President Biden presented his $1.8 trillion American Families Plan, which focuses on expanding benefits for education, children and childcare. The Biden administration intends to pay for the plan with a series of tax hikes on certain individual taxpayers. Depending on your income and source of wealth, there are some clear winners and losers of this proposal, so let’s look at each and start with those who lose.

Losers Under the Plan

High Earners: The proposed plan would increase the highest individual tax rate from 37 percent up to 39.6 percent. Currently, this tax bracket starts with those earning more than $523,000 for singles and $628,000 for taxpayers who are married filing jointly. While the percentage increase may appear small, this change is projected to raise more than $111 billion over the next 10 years.

Heirs of Large Estates: The plan proposes eliminating the “step-up” in basis on assets received when an estate is passed on. The step-up in basis means that the heir now has a basis in the inherited asset equal to the fair market value at the date of death. This essentially eliminates the payment of capital gains taxes.

The plan allows for the initial $1 million in transferred gains to remain tax-protected, so this would only impact larger estates.

Wealthy Investors: A change to the long-term capital gains and qualified dividends taxation is proposed for taxpayers earning more than $1 million per year.

Currently, long-term capital gains (on assets held for more than one year) and qualified dividends are taxed at a flat 20 percent. The plan taxes long-term capital gains and qualified dividends as ordinary income, raising the rate to 39.6 percent for the taxpayer affected.

Hedge Funds and Private Equity: The Biden plan looks to eliminate the carried interest tax break, which allows partners in the funds to treat a large portion of their compensation as long-term capital gains instead of ordinary income.

Real estate investors: Currently, the tax law allows for what are called section 1031 like-kind exchanges. A 1031 exchange allows the proceeds from the sale of real estate to be reinvested in another similar or “like-kind” asset, and defer the capital gains taxes as a result.

The proposed plan would eliminate section 1031 like-kind exchanges for all sales where there are gains of $500,000 or more.

Winners

Low and Middle-Income Families with Children: The Biden tax plan calls for a five-year extension of the expanded Child Tax Credit (CTC) created in the American Rescue Plan. The CTC gives a credit of $3,000 for every child age 6 to 17 and $3,600 for children 5 and younger for single taxpayers earning $75,000 or less and married filers earning $150,000 or less. The plan would also make the existing $2,000 CTC permanently refundable.

Low-Income Individuals Without Children: The plan proposes a permanent enlargement of the Earned Income Tax Credit. The American Rescue Plan increased the maximum benefit for filers without children from $534 to $1,502 and broadened the eligibility criteria to include those under and over 65.

Working Parents: The American Rescue Plan also included a temporary enhancement of the Child and Dependent Care Tax Credit. This credit would give qualifying families a tax credit of up to $4,000 for one child or $8,000 for more than one child to compensate for childcare costs while they work, including after-school programs. The new tax plan would make this credit permanent for those making $125,000 per year or less.

Conclusion

The benefits of the Biden tax plan for its winners are nothing new or novel. Essentially, it calls for making permanent several the provisions originally passed in the American Rescue Plan and increases taxes on wealthier taxpayers to pay for it.

The Child Tax Credit as we know it originated during the Clinton administration, but the recently enacted American Rescue Plan created a new version. The updated version of this tax credit could have a beneficial impact on Americans struggling through the COVID-19 pandemic. There are changes to many aspects of the credit, so let’s look at each one below.

Monthly Payments Versus Once-a-Year Credit

First, the new version of the Child Tax Credit applies only to the year 2021. If a family qualifies, the credits are $3,600 for each child under age 6 and $3,000 for those ages 6 to 17.

The major difference is not the limits, but that in 2021 half of the credit will be paid on a monthly basis in the second half of the year. From July through December, the credit will be paid out at a rate of $300 for each child under age 6 and $250 for each child ages 6 to 17. In prior years, the tax credit was available only when filing an annual tax return. The other half of the credit in 2021 will be reconciled on 2021 income tax returns.

Income Limits and Phase-Outs

Similar to the stimulus checks, the tax credit is based on adjusted gross income. To receive 100 percent of the credit, the AGI limits are $75,000 for single filers, $112,500 for heads of household and $150,000 for those married filing jointly.

The phase-outs start once a taxpayer exceeds these AGI thresholds. Every $1,000 in AGI over the limit reduces the credit by $50 (per dependent child). For example, if a couple filing jointly earned an AGI of $165,000, their credit will be reduced by $750 per child.

Qualification for the Credit

While the tax credit is ultimately based on 2021 income, to facilitate the monthly payments, the new Child Tax Credit will use 2020 income tax returns. For those who haven’t filed yet, the look-back will be to 2019. The monthly payments will be based on these already filed tax returns and then the balance of the credit be reconciled based on 2021 income.

If a taxpayer receives more interim monthly payments on the tax credit than their 2021 AGI entitles them to, they will need to pay back the unqualified portion of the credit.

Unique Situations

In the scenario where a child crosses age thresholds mid-year in 2021, the age for determining the credit will be based on how old the child is on Dec. 31, 2021. For example, a child who turns 6 before the end of the year will qualify for the lower $3,000 credit and not the $3,600 for those under 6.

Existing Child Tax Credit is Still Available

One of the unique features of the new Child Tax Credit is that the old version is still available. This version established under the Tax Cuts and Jobs Act of 2017 has significantly higher AGI thresholds: single taxpayers with an AGI of $200,000 and married filing jointly at $400,000. As a result, many taxpayers will still qualify for this version with its lower credit of $2,000 per child and no monthly payments.

Conclusion – There’s More to Come

As the July 1, 2021 start date approaches, the IRS will release more details on the new Child Tax Credit and what taxpayers can do to take advantage of the changes.

The recently passed American Rescue Plan (ARP) Act of 2021 includes a provision making nearly all student loan forgiveness tax-free, at least temporarily. Before the ARP, student loan forgiveness was tax-free only under special programs. Before we look at the changes to come under the ARP, let’s look back at what the previous law provided.

The Old Rules

Under the earlier measure, student loan forgiveness was tax-free under certain circumstances. These special programs included working in certain public sectors, some types of teachers as well as some programs for nurses, doctors, veterinarians, etc. Essentially, you had to work in a specific field under certain conditions for a minimum length of time and some or all your student loans would be forgiven or discharged. There are also other technical qualifications, such as death and disability, closed school, or false certification discharges, but these aren’t widely applicable.

Because student loans are not dischargeable in bankruptcy, income-driven repayment plans were the other main type of program that could result in forgiveness or discharge. Typically, borrowers repaid an amount indexed to their income over a 20-to 25-year period; whatever was leftover at the end was discharged. The forgiven loan amounts under income-driven repayment programs were considered a discharge of indebtedness and tax as ordinary income (although there are exclusions for insolvent taxpayers).

The New Rules

Under the new law in the ARP, the forgiveness of all federal student and parent loans are tax-free. This includes Direct Loans, Family Federal Education Loans (FFEL), Perkins Loans, and federal consolidation loans. Additionally, non-federal loans such as state education loans, institutional loans direct from colleges and universities, and even private student loans also qualify.

The essential criteria for the loan discharge to qualify for tax-free treatment is that it must have been made expressly for post-secondary educational expenses and be insured or guaranteed by the federal government (this includes federal agencies).

This all means that the debt discharged under income-driven forgiveness programs will now be tax-free as well, but there’s a catch. The discharge of student loan debt needs to happen within the next five years because the provision expires at the end of 2025. There could be an extension, but that’s uncertain now.

Why this Change May Really Matter

The change in rules making income-driven student loan forgiveness tax-free isn’t a huge deal for most people. The new law really matters because it sets the stage for broader student loan forgiveness. The program currently being floated by President Biden to forgive $10,000 in student loan debt or the even larger $50,000 proposal by some Senate Democrats will qualify for tax-free treatment.

Good tax professionals ask the right questions to ensure they understand your situation and can help you to the best extent the law allows. Given the host of pandemic-related tax changes for 2020, it’s good to keep these four questions below in mind. If your tax preparer doesn’t ask these questions in your tax organizer or during a meeting, raise them yourself.

1. Did you receive your stimulus payment?

Not everyone received all the stimulus they were entitled to. As a result, the amount of your stimulus payments needs to be reconciled on your 2020 tax return to calculate if you qualify for the Recovery Rebate Credit.

The way the Recovery Rebate Credit works is that if you qualified for stimulus payments but didn’t receive them, then you’ll receive a credit on your 2020 tax return. On the other hand, if you received too much, there is no impact to your refund or balance due. You can’t lose here, so make sure you discuss your stimulus payments.

2. Did you work remotely? If so, when and where?

As a result of the pandemic, a lot of people worked from home for all or part of the year. If you lived in the same state you worked in, then there’s no cause for concern or further investigation. In situations where workers lived and therefore worked remotely in a different state than they normally would have commuted to when going into the office, then there could be an issue.

If you worked from another state for any part of the year, make sure you ask your tax preparer about this so you can understand the filing requirements in each state and any nexus issues. Just remember that if you are a W-2 employee, it doesn’t matter if you worked from your home, there is no home office deduction unless you’re self-employed.

3. Did you take any distributions from your retirement accounts in 2020 due to COVID-related circumstances?

Typically, early distributions from tax-advantaged retirement accounts such as 401(k) and IRAs are subject to a 10 percent penalty. There are provisions in the law that allowed penalty-free distributions in 2020 under certain circumstances related to COVID-19. Also, the income from distributions is spread over three years, which can further reduce the overall tax rate (unless you elected to tax it all in the year of distribution).

If you took distributions from a retirement account and were impacted by COVID-19, make sure your tax professional is aware of these exceptions; and ask the right questions to see if you qualify for any of the preferential treatment.

4. Are you self-employed and missed work because you were sick with the coronavirus or needed to care for someone who was ill with it?

Under the Families First Coronavirus Response Act (FFCRA), those who are self-employed can be eligible for sick and family leave credits if they or a family member had coronavirus and couldn’t work between April 1 and Dec. 31, 2020, as a result. If eligible, your tax preparer will file Form 7202 with your Form 1040 to make the claim.

Conclusion

Doing the best as a tax preparer means knowing your client’s situation and circumstances. There’s a good chance your tax professional is already on top of the COVID-19 changes, but it’s good to keep the questions above in mind just in case.

In late December, Congress passed the Consolidated Appropriations Act, which in addition to providing COVID-19 relief provisions also included many tax provisions and extenders. The Act contained many COVID-related tax provisions, as well as a slew of extenders ranging from one year to permanent. This article will focus on the miscellaneous tax and disaster relief provisions, which are more applicable to most taxpayers.

Miscellaneous Provisions

Charitable Contributions – For tax years 2020-2022, starting in 2020 non-itemizers can deduct $300 in charitable contributions, and starting in 2021 non-itemizer can deduct $600 for married couples filing jointly.

Full Business Meals Deduction – Typically, business meals are only 50 percent deductible; however, the new tax law provides for a 100 percent deduction for restaurant meal expenses incurred in 2021 and 2022.

Low-Income Housing Tax Credit – Starting in 2021, a 4 percent rate floor is established for calculating credits related to the acquisition of and bond-financed low-income housing developments.

Minimum Interest Rate for Certain Life Insurance Contracts – The bill ties the rates going forward for section 7702 fixed interest rates for life insurance contracts to benchmark interest rates that are periodically updated.

Minimum Age for Distributions – Certain qualified pensions can make distributions to workers who are 59½ or older and still working, with a special allowance for some construction and building trade workers, where the age is lowered to 55.

Modified Charitable Contribution Limits – An extension for one year through 2021 is given for CARES Act increased limits on deductible charitable contributions for corporations and taxpayers who itemize.

Disaster Relief

Disaster tax relief provisions are available for individuals and businesses in presidentially declared disaster areas on or after Jan. 1, 2020, up through 60 days after enactment.

Use of Retirement Funds – Residents of qualified disaster areas can take up to $100k in qualified distributions from retirement plans or IRAs, penalty-free. Taxpayers have up to three years to pay the distributions back without penalty.

Disaster Zone Employee Retention Credit – A tax credit of up to 40 percent of wages (capped at $6,000 per employee) is available to employers who are actively engaged in a trade or business in a qualified disaster zone.

Disaster Relief Contributions – Corporations are allowed qualified disaster relief contributions of up to 100 percent of their taxable income for 2020.

Tax Extenders

Aside from the miscellaneous and disaster relief provisions, the act extended numerous existing tax laws anywhere from one to five years or even permanently. Below is a list of the extended provisions. Due to the number of extender provisions, only a table is provided below.

One-Year Extensions

• Sec. 25C 10% credit for qualified nonbusiness energy property.
• Sec. 30B credit for qualified fuel cell motor vehicles.
• Sec. 30C 30% credit for the cost of alternative (nonhydrogen) fuel vehicle refueling property.
• Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
• Sec. 35 health coverage tax credit.
• Sec. 40(b)(6) credit for each gallon of qualified second-generation biofuel produced.
• Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
• Sec. 45(d) credit for electricity produced from certain renewable resources.
• Sec. 45A Indian employment credit.
• Sec. 45L energy-efficient homes credit.
• Sec. 45N mine rescue team training credit.
• Sec. 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest.
• Sec. 168(e)(3)(A) three-year recovery period for racehorses two years old or younger.
• Sec. 168(j)(9) accelerated depreciation for business property on Indian reservations.
• Sec. 4121 Black Lung Disability Trust Fund increase in excise tax on coal.
• Sec. 6426(c) excise tax credits for alternative fuels and
• Sec. 6427(e) outlay payments for alternative fuels.
• The American Samoa economic development credit (P.L. 109-432, as amended by P.L. 111-312).
  

Two-Year Extensions

• Sec. 25D residential energy-efficient property credit (the bill also makes qualified biomass fuel property expenditures eligible for the credit).
• Sec. 45Q carbon oxide sequestration credit (through 2025).
• Sec. 48 energy investment tax credit for solar and residential energy-efficient property.

Five-Year Extensions

• Sec. 45D new markets tax credit.
• Sec. 45S employer credit for paid family and medical leave.
• Sec. 51 work opportunity credit.
• Sec. 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence.
• Sec. 127(c)(1)(B) exclusion for certain employer payments of student loans.
• Sec. 168(e)(3)(C)(ii) seven-year recovery period for motorsports entertainment complexes.
• Sec. 181 special expensing rules for certain film, television, and live theatrical productions.
• Sec. 954(c)(6) lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
• Sec. 1391(d) empowerment zone designation.
• Sec. 4611 Oil Spill Liability Trust Fund financing rate.
• Sec. 1397A increased expensing under Sec. 179 and Sec. 1397B nonrecognition of gain on rollover of empowerment zone investments are both terminated for property placed in service in tax years beginning after Dec. 31, 2020.
• The Sec. 1394 empowerment zone tax-exempt bonds and Sec. 1396 empowerment zone employment credit, which expire Dec. 31, 2020, were not extended.

Permanent Extensions

• Sec. 213(f) reduction in medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income instead of 10%.
• Sec. 179D deduction for energy-efficient commercial buildings (the amount will be inflation-adjusted after 2020).
• Sec. 139B gross income exclusion for certain benefits provided to volunteer firefighters and emergency medical responders.
• Sec. 45G railroad track maintenance credit; however, the credit rate is reduced from 50% to 40%.

Conclusion

The Consolidated Appropriations Act passed in December 2020 not only extended many existing tax laws and instituted COVID-19 relief, but it also changes many typical tax laws (at least temporarily). Taxpayers should pay attention to these year-end tax law changes as they can significantly impact their tax situations.

While excise or vice taxes have long been a part of the American tax landscape related to alcohol and cigarettes, the recent invention of vaping and legalization of marijuana and other substances is changing the landscape.

What Are Excise Taxes?

Excise taxes are taxes on specific types of consumable products such as alcohol or tobacco for one of two reasons. First, as vice taxes in order to raise revenue to cover the costs related to consumption; and second, to deter consumption itself. Unlike other types of consumption taxes such as sales tax, these are specific to certain products.

Do They Change Behavior?

Theoretically, when you increase the price of a product such as alcohol through the addition of excise taxes, demand should go down. While this may be a deterrent and limit demand, excise taxes certainly haven’t proven to be a feasible way to eliminate behaviors. A pack of cigarettes can cost upward of $15 in major cities, but there are still people smoking. It’s a similar situation with drinking and gambling.

It’s All About the Benjamins

While we think of excise taxes as vice taxes today in many respects, the main point isn’t to change behavior – it is to raise revenue. Excise taxes pre-date the United States and were one of the main forms of government funding in America before income tax was created. Alcohol taxation goes back to George Washington’s presidency and incited the infamous Whiskey Rebellions. Cigarette taxes were introduced as a way to pay for the Civil War. In the end, it’s about the money generated as there are easier and more effective ways to regulate behavior.

New Products Equal New Taxes

The legalization of marijuana by states raises the issue of excise taxes on this product. Unlike tobacco, where one of the goals is to decrease consumption, the situation here is more one of legalizing something to raise consumption and generate revenue as a result.

Marijuana taxation is more akin to alcohol in the years following prohibition. In both cases, you have large-scale illegal operations and illicit consumption with the aim of moving them to legitimate status. In this sense, it’s different than other vice taxes. 

Initially, at least, the authorized market will have to operate in parallel with the black market for the same product, limiting the amount of taxes that can be raised when there is still an unregulated and untaxed alternative.

Beyond Marijuana

Aside from marijuana, there are other new products that could be taxed and generate revenue, the most notable being vapor products. While vaping products are not really that new, the market is just growing to a substantial size.

Taxing vaping products is more complicated and problematic. Some consider these products to be just as harmful as cigarettes, while others not so much. There is evidence that nicotine consumed via vaping is less harmful than through smoking cigarettes.

Theoretically then, the government should apply less taxes as a result if the harm and therefore cost to society is less.  The problem with this is that less revenue is raised. As noted before, we come back to the issue that vice taxes are often revenue-raising tools disguised as public safety measures.

Too Successful For Its Own Good

Vice taxes can be too successful, with tobacco as the best example. While people may stop buying cigarettes, they don’t stop consuming cigarettes; instead, they buy them elsewhere.

For example, more than 50 percent of cigarettes consumed in New York are purchased out of state. If you push too far, people will react.

Conclusion

Excise and vice taxes are here to stay. While varying arguments can be made that they benefit society by shaping behaviors, it is undeniable that state, local and the federal government are addicted to the revenue generated.

The Social Security Administration recently announced 2021 increases to both benefits and the taxable wage base for FICA taxes.

Increases Announced for 2021

Workers are facing a 3.7 percent increase in the taxable wage base subject to Social Security taxes, increasing the amount from $137,700 up to $142,800. This means high earners who make as much as or more than the taxable wage base will pay $8,853.60 of the employee withholding portion or $17,707.20 in total for the self-employed – who pay both employee and employer portions of the tax.

Retirees receiving benefits will only garner a 1.3 percent cost-of-living (COLA) raise in 2021, resulting in a raise of $20 per month for the average single beneficiary and $33 per month for the average retired couple. COLA increases for beneficiaries have been low for a long time, with several years seeing zero increases in the past decade or so. You can see the historic trend of COLA increases in the chart below, going back to 1975.

Medical Expenses Outpacing COLA increases

Low COLA increases are putting pressure on retirees’ finances as medical expenses are rising at a much faster pace, with some believing they are given too little weight in the COLA calculation. Moreover, retirees need to consider Medicare Part B and Part D premiums.

While the official 2021 premiums are not announced yet, there are estimates out there that Part B premiums (covering doctor and outpatient services) will raise $9 per month, or approximately 6.2% percent, from $144.30 to $153.30. These are just average figures, as there are income-related surcharges that apply to both Part B and Part D drug premiums. During 2020, for example, individuals making more than $87k per year and couples filing jointly making over $174k per year began paying higher premiums for Part B and Part D than other recipients, with those at the top of the surcharge paying almost $1,000 per month for Part B premiums alone.

Income Caps on Working Beneficiaries

Finally, there are new earnings limits for workers below full retirement age (age 66 for people born in 1943 through 1954). In 2021, those who are not at full retirement age will lose $1 in Social Security benefits for every $2 they earn over $1,580 a month ($18,960 per year). After reaching one’s full retirement age, there are no earning thresholds that will impact benefits.

Conclusion

The 2021 COLA increase continues the recent trend of coming in low and putting pressure on retirees’ finances, while medical expenses continue to rise at much faster rates. As a result, retirees will see less disposable income from their benefits, while high-earning workers will see continued tax increases that outpace benefit payouts. This puts pressure on all beneficiaries of the system.

¹ Starting in 1975, Social Security benefit increases have been based on cost-of-living adjustments (COLAs). Pre-1975, the benefit increases were set by legislation.

This has been a year of economic and tax uncertainty with the impact of the COVID-19 pandemic, potential stimulus bills, and the presidential election. As a result, tax planning may be more important than usual this year. To help guide you, we will cover six year-end tax planning strategies – three for individuals and three for businesses.

Individual Year-End Tax Planning Tips and Strategies

1. Take advantage of above-the-line charitable deductions.

Unlike previous years, where taxpayers needed to itemize their deductions in order to see any tax benefit from charitable deductions, everyone can benefit on their 2020 tax return. The CARES Act created an above-the-line charitable deduction for taxpayers who don’t itemize. In order to benefit from the $300 cash contributions deduction, make sure to donate before the end of the year if you haven’t already.

2. Stimulus Check Impact

The CARES Act also created the stimulus payments of up to $1,200 per taxpayer and $500 per qualified dependent child. While the initial round of stimulus checks was based on 2018 or 2019 tax return filing information, these stimulus payments are technically pre-paid 2020 tax credits. As a result, your 2020 tax return will calculate the credit due based on your income level, and there’s nothing but good news here. If your 2020 return shows you should receive an additional credit, you can claim it on your return. But if your return shows a credit less than a stimulus check you’ve already received, there is no clawback.

3. Investment With Opportunity Zones

Congress created powerful incentives for investing in very specific geographic regions by creating special tax treatment for “opportunity zones.” Investments in opportunity zones offer taxpayers the potential to defer tax on gains until as late as 2026. Moreover, there is the potential to recognize only 90 percent of gains on investments held for at least five years; and no tax on those held for 10 years (there are other rules, but they are out of the scope of this article). As a result, investments in opportunity zones can provide tax-free potential and protect against future tax law changes.

Business Year-End Tax Planning Tips and Strategies

1. Accelerate AMT Refunds

The Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax (AMT) and let companies claim all of their unused AMT credits in any taxable year beginning after 2017 but before 2022. The CARES Act accelerated the refund timeline, letting companies claim all their unused credits in either 2018 or 2019. For many, the most effective way to take advantage of this is to file a tentative refund claim on Form 1139, which must be done by Dec. 31, 2020.

2. Use Current Losses for Quick Refunds

The CARES Act brought back a tax provision that allows businesses to take current losses and offset them against income from prior years and receive refunds now. Net operating losses (NOLs) that are the result of 2018, 2019, and 2020 business activity can be carried five years back to claim refunds against taxes paid.

Careful consideration should be given to the strategy for claiming these NOL carry-backs because, depending on the type of business entity, your tax rate may have been higher in some of the five available years versus others. Make sure to leverage any tax rate arbitrage to maximize your benefit.

3. Payroll Tax Deduction Timing

Another provision of the CARES Act gives employers the option to postpone payment of their portion of Social Security taxes until the end of 2020. The deferred amounts are due half by the end of 2021 and 2022. This may be great from a liquidity perspective; however, depending on your business’s accounting, this could also mean a deferral of the deductibility of this expense as well. You should weigh the liquidity benefits of the deferral versus the value of a current year deduction – especially considering the accelerated NOL provisions discussed above.

Conclusion

These are just a few of the potential year-end tax planning strategies you can employ before the end of 2020. Make sure to consider these and speak with your tax advisor to see what makes the most sense for your situation.

The Senate Republicans’ slimmed-down stimulus bill recently failed to materialize after receiving less than the 60 votes needed to move forward. The “skinny” stimulus bill, with a price tag of only $650 billion, was intended to be a way to quickly inject stimulus into the economy and bypass both the multi-trillion-dollar Republican HEALS Act and the Democratic HEROES Act.

The current stimulus limbo leaves millions of Americans in a position of uncertainty. Four main areas that the Senate bill intended to address but are now up in the air include a second round of stimulus checks and the impact on struggling tenants and homeowners, as well as the long-term unemployed.

Next Round of Stimulus Checks

The first stimulus bill, the CARES Act, sent more than $300 billion in stimulus checks to Americans back in March to help mitigate the effects of COVID-19 slowdowns. While this helped millions, many people’s jobs or businesses remain impaired due to the economic impact of the pandemic, and they are hoping for a second stimulus check to help them get by.

With the failure of the Senate bill and the stalemate in the House, the chances of a second round of checks continues to diminish. On the bright side, the U.S. Treasury noted it is ready to print and mail the checks as soon as something is authorized.

Troubled Tenants and Homeowners

The economic fallout from the pandemic placed many tenants and homeowners in the position of being evicted or foreclosed. The CARES Act from March placed a temporary moratorium on evictions and foreclosures, sparing millions. Following this measure, President Trump issued an executive order in August granting the CDC authority to cease evictions as a measure to prevent the spread of COVID-19. The CDC took this order and announced a stop to all evictions until the end of 2020.

For homeowners with federally backed mortgages, the CARES Act moratoriums on single-family foreclosures were also extended until the end of 2020. Moreover, many states passed laws protecting those without federally backed loans from foreclosure.

For both renters and homeowners, these protections will disappear once we enter 2021 unless the government steps in with new legislation or regulations. Keep in mind that for both renters and mortgage holders, payments are being deferred and not canceled – so ultimately, they will still need to make the payments.

Long-Term Unemployment

Millions remain unemployed due to the pandemic; without federal help, their unemployment benefits will expire soon. The CARES Act gave an additional 13 weeks of benefits on top of the initial 26 weeks of unemployment insurance benefits; however, for those impacted on the front-end of the pandemic, these extended benefits will expire at the end of November.

The Senate bill included $300 per week of benefits through the last week of 2020; however, with this failing and without additional aid to state funds, the long-term unemployed won’t have anything to rely on if Congress does nothing.

Conclusion

Democrats responded with a smaller version of their original second-round stimulus bill, coming in a price tag of $2.2 trillion, down from the original $3.4 trillion. This is likely too high a price tag still to garner Republican support. If nothing happens before the mid-October recess, then we will all be waiting until after the Nov. 3 election.

No surprise, but Americans are consuming and spending less since the coronavirus kicked in.  Retail sales dropped to 8.7 percent in March, the largest month-over-month decline since the Census Bureau started tracking this data. Previously, the sharpest decline was less than half this – at 3.9 percent from October 2008 to November 2008, during the previous economic crisis. The reduction in consumer spending is due in part to lockdowns, spending more time at home for fear of the virus, and the economic impact – whether it’s losing a job, reduced hours, or in anticipation of tougher times ahead.

While consumer spending is down at a net level, there appear to be some winners and some losers in the post-COVID world of staying in and working from home. Restaurants and apparel are the hardest hit, whereas online retailers, home, garden, grocery, and alcohol sales are all up.

The decline and shift in consumer spending are having a strong negative impact on state sales tax revenues. Nationwide, sales taxes account for approximately 20 percent of all state revenue, so the decline in consumer spending will have a material impact on state budgets. As a result, states are looking at new ways to generate or increase revenue to offset the trend. Below we’ll look at three ways states are looking to raise taxes to make up for holes in their budgets.

Grocery Staples 

Eating out less and working from home mean Americans are spending more at the grocery store; approximately 13 percent more year-over-year, per Census data. The issue for states is that groceries are generally not taxed or low-taxed, although there are a few items that apply the full tax rate.

Kansas, for example, applies the full sales tax rate to groceries. The consequence of this is that grocery sales make up about 15 percent of Kansas’ total sales tax revenue. The consequence of this policy is that the state’s sales tax revenue has barely taken a hit year-to-date.

States are taking notice and may move to the trend of taxing groceries as a way to recover part of their declining sales tax revenues.

Digital Taxes

Another trend is the increase in streaming services and one-time rentals/purchases of digital goods for entertainment and working at home. Currently, 22 states tax streaming services, and 30 states tax digital goods. Other states will look to start taxing these services as well, and digital taxes will start to expand into cloud storage and other services as more people work remotely.

Sin Taxes

Sin taxes are taxes on goods and services that are “bad” for us; think alcohol, tobacco, gambling, and marijuana (where it’s legal). Increases in sin taxes are generally easier to pass as they don’t apply to the overall general population and politicians can play the moral angle.

During the last recession, for example, lawmakers in more than 12 states increased tobacco and liquor taxes. Newer sin taxes are being instituted, such as those on vaping equipment and supplies.

Conclusion

The exact form and structure will vary, but one thing is certain: States will institute or increase taxes in areas where the money is being spent to ensure their sales tax revenue remains stable.