Legislative Update – July 24, 2020

Federal Relief Debate and Impacts on Vermont 

Congress returned to work in D.C. on Monday with the expectation that before they are scheduled to adjourn on August 7th another piece of legislation in response to the pandemic will be passed.  On Wednesday night Senate GOP leaders and the White House announced they’d arrived at a deal, making the fault lines that had already formed even more clearly between the two parties. 

While the GOP has put forward their deal, the Democrats have significant bargaining power given their control of the House, the number of Senators aligned with them, and to some extent, the popular nature of some of their proposals.  One thing that distinguishes these proposals from our past few rounds of COVID-19 relief is that there is not an intention on the part of the GOP to move all these items in one bill; instead, Republicans intend to move them in multiple, smaller bills.  While this may be the de jure method of approach, it will be debated as one de facto package.  

Below are some of those fault lines – before you jump into this, understand, there is a long way to go.  While the White House and Senate Leadership reached a tentative deal Thursday, they punted until Monday to unveil all the details, and they still need to negotiate across the aisle.  With that, here are some big points under negotiation:

• Size – The GOP, under the leadership of Mitch McConnell, has drawn a line in the sand at a $1 trillion package presumably due to Tea Party pushback; this new rift is reminiscent of 2008 when after creating the TARP program Republicans drew criticism from their own caucus pressuring leadership to spend less as they campaigned for re-election in fiscally conservative districts.  Meanwhile, Democratic leadership under the direction of Speaker Nancy Pelosi already passed their HEROES Act through the House that included $3 trillion and they would like $1 trillion alone in state/local government support.  The Democrats are confident that they can get at least $250 billion for local government out of the package.  The compromise, or maybe consolation prize, for less or no new funding, will likely come in the form of regulations around the Coronavirus Relief Funds already allocated to states under the CARES Act being loosened, allowing states to apply those funds for things such as revenue replacement. 

  What does this mean for Vermont?  If no new funding comes to the state as it did under the CARES Act and the state only has CRF to spend with more flexibility, it will likely mean our state will spend about $225 million of CRF still left to cover revenue shortfalls, leaving little or no additional funding for business relief or other programs. 

  It is worth noting that using all this funding to backfill revenue shortfalls will not solve the entire problem.  The latest shortfall in the education fund released by the Joint Fiscal Office this week shows a $171 million shortfall.  The reason that the legislature is returning in August is because they will have a clearer picture with which to budget with the data and dollars collected from the new July tax deadlines available.  A reminder: money committees have already identified $50 million in potential new taxes including a cloud tax, candy tax, “luxury” clothing tax, and a 1% COVID surcharge sales tax.

• Federal Pandemic Unemployment Compensation (fPUC) – colloquially known as the “extra $600” this enhancement to unemployment benefits added to the CARES Act at a late stage of development is set to expire at the end of the month and has already been a major point of contention in the framing of the next legislative package.  According to a study by the Congressional Budget Office, 1 in 5 Americans has utilized unemployment due to this pandemic, and of that group, 80% have received more in UI benefits than they would at work.  While this has made it difficult to fill open positions and created incentives not to work, there is deep nonpartisan and bipartisan agreement that the enhanced benefit, while gratuitous, is preventing a massive dip in consumer spending that would be expected at this level of unemployment; keeping the economy afloat (see the study by JPMorgan Chase). 

  The parties will need to strike a balance to appease the large number of voters who benefit from this program while also making an enhanced benefit contribute to sustainability.  Retaining the benefit as quickly as possible is a major goal of the Democratic leadership, one they will likely fail at, given that due to the mechanics of our government, passing a continuation of the program at its earliest will still mean two or more weeks without it (unless they make it retroactive and explicitly give state DOLs the ability to back pay them benefit). 

  The deal that the Senate GOP and White House struck would replace the PUC with a roughly 70 percent match of a worker’s wages before they were laid off. This will be a tricky proposition as many states across the country deal with archaic systems to administer their UI program and there are a patchwork of wage replacement formulas already used making changing a formula overnight daunting. 

  What does this mean for Vermont?  The CARES Act requires states to provide fPUC through July 31, however, Vermont, like many other states, ends its benefit week on Saturdays making July 25 the last Saturday of the month.  Federal law does not allow the state to pay this particular benefit through Saturday, August 1st. This means that, as we outlined above, even if the benefit is reinstated, it may be weeks until it reaches Vermonters.  This could potentially impact the ability of employers to hire on staff. 

  According to the latest data, Vermont has seen over $564 million (combined general UI and PUA) come to the state in fPUC benefits to date which have had an untold, however, undoubtedly positive impact on the Vermont economy.  Given that the state has paid only $230.5 million in general UI payments and $421.5 in fPUC benefits to date, one could surmise that most Vermonters receiving UI benefits are making more than they would at work.

• Tax cuts long shots – The Trump Administration this week made clear its desire to see a payroll tax cut which surprisingly was met with little fanfare, especially as the current pandemic contributes to social security becoming an even more rapidly growing unfunded liability.  Meanwhile, the House Democrats have already sent to the Senate a reinstatement of the SALT deduction changes that came from the so-called 2017 Tax Cuts and Jobs Act.  Both are longshots and likely will not have traction, however, you have not seen the last of them. 

  What does this mean for Vermont?   Vermont easily fits the profile of a state that would benefit from the reinstatement of SALT and this would be beneficial to our state.