TAX VIRUS BRIEFING: Payroll Tax Deferral Isn’t a Winner So Far

Payroll taxes—to defer or not to defer. Business signals so far are pretty strongly against President Donald Trump’s deferral directive. As virus-aid talks stay stuck, state and local governments continue to seek congressional support for more financial help whenever lawmakers can put a package together.

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Democrats and the White House agreed this week to one thing, at least: Their failure to get together on another rounds of coronavirus relief legislation won’t block negotiations over a continuing resolution—a bill that will be needed to fund the government past the Sept. 30 end of this fiscal year. Both parties want to avoid a government shutdown before the November election.

The Trump administration expressed a desire to get moving on a relief package, but a bridge across the political chasm isn’t in sight yet.

In the absence of relief-bill developments, attention remains focused on President Donald Trump’s directive for employers to defer withholding and pay workers’ Social Security payroll taxes for the rest of this year. Federal agencies apparently are being required to defer, but so far few businesses, if any, say they are going to do it.

A huge obstacle: the prospect of having to repay the deferred amount next year. Trump’s desire to have Congress forgive the taxes doesn’t currently appear likely to win lawmakers’ backing, although Rep. Kevin Brady, top Republican on the House Ways and Means Committee, said this week that he would introduce a bill to effect that result. Treasury Secretary Steven Mnuchin said this week that repayment could come from Treasury general funds.

There had been some confusion about whether Trump’s directive was mandatory, but an IRS attorney confirmed Thursday that it wasn’t. Employers aren’t required to stop withholding, attorney Kelly Morrison-Lee told a payroll industry teleconference session.

Questions remain nonetheless. A big one is how an employer, and an employee, would handle a situation in which the worker left that job before the start of the deferral payback period next year. “How are you supposed to recoup from someone who no longer works for you?” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce.

Another cause for concern is that the employees themselves may have little control, if any, over whether payroll tax withholding is deferred.

Paycheck Protection News: Democratic staff of the House Select Subcommittee on the Coronavirus Crisis said more than $1 billion in Paycheck Protection Program loans went to small businesses that got multiple loans—something the program didn’t allow.

In the States

One of the roadblocks to virus aid agreement between Democrats and the White House has continued to be a huge gap between the amount of federal money each side thinks should go to state and local governments, hard hit by revenue losses from pandemic lockdowns. The White House wants only a fraction of what Democrats have favored.

Federal talks may be shut down, but lobbying by those other levels of government isn’t. “State and local governments don’t have the luxury of sort of letting the chips fall where they may,” lobbyist Leslie Pollner said.

Sixty-one state and local governments, and seven associations representing different levels of government have hired lobbying firms since the pandemic started, and they are still working on lawmakers to include more funding in whatever package may emerge early this fall after many weeks of inaction.

Mnuchin told a House committee this week that Trump has authorized him and Mark Meadows, Trump’s chief of staff, to put more money on the table for state and local governments.

Illinois: After doubling its motor fuel tax last year, the state expected double the revenue. But the pandemic greatly stifled driving, and revenue from that tax was only 55% greater from April through July than in the same period last year.

New Jersey: Only a river’s width away from the nation’s stock trading hub, the state is home to data farms that process hundreds of millions of trades every day—a business that Gov. Phil Murphy sees as ripe for taxation to help restore the state’s fiscal strength and fund his social agenda. His proposed levy could bring in as much as $10 billion a year, a lawmaker says. Murphy also has proposed a millionaires tax and tax increases on boat sales and other items.

Noth Carolina: Lawmakers sent Gov. Roy Cooper a package that authorizes another $1.1 billion in virus relief, including a $335 one-time payment for families with children, tied to the child tax credit. Lower-income families that don’t have tax-filing obligations may also claim it.

Texas: Sales tax revenue, which rose earlier in the summer, dropped again in August (based on July receipts), probably because coronavirus infection rates rose in July. As the largest tax revenue source for the state, sales tax is watched closely. Notably, alcoholic beverage taxes in August collections were down 39%.

Bloomberg Tax has a state-by-state roadmap logging all virus-related developments as they happen.

Global Developments

Some European countries have been renewing cross-border commuter taxation agreements as the pandemic wears on, and some agreements are due to expire before long. But the prospect of ongoing, widespread work-from-home is creating headaches for workers and employers.

Company executives worry about costs, but countries may find it too hard to resist ending their agreements as they struggle to refill their coffers.

Canada: The Revenue Agency increased the amount of overtime meals or the meal portion of a travel allowance that can be excluded from an employee’s taxable income.

France: President Emmanuel Macron released his “France Relaunch” plan featuring business tax cuts, wage subsidies and environmental project funding. The package aims at long-term growth within what Macron calls a “philosophy of transformation.”

U.K.: Top government officers promised Conservative members of Parliament that while some hard choices will have to be made to bring the economy back, there won’t be a “horror show” of tax increases that would last into the significant future. They didn’t appear to rule out temporary increases, though.

In a parliamentary hearing this week, economists generally agreed that this isn’t the time to raise taxes. Some noted, however, that in the pre-pandemic period, U.K. taxes accounted for about 37% of economic output, much less than France’s 50%-plus and Italy’s 47%.

More international news and information on coronavirus is here.

Dive Deeper With Bloomberg Tax Insights

• Aydin Hayri, Manoj Raj, and Jamie Hawes of Deloitte: Key transfer pricing issues related to possible pandemic impacts on foreign multinationals operating in the U.S.
• Christopher Hanewald of Wyatt, Tarrant & Combs: How uncertainty about Paycheck Protection Program loan forgiveness is affecting would-be buyers of loan recipients.
• Kyle Pomerleau of the American Enterprise Institute: President Trump’s executive action directing deferral of employer withholding of Social Security tax from paychecks raises many questions and is unlikely to effect its economic-relief goals.
• Anthony Millin of Shulman Rogers: How a firm’s use of technology in the pandemic can lower costs and help attorneys serve clients better.