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Thursday, May 7, 2020

CARES Act: Help Taxpayers, Not Government

My idea for a CARES Act pass-through mechanism to benefit taxpayers would have some substantial benefits for the private sector.


In response to the upcoming special session with the Wyoming legislature, where the state's lawmakers are going to discuss how to spend the CARES Act money, I have proposed a measure that would simply pass the funds onto taxpayers. This is a controversial idea, for sure, but I would nevertheless like to propose a broader discussion of it beyond the Wyoming borders.

Before we delve into the details, let me again point out that this pass-through mechanism is intended to give state legislators and governors ideas for how to restart the economy. The mechanism is not the official policy of any organization; it is a thought experiment to challenge out-of-the-box thinking at a time when it is very much needed. We are in a desperate situation that demands unconventional policy responses; the worst approach is to simply replenish government coffers and expand government while providing strictly limited and selective help to taxpayers.

The mechanism I propose, aimed at passing CARES Act relief money onto taxpayers, is intended to give the strongest boost possible to the private sector, right when it needs it the most. It is also intended to avoid government spending that would create a need for higher taxes in the future. If lawmakers and governors like it, or of they choose to use the CARES Act money in some other way to achieve the same goal, is of less importance. What matters is the outcome. 

What matters more than anything right now, is that states do something unconventional to put their taxpayers first. To simply stay within the confinements of conventional wisdom is to beg for more economic and fiscal problems in the future. It is like filling the can with rocks before kicking it down the road. 

The controversy around the pass-through mechanism has centered in on its alleged illegality. It has been suggested from members of the legal profession that a state cannot simply suspend revenue collections and use the CARES Act money to reimburse its general and other funds for the forfeited revenue.

There are two responses to this. First, the illegality argument is debatable, perhaps even a rush to conclusion. It is ostensibly motivated by lack of understanding of public finance. 

Notwithstanding any other provision of law, to provide liquidity to eligible businesses, States, and municipalities related to losses incurred as a result of coronavirus, the Secretary is authorized to make loans, loan guarantees, and other investments in support of eligible businesses, States and municipalities
About 90 percent of the $500bn appropriated under this section is left open-ended "for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities". The section then specifies how the Federal Reserve would guarantee such loans, loan guarantees and "other investments".

In other words, there is indeed a way for a state government to use CARES Act funds for the pass-through mechanism I outlined. The actual execution of the mechanism would require one extra layer between the CARES Act money and the taxpayers, but there is nothing standing in the way of a state legislature doing precisely that: using these emergency funds to provide relief for taxpayers.

Secondly, there is always the possibility of declaring a state economic emergency. It would be written by the governor specifically to allow the state's taxpayers to enjoy relief as they try to recover from this long and serious disruption. 

The declaration of an economic emergency is entirely doable. Emergency powers may be temporary, with automatic expiration dates, but they are not enumerated. They are entirely at the governor's discretion. This means, as we have seen with the current public-health crisis, that a governor can use his or her emergency powers to override private contracts, even the constitution. 

By the same token, the state's chief executive could easily use these powers to declare an economic emergency. It would be a concentrated one, focused entirely on overriding rules and regulations attached to the CARES Act. As such, it would be much narrower than current public-health emergency declarations.

It should also be popular, especially if its purpose is to protect - not restrict - the private, tax-paying sector.

If used this way, an economic emergency would allow states to provide significant taxpayer relief at the very right point in time. Here is a rundown of what it would mean for the Western states, based on 2019 state government tax collections as reported by the Census Bureau:

Colorado. With total tax collections of $15.9 billion, and with $2.23 billion coming in under the CARES Act, the Centennial state could suspend all state tax collections for seven weeks. It could also choose to suspend the individual income tax for a full quarter, or eliminate its corporate income tax for an entire year and give individual income-tax payers nine weeks' worth of relief.

Idaho. The CARES Act has a standard minimum amount of $1.25 billion that is paid out to smaller states. Idaho, being one of them, thus gets the equivalent of one quarter of total state tax revenue. In other words, the state could suspend all tax collections for three full months. It could also target its relief efforts by cancelling sales and gross-receipts tax collections for six months, or suspend its corporate income tax for a full year and its individual income tax for six months.

Montana. As another state receiving the standard $1.25bn, the Treasure State is in a position to suspend all state taxes for five months. Another option is to suspend the state individual income tax for six months plus suspend the state property and motor fuel taxes for an entire year. This latter alternative is a package that would have a significant and very direct stimulus effect on small business activity and consumer spending.

Nebraska. With approximately $5.8 billion in total tax revenue, the legislature in Lincoln could give all its taxpayers a complete relief from state taxes for eleven weeks. Since this is a state that relies heavily on sales taxes - they provide more revenue than even the individual income tax - reducing the state sales taxes by half, or suspending them for six months, would be a nice way of putting money back into the private sector. An almost as direct and effective measure would be to do the same with the individual income tax (which is a little bit smaller in terms of revenue than the sales tax). 

North Dakota. State tax collections amount to approximately $5 billion, allowing for a one-quarter full tax relief based on the standard CARES Act amount. Other options are: cut the severance tax in half to help the oil industry; or suspend for an entire year all individual and corporate income taxes and the state gas tax and all license fees (including motor vehicles and all occupational and business licenses), and still have enough money to suspend selective sales taxes for six months.

South Dakota. In lieu of individual income taxes and state property taxes, sales and gross receipts taxes account for about 83 percent of state tax revenue. The $1.25 billion would allow the legislature - and the governor under an economic emergency - to suspend the general sales tax for an entire year and still have enough money to suspend occupational and business licenses for the same period.

Utah. Somewhat surprisingly, the Beehive State gets the base $1.25bn CARES Act money; one would have expected this state to be closer to Colorado in disbursement. This money is nevertheless enough to give taxpayers a relief from state taxes for a full six weeks; or three months without the individual income tax; or a year's worth of suspension of the corporate income tax, the gas tax, and motor vehicle license fees.

Wyoming. The $1.25 billion that the CARES Act dispenses to the Cowboy State would be enough to allow for approximately 12 weeks' worth of suspension of state revenue collections (taxes, fees, other charges), or six weeks if local governments are included. Since Wyoming has a sizable amount of money in the bank, a small withdrawal from the state's rainy-day fund would allow for a full two-month suspension of revenue collections.

Again, the purpose behind this idea for a pass-through mechanism is to give legislators ideas for how to restart their economies, avoiding to fall for the temptation to simply replenish government coffers. The execution of this mechanism requires out-of-the-box thinking on behalf of lawmakers and governors, but this is a situation where that type of thinking is required. If we simply use it to maintain, even expand government, we are going to be much worse off on the other side of this public-health emergency. 

What matters here is the goal with the pass-through mechanism, namely that the relief provided by the federal government goes to help taxpayers. This is the only way that we can restart the economy and make sure it goes back up in high gear. How exactly lawmakers and governors go about that, is less important. The mechanism provides two alternatives; if there are better ways to get the job done, by all means, use them.

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