The Worst Stimulus Idea Ever?

When I said that Pelosi’s fiscal conservative tendencies were a weakness when it came to stimulus legislation, I didn’t think that an example would come along that would be quite so thuddingly obvious:

WASHINGTON — As lawmakers prepare for another round of fiscal stimulus to address economic fallout from the coronavirus pandemic, Speaker Nancy Pelosi suggested the next package include a retroactive rollback of a tax change that hurt high earners in states like New York and California.

A full rollback of the limit on the state and local tax deduction, or SALT, would provide a quick cash infusion in the form of increased tax rebates to an estimated 13 million American households — nearly all of which earn at least $100,000 a year.(NYT)

This is one of the worst stimulus ideas I’ve ever heard of. To begin with, it’s incredibly administratively fiddly, requiring people to go back and “refile their taxes” from 2018 and 2019, which is absolutely going to limit the takeup rate from this benefit and slow down the rate at which cash goes out the door.

But as Seth Hanlon from even-the-moderate Center for American Progress notes, that problem pales in comparison to how wildly regressive this move is. The State and Local Tax Deduction is a benefit that goes overwhelmingly to the affluent and the wealthy (at least the ones who live in blue states with more progressive state tax structures), and capping that deduction was pretty much the only populist thing in the Trump tax cuts. Pelosi can talk all she wants about making it “tailored to focus on middle-class earners and include limitations on the higher end,” but that means that “only 3 percent of households in the middle quintile of American taxpayers would receive any benefit at all from the SALT cap repeal.”

In other words, trying to target this proposal so that it’s less regressive makes it wildly ineffective. So why bother?

If we’re going to do another round of stimulus – and we absolutely should, because the unemployment and GDP numbers are only going to get worse – there are lots of ideas out there that are infinitely more worthy than this misbegotten reject:

• State and Local Aid: if there is one thing that will absolutely turn our current “shelter-in-place” recession into something much longer-lasting, it’s what’s going to happen when state governments under enormous strain from Covid-19 respond to collapsing revenues by slashing their budgets. The big stimulus bill sent $150 bilion to state and local governments, but no one thinks that’s going to cover the full costs of the epidemic, let alone cover the normal operations of government.
• Payroll Nationalization: across the Atlantic, one of the things that was quite impressive to see was how fast the idea of the government stepping in and nationalizing private sector payrolls to prevent layoffs spread from Denmark to other governments across the E.U (sometimes building on top of existing policies like Germany’s kurzarbeit system). Currently, the U.S is relying on a kludged system of loan forgiveness for companies that don’t lay off their workers, but it’s divided between a program for big businesses run out of the Treasury and a program for small businesses run out of the Small Business Administration, and relying on business to apply for loans and then checking on compliance is just too slow a mechanism to get ahead of historic layoffs.
• More Direct Payments: $1200 is not enough money to tide millions of Americans through a period where they can’t work but still have to pay rent and buy groceries. This is doubly true for the 25% of American households who are unbanked or underbanked, who may have to wait up to three months to get their money. Sending people prepaid debit cards that can be topped-up automatically is a superior option that’s just sitting there on the table.

Above all, we need systems and procedures that transform emergency programs into automatic stabilizers that will kick in and stay kicked in as long as they are needed. Here again, there are models available: Senator Bennet’s Unemployment Insurance bill would make UI function the way it’s supposed to throughout this and any future emergency; adopting a Sahm trigger rule for direct payments would ensure that the money printer keeps printing until economic normality resumes.

Any of these ideas would be far superior to a SALT cap repeal.