Federal Aid Underneath the Tree

It was delayed and contentious but lawmakers reached agreement on another installment of pandemic aid response. The Committee for a Responsible Federal Budget provides this summary (based on their best understanding before the text was released).  The relief provisions were actually combined with budget appropriations requiring a whole roll of wrapping paper for the bill's whopping 5600 pages.

Distribution formulas for all these programs and allowable uses of funds matter as much as the totals.  Both may offer some potential for political controversy as states' policies in response to the pandemic are not completely independent from the health and economic fallout experienced by states, and questions may exist on how prior/proactive state budget action on topics addressed in this bill will be viewed by the federal government with respect to aid distribution and federal reimbursement.

A Few Preliminary Observations

Cross That Off the To Do List -- The federal extension and augmentation of unemployment benefits through March 14 is a critical development for both workers and the state.  Minnesota was prepared to borrow an additional $200 million from the federal government to pay for a 13-week extension for those who have exhausted regular employment benefits.   As we noted at the beginning of the year as COVID took hold, according to the U.S. Department of Labor’s 2020 Trust Fund Solvency Report, the UI trust fund was considered below the minimum level for adequate state solvency going into a recession and Minnesota featured the lowest solvency ratio of any state with which it shared a border. As of mid-December, Minnesota had a UI trust fund deficit of $660 million, 7th highest in the nation.** 

Budget Impact of Special Session 7 Reduced -- Similarly, under Article 7 of the recently enacted state COVID relief bill, if Minnesota receives additional federal COVID aid during this fiscal year -- and federal law allows the aid to be used as the state intends -- MMB must cancel the general fund appropriation and use federal aid for this purpose.  The $216 million appropriation for the three "buckets" of state business relief payment payments would appear to have a high likelihood for such a cancellation (or general fund reimbursement if the money has already gone out).

More Targeting, But Still... -- The CARES act passed earlier this year demanded speed above all else leaving the effort open to some questions about the efficient use of limited resources.  From the descriptive summary, this package appears to reflect much more thought and effort on the issue of targeting aid to businesses and individuals most impacted.  That said another round of checks -- this time $600 per capita ($2,400 for a family of four) will once again likely send tens of billions to households who have experienced no economic impact from the pandemic.

Government Revenue Replacement Shutout -- General purpose aid to state and local governments for replacing lost tax revenue due to COVID was a casualty of the negotiations and is a major sore spot among state and local government officials.  In addition, at first glance it appears the flexibility states have in reimbursing COVID expenses this time around will be more limited than it was in the CARES program.   There is no multi-billion dollar pool for states to appropriate and allocate for COVID expenses as they see fit.  The targeted, more program-specific nature of the package this time around will certainly provide some relief for government operating budgets and help preserve tax revenues.  But the failure to provide aid for lost revenues will likely be felt, especially in the forthcoming biennium in which 95 cents of every new dollar of general fund tax revenue is currently forecast to be consumed by current law health and human service spending (as we will discuss in our next Fiscal Focus).

"No deduction shall be denied" --  A political kerfuffle arose out of the CARES Act as PPP loan proceeds were exempt from taxation but businesses discovered the IRS had concluded expenses paid with loan proceeds were not.  From a pure tax policy standpoint, that makes sense.   A forgiven loan is economically equivalent to a grant. If the grant is exempt but the expenses associated with it are disallowed there is still no tax liability.  So disallowing the expenses only prevents the business from deducting them as a way to reduce tax due on other income it may have.  In other words, it's stacking a tax break on top of a government handout.  And the extra benefit comes with a cost to the federal treasury -- up to $200 billion according to the CBO.

No less importantly, it undercuts the purpose of the program itself.  Businesses that are still generating current year taxable income are not the businesses that most need direct government relief.  Those needing to find a way to keep doors open and losing money even with PPP assistance are.  As several tax experts have questioned, shouldn't Congress extend loans to more struggling companies, rather than multiplying the benefit for the fortunate few that both get PPP loans forgiven and have enough other income to generate positive tax liability now or in the future?

Nevertheless, expenses are now deductible creating a no-win conformity decision for state government.  Conform and state revenues will likely take a noticeable hit.   Don't conform and you add another compliance and administrative headache to a large and rapidly growing list in these unusual times.

** Corrected an earlier post due to a spreadsheet calculation error from the Tax Foundation