Inside the $1 Trillion Fiscal Stimulus Being Crafted to Avert a US Recession

As coronavirus cases continue to rise globally, most governments and private sector companies are adopting stringent social distancing measures, with concerns regarding the attendant economic damage continuing to build. US economic activity is expected to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals and supply chains are ground to a halt.

Several large investment banks are forecasting US GDP to decline 5%-24% in 2Q20 with a recovery in late 2020. Recovery in 2H2020 is predicated on the pace with which social distancing and seasonally higher temperatures reduce community transmissions, in conjunction with size of fiscal stimulus.

While the initial response from developed economies including USA was slow, over the last few days – policy makers have provided significant monetary and fiscal boost to the economy. While US Congress and President Trump have announced measures aggregating to 1% of GDP since early March, US Congress is preparing a fiscal boost that may be far more significant – up to 10% of GDP. For perspective, the entire fiscal boost in 2008-09 Great recession amounted to about 5.5% of GDP.

While lawmakers still debate the measures, it is helpful to look at GOP Senate proposal that was published late in the week and forms the bedrock of discussion in the Congress.

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Fiscal measures targeting businesses

Small business loans/payroll subsidy

• Liberalize lending standards under the Small Business Administration’s (SBA) 7(a) lending program allowing firms with up to 500 employees to receive loans equal to four months average payments for payroll, rent, and other debt obligations (up to $10MM per firm).
• The loans would be originated by banks but the SBA guarantee would increase from 75% to 100% of the loan amount.
• Payments could be deferred for up to one year.
• The program would dedicate up to $300bn (1.5% of GDP) to forgive loan balances used to finance payroll from March 1 to June 30, 2020, as long as firms continue to pay workers at least 75% of their normal pay.

Industry focused relief

• Loans or loan guarantees of $50bn to airlines, $8bn to air cargo, and $150bn to other industries.
• Treasury may seek compensation and participation in future gains, which could take the form of “warrants, stock options, common or preferred stock, or other appropriate equity instruments.” Employee compensation of participating firms would be restricted for two years.

Tax relief for businesses

• Delay filing dates for estimated business taxes from April 15, June 15, and September 15, to October 15.
• Some measures that would roll back some of the restrictions that were imposed in the 2017 tax reform law temporarily.
• Allow businesses to carry back net operating losses (NOLs) up to five years to offset profits from prior years, which would generate cash refunds of prior taxes paid. It may also temporarily allow the ability to fully offset income.
• Temporary changes to the limitations on loss rules for partnerships and sole-proprietors.
• Speed up refunds of corporate alter native minimum tax (AMT) credits.
• Temporary relaxation of the section163(j) limitation of interest deductions to 50% of adjusted taxable income-instead of current 30% limit.
• A number of technical corrections to provisions in the 2017 tax law (“Tax Cuts and Jobs Act”).
• A suspension of certain aviation excise taxes through the creation of an “excise tax holiday” through December 31,2020.‍

‍Fiscal measures targeting individuals

 Payments to individuals

• The bill provides a $1200 rebate to taxpayers ($2400 in the case of a joint tax return) with incomes up to $75,000 ($150,000 joint).
• The credit phases out for additional income up to $99,000 ($198,000 joint) based on the 2018 tax return.
• It also provides a $500 rebate for each child.
• The bill does not set a date for when the rebates will be sent but says they will occur “as rapidly as possible.”
  

Tax measures for individuals

• Rebates of up to $1,200 for single filers and $2,400 for joint filers (with amounts increased by $500 per child). These payments are subject to phase-outs beginning at $75,000 / $150,000 adjusted gross income (AGI) for single filers / joint filers.
• A delay of the April 15 filing date for 2019 returns until July 15. Also, a delay in estimated tax payments otherwise due from date of enactment until October 15, 2020
• A waiver of the early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans.
• Allowance of up to $300 of charitable deductions for non-itemizing taxpayers for tax years beginning in 2020 and relaxation of the limitations for those taxpayers who itemize.

One key issue to look out for in the ongoing US fiscal negotiations is the speed with which any fiscal package will be eventually delivered to companies and consumers as any delay will have catastrophic impact on the economy. Obviously it is not easy to write a check to US households or retool existing systems (unemployment benefit systems, social security payment systems, EBT cards) while providing holistic coverage efficiently and effectively.

While Winston Churchill supposedly did not say half the things he is supposed to have said including, “You can always count on Americans to do the right thing - after they've tried everything else.” This time 331 million Americans sincerely hope that our legislators will follow that dictum. 

‍Amitabh Bhargava
SRA Consulting

Bert Knotts
SRA Consulting