than the $600 per week previously provided,” he said. “Again, the key is to get businesses operating again and for workers to be connected to a job that will help to increase economic activity on the supply side that is critical for us to have a stable and strong recovery.”
Ginn said that more can — and must — be done to speed economic recovery.
“Families across America are struggling from being unemployed and being uncertain whether they can keep their business open or when they will get a job or be called back,” he said. “In order to help the American people, we need accurate and reliable COVID-19 data that includes timely demographic information to understand more about its contagion and effects so hospitals aren’t overwhelmed and vulnerable populations are assisted with necessary resources as governments reopen society for everyone else. Along with that, there is a need to rightfully provide funding to businesses that were stripped of their resources from governments during lockdowns.”
The TPPF supports a targeted, short program called the Workplace Recovery Act, which covers businesses‘ net operating losses so they can keep workers onboard and rehire others until this lockdown situation is over.
“Fortunately, Congress could reauthorize the available $1.3 trillion from its other already passed legislation for this program and scrap the rest of the measures under consideration that aren’t targeted or timely,” Ginn said. “In addition to state and local governments reopening society and Congress passing the Workplace Recovery Act, there is a need for governments to get their budgets under control by reducing wasteful spending so that this redistribution of incomes through the government sector doesn’t further slow economic activity.
“Another thing is ending unnecessary regulations, particularly those that were suspended during the lockdowns,” he continued. “By following this approach, American families can have some calm from increased certainty about their future during a chaotic time, which is what the president seems to be trying to provide even as Congress does its best to make the situation worse.”
Ginn earned his doctorate in economics at Texas Tech University and has taught at Texas Tech and Sam Houston State. He joined the Texas Public Policy Foundation in 2013 and worked there until joining the Trump administration in 2019. He returned to the foundation in May.
Ginn said his goal at the TPPF is to preserve the state as a place where Texans can build their careers, raise their families and live their lives freely.
Until now, governments in America have never shut down society like they did due to COVID-19. Unfortunately, the destruction by the novel coronavirus and the lockdowns have devastated lives and livelihoods.
But we must consider not only the effects we can see such as the number of cases and deaths reported, but also the unseen effects of government action, such as sidelining entrepreneurs to solve problems.
There’s no doubt that daily reports of (often flawed) COVID-19 data and the responses by government have elevated fear among us. But what’s worse is that the lockdowns have substantially limited our Creator’s design for us to be social, and sidelined entrepreneurs’ ability to conquer this disease.
The first is self-explanatory. Even if you don’t believe in a Creator, the evidence of the harm lockdowns have caused or contributed to is heartbreaking.
There’s evidence that the situation has resulted in increased suicides, more cancer deaths, worsened mental health, and elevated cases of severe child abuse. And as many businesses closed their doors, Yelp reports that more than half won’t reopen.
Less business activity has contributed to GDP growth in the second quarter likely contracting by a record pace, 12 million more people unemployed, and many Americans on welfare programs.
The psychological and economic tolls this Great Disruption is having on Americans will be long-lasting. We need a proven path that safely deals with the real issues surrounding COVID-19 while allowing us to be social and conquer the disease more quickly.
We must put entrepreneurs back in the game.
The entrepreneurial spirit is unlocked in our typical system of free enterprise with limited government intervention. This spirit creates a process of risk and discovery through profit-loss that has created breakthroughs by entrepreneurs in conquering fear and improving lives and livelihoods.
Just think about how this system has benefited people across the globe by eliminating many infectious diseases, largely eradicating famine, and substantially reducing poverty.
These include allowing the U.S. to overcome the Spanish flu in 1918, the diphtheria peak in 1921, polio outbreaks in 1916 and 1952, and swine flu in 2009 without governments locking us down. That allowed entrepreneurs in health care and elsewhere to design innovative ways to overcome these obstacles.
We’re told this time is different, so more severe restrictions were necessary. While possibly necessary for the elderly and the vulnerable, it’s questionable for everyone else.
For example, Stanford University’s disease prevention chairman Dr. John Ioannidis said, “For people younger than 45, the infection fatality rate is almost 0%. For 45 to 70, it is probably about 0.05%-0.3%. For those above 70, it escalates substantially.”
By allowing fear from COVID-19 headlines to drive government decisions instead of the full context of the situation, we lose many opportunities to improve our world.
Entrepreneurs are trying to conquer our fears despite the draconian government policies.
They have done this at the businesses we all frequent by helping to reduce the virus’ contagion including using Plexiglas dividers in stores, requiring masks for entry, and creating stickers to help with social distancing. Their innovation has been alive and well at restaurants by expanding the use of mobile ordering and even food delivery robots to keep selling their foods. There are many more finding therapeutics and ultimately a vaccine.
But these extraordinary measures to deal with COVID-19 are just the tip of the iceberg to what human ingenuity could bring if our entrepreneurial spirit is allowed to thrive. But governments have been using political calculations to address a problem they can’t do well, if at all.
Governments don’t work well in a crisis.
They are short-sighted and wrongly impose one-size-fits-all policies that often fit very few. The same is true this time around with universal masks, lockdowns for everyone, or closings of specific businesses rather than focusing on protecting the vulnerable populations.
Not opening government schools to in-person instruction would make the situation worse. That’s why many parents are seeking alternatives, such as informal school “pandemic pods” and homeschooling.
Let’s give entrepreneurs (meaning all of us) the opportunity to seek solutions to the COVID-19 situation as we have many times before, so that we will have increased liberty, more calm, and greater flourishing.
Most signs point to an improving COVID-19 situation in Texas—unless you consider the recently questionable elevated test positivity rate that’s keeping us from reopening.
On Aug. 13, Texas reported 6,879 hospitalized COVID-19 patients statewide, the lowest number since June 30. And on that day, the Texas Medical Center in Houston had its 27th consecutive day of decline of the seven-day trend of daily COVID-19 patients hospitalized, with the average of hospitalizations being almost half of their peak. Texas’s seven-day average of new daily COVID-19 cases on August 13 was 38% off its July 14 peak.
Those are good signs but Texas’s testing positivity rate, the share of those tested for COVID-19 who test positive, surged to a seven-day average rate of 24.5% on Aug. 11. That’s well above the 10% rate that Gov. Greg Abbott has indicated the state needs to consistently maintain for bars and other shut-down businesses to reopen, and for capacity restrictions to be eased.
Dr. Ashish Jha, Professor of Global Health at Harvard, has suggested that “the outbreak in Texas may actually [have been] getting worse over the last week or so.” And the skyrocketing test positivity rate sparked a call by Gov. Abbott to bring in a special “data team” to examine what’s going on in the Lone Star state, which the positivity rate surprisingly fell by 8.4 percentage points that day to 16.1%.
But more context shows that Texas may be on the road to recovery—but is being held back by a dysfunctional data reporting system that obfuscates reality and distorts policy choices.
A recent analysis indicates that testing for COVID-19 remains on the upswing in most Texas counties, leading to a discrepancy between county and state data. The culprits for this discrepancy are tests labeled as “pending assignment,” which once numbered over a million but have decreased to roughly 476,000 as of Aug. 13.
Tests marked as “pending assignment” are recorded by the Texas Department of State Health Services but have not been assigned to a county. Previously, unassigned cases had been included as part of the state’s test rate calculations, but this appears to have been changed around July 31, when reported tests began to decline.
Furthermore, it’s not clear which date the state records to a test when they assign it to a county, resulting in new data illustrating a sharp increase in the test positivity rate when the outbreak seems to be improving.
Moreover, Gov. Abbott has suggested that the closure of some of the temporary testing sites in July may have influenced the figures. And testing centers in Austin and other areas were recently only testing symptomatic people.
It is commendable that the state is working to make its data as accurate as possible. But this effort lacks transparency, and that lack of transparency comes at a cost. The possibility exists that demand for COVID-19 tests has declined from what’s been called “COVID fatigue,” but the state’s data don’t make that clear.
Collectively, simple fractional math shows how some combination of these factors would contribute to driving up the positivity rate. Not only could this data create unnecessary fear among Texans (and reinforce the mainstream media’s panic-oriented narrative), it could also hamper efforts to revive the Texas economy.
While many Texas businesses have been permitted to reopen or restart at limited capacity (allowing the economy to begin its long road to recovery), bars are still suffering from the effects of the lockdown. This has also forced about 1,500 restaurants, which employ roughly 35,000 people, to close because alcohol sales exceeded 51% of their total revenue.
The implications extend beyond bars, as the flawed test positivity rate reporting influences general capacity restrictions, outdoor gatherings, and mask mandates, along with the reopening of schools and professional sporting facilities.
For Texans, lockdown orders are more than just policy decisions; they can determine the fate of our lives, livelihoods, and the futures of our children.
Texas shouldn’t determine reopening guidelines based on flawed metrics. Texas has worked to conquer COVID-19, and it deserves a data reporting system that accurately represents the facts. This would help direct targeted policies, instead of blanket ones, to help vulnerable populations so we can safely reopen.
Otherwise, Texas risks permanent economic and health damage, not just because of the pandemic itself, but also because of bureaucratic inefficiencies within the state’s data reporting system.
On Saturday, August 8, President Trump signed four executive actions in response to a Congressional stalemate on the next round of COVID-19 relief. This brief covers the memorandum deferring some employees’ payroll taxes to Social Security without affecting the program.
Background on payroll taxes:
There are two types of payroll taxes:
Social Security rate is 12.4% on wages capped at $137,700—half is paid by the employer, half is paid by the employee (though employers typically pass on this tax in the forms of lower wages and higher prices).
Medicare rate is 1.45% for both the employer and employee with no wage cap.
Employee payroll taxes are withheld by employers and paid on their behalf.
The CARES Act (March) deferred payments of employer payroll taxes until either 2021 or 2022.
Details of the August 8 memorandum on deferring payroll taxes to Social Security:
Defers employee payroll taxes to Social Security from September 1 to December 31or until an unspecified later date, without penalty, interest, or additional tax.
Applies only to those earning before tax less than $4,000 biweekly ($104,000 annually).
Requests that the Secretary of the Treasury “explore avenues, including legislation” to permanently eliminate these deferred payroll taxes.
The stated intention of this action are to:
“put money directly in the pockets of American workers”
“generate additional incentives for work and employment”
Economic effects questionable from increased uncertainty & fiscal effects are uncertain:
This is effectively a no-interest loan from the government (i.e., taxpayers) to workers, with uncertainty about if, and when, it will be repaid.
The change doesn’t affect incomes for unemployed workers and may not increase disposable incomes of employed workers who will likely save any income increase or the employer with withhold the funds to eventually repay the payroll taxes, unless they’re forgiven by Congress.
The action could add about $150 billion to the FY21 budget deficit, which weighs on the economy, depending on whether Congress cuts the payroll taxes owed, as funds will be transferred from the General Fund to cover the reduction in payroll taxes to Social Security.
There is much uncertainty from the memorandum by employers about how they will handle the employee payroll tax deferral. It’s not clear when the deferred taxes are due or how they will be paid (directly by employees or through employers). These questions should be resolved soon, as Secretary Mnuchin recently indicated employers can choose whether to withhold the taxes.
The memorandum doesn’t change the cost of hiring employees, so it will not increase the number of jobs available. That is inherently constrained by limited business activity from government-mandated lockdowns.
Recommendations to improve the economy and the livelihoods of Americans:
Safely reopen society by ending state and local government-mandated lockdowns.
Get businesses operating and workers working again, such as with TPPF’s Recovery Act.
Eliminate wasteful programs to rein in excessive government and end unnecessary regulations.
On Saturday, August 8, President Donald Trump signed four executive actions in response to a Congressional stalemate on the next round of COVID-19 relief. This brief covers the memorandum allocating federal Disaster Relief Funds (DRF) to enhance state unemployment insurance (UI).
Background on UI:
The federal-state UI system was created in 1935 as a form of social insurance run by—and usually funded by—states from collected business taxes, with the Department of Labor overseeing it.
Most states typically fund UI at half of lost wages for about 26 weeks while workers search for jobs (Texas requires the unemployed to report applying for at least 6 jobs per week).
The federal government can provide extended UI for 13 or 20 weeks longer and split that cost with states. However, the 2009 American Recovery and Reinvestment Act was the first time the federal government covered it all and lasted until 2013 when extended UI was provided for up to 99 weeks.
Congress passed the 2020 CARES Act that included federal funds for enhanced UI of $600 per week until July 31. Separately, the federal Pandemic Unemployment Assistance program extends the UI period for 13 weeks, for a new maximum of 39 weeks.
Economists find that 68% of eligible workers received enhanced UI greater than their lost earnings. Other economists highlight how high unemployment benefits can encourage layoffs, discourage work, and delay productive economic reallocation.
Details of the August 8 memorandum that provides enhanced UI by the federal government:
Directs up to $44 billion from the Federal Emergency Management Agency’s (FEMA) Disaster Relief Fund (DRF) to fund enhanced UI.
Offered $300 per week in enhanced UI if the state increased their UI by $100 per week. This requirement was then clarified so that an unemployed person could receive the enhanced UI if they already receive at least $100 per week from the state UI.
Enhanced UI terminates for work weeks ending on December 6, 2020 or when funds run out, whichever occurs first. An estimate predicts funds could run out after about five weeks.
Economic effects are minimal until an end to lockdowns & fiscal effects are neutral given DRF:
Fiscally neutral because money is in the DRF but would change if natural disasters occur this year (e.g., hurricanes) requiring more than $25 billion in spending—the amount retained in the DRF.
Federal enhanced UI is now tied to state UI if an eligible person receives more than $100 per week from the state UI. An economist estimated that nearly 1 million unemployed people currently receive below $100 per week so wouldn’t get the extra $300 per week.
Enhanced UI payments won’t start until at least late August, meaning many people who were dependent on the new total UI will receive only the normal state UI. The decline to the historical amount of the state UI could help incentivize people to search for work during or after lockdowns.
There’s evidence that enhanced UI may not have discouraged searching for work because jobs have been limited during lockdowns, so decreasing it may not have much effect until ending lockdowns.
Recommendations to improve the economy and the livelihoods of Americans:
Safely reopen society by ending state and local government-mandated lockdowns.
Get businesses operating and workers working again, such as with TPPF’s Recovery Act.
Eliminate wasteful programs to rein in excessive government and end unnecessary regulations.
Congress should scrap what’s currently being discussed in the next round of COVID-19-related recovery efforts. Instead, it should focus on getting businesses operating and workers working again after governments’ lockdowns severely disrupted the lives and livelihoods of Americans.
This can be done with the Foundation’s proposal of the Rehire America Workplace Recovery Act that includes the essential component of the free enterprise system: private property rights.
The proposal focuses on giving people the dignity of work by compensating businesses for cash losses incurred due to governments’ shutting down of society due to COVID-19. These net operating losses by businesses were realized from government lockdowns (beyond prior voluntary social distancing measures).
This proposal contrasts with much of the approach in Congress today that would prolong any economic weaknesses.
Handing out stimulus checks (some of which are erroneously sent to dead people) doesn’t get people working again. Extending overly generous unemployment benefits that exceed what 68% of Americans were earning disincentivizes work. And saturating profitable businesses with taxpayer dollars while letting too many small businesses go under fails, too.
The result of most of the current programs in Congress will be prolonged unemployment and weak growth. But our proposal would strengthen and shorten the recovery to let people prosper.
The COVID-19 economy has been one of records set in both directions.
The many disruptions during March and April plunged the country into a deep recession. The economy shed 22.2 million jobs, with the unemployment rate jumping from its historic low in February of 3.5% to 14.7% in April.
Though official second quarter GDP figures have yet to be released, analysts are expecting a 30-plus percent annual rate of contraction. By any comparison, the U.S. economy has never experienced such a quick reversal in its economic condition.
Though these numbers paint a bleak picture, there are more recent signs of optimism.
The U.S. labor market in May and June added 2.7 and 4.8 million jobs, respectively. Both figures were record highs. More hiring drove the unemployment rate down to 11.1% in June.
If this momentum continues, one would expect third quarter GDP to rebound from its projected second quarter low. Existing home sales rebounded in June, increasing by a record 20.7% providing additional evidence we’re likely in the beginnings of an economic recovery.
The Recovery Act’s compensation strategy would assist this rebound. It provides funding to help employers keep current employees and to rehire those laid off due to cost-cutting associated with the COVID-19 shutdowns.
It also conveys a core principle of effective programs in that it is self-terminating and temporary. A recipient’s participation in the program automatically ends once it’s no longer suffering cash losses or at the end of the program.
That’s the goal of the Recovery Act — to stabilize business operations to provide confidence for firms to retain and rehire employees. In fact, it places a compensation premium of 20% on rehiring furloughed workers. By compensating businesses for cash losses (including employee costs), this proposal aligns with an improving economy.
One of us estimated the economic and fiscal effects of this proposal depending on the duration from July to either September 2020 or February 2021 above the base case recovery over the next year. It would contribute to an extra $498 billion to $1.4 trillion in GDP, between 1.8 and 5.6 million new jobs, and cost taxpayers from $450 billion to $1.3 trillion.
Though a hefty price tag for the longer duration, the $1.3 trillion cost looks to be within what Congress has authorized but not disbursed yet from prior phases of economic aid so no new spending may be necessary if reallocated. If that’s not an option, the Act’s benefits outweigh the cost and would repay itself under six years. These results seem much better than the major packages considered by Congress.
The spirit of the Recovery Act is in a recent bipartisan bill called the Small Business Recovery Comeback Act so there’s a way to get this done for Americans. It could be improved by including more of the aspects that we’ve outlined above to make it cost-effective and time-constrained.
We need Congress to take a fresh start rather than funding the same flawed programs and principles. The Recovery Act is grounded in a free enterprise system. This is both an economic argument and a moral imperative to recover Americans’ livelihoods.
The media loves to portray Americans as stubborn—refusing to abide by the measures that could help address the COVID-19 pandemic. Yet the data show that Americans were already doing their part, long before measures became mandates.
The Institute for Health Metrics and Evaluation has a measure of social mobility. Based on anonymous cell phone data made available by phone companies to help fight the pandemic, the measure shows how much people get out, get around and even mingle.
This measure shows that the U.S. was running at about a 2% rate of mobility compared with a typical 0% before March 2020. That’s our pre-pandemic base rate.
By March 10, that positive mobility rate had turned to a negative 1% and fell further to negative 13% by March 15. Then many state and local governments started locking down society, which the mobility rate fell to a low of negative 51% by March 31—end of the first quarter.
In other words, people were already voluntarily practicing social distancing before governments made it mandatory.
But the mandates meant that many businesses had to close, so no matter what people were voluntarily doing, much of Americans’ action and interaction stopped. Though the economy was surging in January and February—reaching historic bests in the labor market, things fell off of a cliff in March as the economy cratered at an annual rate of 5%.
For comparison, the economy hasn’t contracted that much since the depths of the Great Recession when it fell by 8.4%. This time that 5% was just the beginning as the second quarter will be much worse.
More than 22 million Americans lost their job through April. Fortunately, though, job creation has turned around some as there have been 7.8 million jobs added back. But there’s a long way to go.
This recovery is going to be unique because some states that didn’t make as extensive lockdowns or started reopening faster will have more economic rebound.
This was apparent in the latest state-level jobs report which showed that Texas led the way in getting folks back to work, and other states that have been reopening faster also had more jobs added.
While Texas has been in the news lately from increasing infections (even though hospitals aren’t overwhelmed and the death rate remains relatively low), the full context of the situation in the Lone Star state must also include the effect on livelihoods.
Tracking social mobility in Texas, IHME shows that the state had a higher level of mobility than the U.S. going into March. This turned negative on March 11 from voluntary social distancing, and then was at negative 49% by March 31 after the shutdown. This contributed to the economy contracting by just 2.5% in Texas, or just half the rate of the nation as a whole.
South Dakota, on other hand, is a rural state that did not lockdown its citizens. Their social mobility turned negative on March 12 and was at negative 36% by the end of the quarter. The lack of a mandate by government helped the state to contract by only 2.2% in the quarter.
California’s social mobility was running slower than Texas or South Dakota going into March, turned negative on March 7 from voluntary social distancing, and negative 52% by the end of March after mandates. California’s mobility fell faster and remained lower from a more extreme lockdown.
This decline in mobility contributed to California’s drop of 4.7% in economic output—almost double the rate of Texas in the first quarter.
The key here is to understand people act rationally.
The rates of social mobility show people were practicing social distancing before mandates were imposed. Wearing a mask, practicing social distancing, and taking care of the elderly and vulnerable will be the norm for the vast majority of people without the destructive effects of government mandates and lockdowns.
In a recent poll, parents’ top concern was whether their children will miss in-person school instruction time. And they have good reason to be concerned as 67% of teachers said completion rates of student assignments were worse than in-person instruction.
This hurts disadvantaged students the most, as the Texas Education Agency recently noted that students in low-income families across the U.S. had a drop of 55.6% in online math coursework whereas those in middle-income families had a 34.2% decline and in high-income families actually had a 4.8% increase.
These losses in students’ participation in learning can contribute to lower lifetime earnings, with a troubling racial achievement disparity.
One study finds that the educational level of the average black or Hispanic student is already two years behind the average white student. These differences are based on multiple factors, including place of residence and wealth disparity.
Delaying in-person instruction due to fears about COVID-19 will exacerbate this disparity.
That study notes that if in-person instruction doesn’t start until January 2021 across the U.S., then while “white students would earn $1,348 a year less (1.6% reduction) over a 40-year working life, the figure is $2,186 a year (3.3% reduction) for black students and $1,809 (3.0% reduction) for Hispanic ones.”
Add to that how disadvantaged students tend to lose educational progress during school breaks as there’s usually less parental involvement and resources available to them than other students. Just think of how months of missed in-person instruction would set them back.
Even if government schools were to educate every student at the same level, the disparity between races and socioeconomic statuses will grow without the choice of in-person instruction. Unfortunately, minorities and poor Texans will suffer the most from this policy choice but would benefit most from that choice.
Despite these concerns, Austin ISD and many other school districts across the state have already decided to have only virtual education for the first few weeks of the school year.
But what of educators’ fears?
Pediatricians, educators, and superintendents from organizations across America recently released a letter noting, “Returning to school is important for the healthy development and well-being of children, but we must pursue re-opening in a way that is safe for all students, teachers and staff. Science should drive decision-making on safely reopening schools.”
The Austin Public Health Interim Health Authority Dr. Mark Escott recently told Travis County Commissioners that having in-person instruction would put the lives of the 192,000 students in Travis County in jeopardy.
While he accurately noted that there have been no reported COVID-19 deaths of those under 19 years old in Austin/Travis County, he said there could be “between 40 and 1,370 deaths in that age group.”
But given flaws in the modeling, these projections are highly suspect.
First, Dr. Escott couldn’t use local data because there were no deaths among school-age children, so he resorted to using China’s data—where there was one death out of 965 cases of those 19 years old or younger.
But extrapolating those data from a communist country like China is a poor choice given the different demographics and health of people. This was also the case with Neil Ferguson who projected the U.S. would have 2.2 million deaths from COVID-19 without any other changes—deaths are currently less than 150,000.
Second, even with the problems with America’s government-dominated health care system, its quality and results are much better than the system in China. And the treatments here are better.
Third, COVID-19 seems to be ineffective in harming and spreading among young people or teachers globally.
Considering the poor modeling of the effects of COVID-19 such as Dr. Escott’s high estimate of 1,370 deaths that’s more than the 1,032 deaths of those 34 years old and younger across the U.S. as of July 15, we should be highly skeptical of these types of projections.
So, why delay or deter the choice of in-person instruction when the lives and livelihoods of kids, parents, teachers are at stake? It would be a disservice to the Texans who need opportunity the most.
Vance Ginn, Ph.D.