There’s a high probability that a support package will become law – but it’s going to take notable political negotiation to get there. Washington Policy Analyst Ed Mills and Healthcare Policy Analyst Chris Meekins weigh in.
Tuesday was a wild ride of potential fiscal stimulus headlines, leading to a steady drumbeat of conversations about what is real and what is bluster. On the positive side, it does appear that President Trump has pivoted quickly toward supporting a bazooka-level fiscal stimulus package, and he is in the process of brainstorming ideas to see where he can get congressional support. More concerning is the lack of any congressional consensus (and skepticism) on what any fiscal package should look like and the fact that Congress will be in recess next week, pushing any deal to the week of March 23 at the earliest. Perhaps the biggest debate of today is whether the market will care about the back-and-forth of the D.C. debate or if focus will be squarely on the high probability that a package will become law.
Trump wish list
President Trump would like a payroll tax holiday, potentially reducing it to 0% through Election Day. At a lunch with Senate Republicans, the president also suggested support for sick leave for impacted workers and support of infrastructure projects (something supported by the chair of the Senate Appropriations Committee, Richard Shelby [R-AL]), according to press reports. Support for shale oil producers and delaying estimated tax payments were also discussed. Overall, the meeting was billed as more of a listening session and no plan has been formally constructed. There are also some conversations among Republicans to require President Trump to drop tariffs on Chinese goods in exchange for their support of any package, with the argument that the tariffs have been a tax on U.S. consumers and businesses.
Payroll tax math
Employees and employers each pay 7.65% of their pay (up to $137,700 for Social Security) in payroll taxes. 6.2% is for Social Security and 1.45% is for Medicare, for a total of 15.3%. It is estimated that each 1% reduction in employee payroll taxes costs between $70-75 billion and $55-60 billion for the employer-paid taxes. If employee-paid taxes were reduced to 0% through the election, assuming an April 1 start, the total cost for the seven months would be between $312-334 billion and between $245-268 billion if it was also extended to employer-paid taxes. $300+ billion in payroll tax cuts is a signal that the total number the Trump administration is contemplating is at the upper range of any estimates; however, it is less certain if congressional support matches the Trump push. As these taxes fund Social Security and Medicare, Democrats will be concerned about any large-scale reduction in these funds. Other issues with payroll tax cuts include that they does not help individuals who are not working and can provide some disproportionate benefits to upper-level wage earners.
A payroll tax cut may also not provide the economic stimulus anticipated if they pass it too early in the crisis. In the midst of a pandemic, consumers cut down on discretionary spending because of economic insecurity. If individuals receive more take-home pay as a result of this holiday while the virus is still spreading, they likely would save the increase in pay or use it to pay down debt rather than to increase discretionary spending, thus not resulting in the intended goal. If the goal of this is to stimulate economic activity, the payroll tax holiday should come after the virus spread has peaked, as it could then help improve sentiment leading to increased spending by the consumer.
Covering the cost of any medical care and testing tied to COVID-19, unemployment insurance, paid sick leave, emergency food for out-of-school students and support for state and local governments are expected to be key Democratic priorities. Democrats are likely to reveal and potentially vote on their package before they leave for a week-long recess at the end of the week. Democrats are also open to some level of infrastructure programs. There is opposition to a payroll tax holiday. As payroll taxes fund Social Security and Medicare, they may be willing to have a reduction, but going to 0 has about a 0% probability. Democrats will also be skeptical that President Trump has reportedly targeted the relief to end on Election Day – they will view it as more of a support for Trump’s reelection than a response to COVID-19. One positive sign for a bipartisan deal is President Trump appointing Treasury Secretary Mnuchin as the point person for negotiations with Speaker Pelosi. Speaker Pelosi and President Trump have a toxic relationship with limited ability to strike a deal, but Pelosi and Mnuchin have a history of striking budget deals.
Democrats are unlikely to support a deal until the public clearly blames Trump for the crisis. There is little incentive to give President Trump a win going into the election. Democrats will have to be careful to not appear as though they are hindering helping Americans for political reasons. By passing their own package before Republicans unite behind a plan, Democrats will likely have the political high ground and increased negotiating leverage. One outside-the-box idea could be Democrats trading relief on state and local tax (SALT) if Trump demands tax cuts as part of any package.
We are in for several weeks of conflicting headlines as a package is developed. A Democratic package is expected (and potentially voted on this week). Congress is in recess next week, but will be back the week of March 23. During the recess, we could easily see Republicans, led by Trump, propose their package. During the recess, Secretary Mnuchin and Speaker Pelosi (or their staffs) can work to build a package that can receive bipartisan support. The spread of COVID-19 could cause some travel disruptions for members of Congress, but there will be an effort to ensure there is a quorum to support any final package.
As long as there’s a probability that a large-scale package will be signed into law, we believe that will help provide some support for skittish markets. However, the health impact of COVID-19 will be a more important near-term driver of market sentiment and economic concern. The bull case from here has been avoiding a worse-case COVID-19 impact and having a massive fiscal and monetary policy response to propel the economy and market as COVID-19 subsides. That is far from certain, but figuring out the timing, size and scope of any COVID-19 impact as well as the fiscal and monetary response remain the key debatable points at this point.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change.
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