A $16 Trillion Hit to the Economy

Plus, IRS Lets High-Income Tax Cheats Slide  [The Fisc]( By Yuval Rosenberg and Michael Rainey Coronavirus Will Cost US Economy Nearly $16 Trillion, CBO Says The coronavirus pandemic will shrink U.S. economic output by $15.7 trillion over the next decade, or $7.9 trillion after adjusting for inflation, the Congressional Budget Office [estimated]( on Monday. In response to a request by Senate Minority Leader Chuck Schumer (D-NY), CBO Director Phillip Swagel laid out how the pandemic has caused the budget office to dramatically revise projections it had issued in January, reducing its forecast for total U.S. economic output by a cumulative, inflation-adjusted 3% from 2020 through 2030. Swagel said that the projections come with an “unusually high degree of uncertainty” given that it's not clear how the pandemic will play out, how social distancing will affect the economy, how past and future policy responses may affect the economy and even how economic data will be compiled amid the disruption caused by the virus. Schumer and Sen. Bernie Sanders (I-VT) responded to the report by urging the Senate and Majority Leader Mitch McConnell (R-KY) to “act with a fierce sense of urgency” and not wait another month to pass the next coronavirus aid package. “How can Senator McConnell look at these catastrophic economic numbers and believe there is no ‘urgency’ to protect America’s working families?” they said in a statement. “At a time of massive wealth and income inequality, how can President Trump believe that what this country needs is another huge tax break for the top one percent?" The Battle Over State Bailouts States are confronting massive budget shortfalls as tax revenues plunge and social safety net spending soars, but there’s no clear sense in Washington about how to approach the problem. Despite strong evidence that federal assistance was both necessary and effective during the last recession, a political battle has broken out over state aid, [says Michael Grunwald of Politico]( leaving many local leaders wondering if they will receive the help they need. Democrats are pushing for nearly a trillion dollars in additional aid to states and cities, as part of an effort to limit the damage caused by layoffs and reduced spending. The CARES Act signed into law in March provided $150 billion in direct aid for state, local and tribal governments, and Democrats have proposed $915 billion more in the HEROES Act that passed in the House in May. But Republicans say they have no intention of taking up the bill and have started pushing back against the idea of further aid, particularly any assistance that could be seen as a bailout of Democratic-led blue states. “Polls show that most voters want Washington to help states avoid layoffs of teachers, police officers and public health workers,” Grunwald writes, “but Senate Majority Leader Mitch McConnell, Fox News personalities, and other influential Republicans are trying to reframe state aid as Big Government Democratic welfare spending.” The experience of the Great Recession: In an effort to prevent layoffs and cutbacks that could make the recession even worse, President Obama proposed $200 billion in aid for states in 2009 as the economy was still deteriorating. Democratic and Republican lawmakers pushed back against the unprecedented size of the aid package, whittling it down to $140 billion. Still, the aid was effective, and there is widespread agreement among economists that it helped ease the recession, even though the relatively small size limited its effects. “There were at least a dozen papers written on the state aid, and the evidence is crystal clear that it helped,” says former Obama economic adviser Jason Furman. “Unfortunately, it was incredibly hard to get Congress to do more of it, and that hurt.” The pivot to austerity: Most states have balanced-budget rules, which force governors to cut back on spending during recessions as revenues fall. Those cuts make the recession worse, most economists agree, by further reducing spending at a time when local economies are already shrinking. In the wake of the coronavirus, states have started announcing layoffs and budget cuts, moves that will almost certainly amplify the effects of the contraction. “There wasn’t a lot of evidence that state aid would be good stimulus in 2009, but now there’s a lot of data, and it all adds up to juice for the economy,” Moody’s chief economist Mark Zandi told Grunwald. “It’s baffling that this is getting caught up in politics. If states don’t get the support they need soon, they’ll eliminate millions of jobs and cut spending at the worst possible time.” A plea from a governor: Larry Hogan, the Republican governor of Maryland, wrote an [op-ed]( Monday asking Congress to move quickly to provide more assistance. “The revenue losses states are projected to face are more than double what we experienced during the Great Recession,” Hogan said, adding that “no amount of fiscal prudence could have fully prepared any state for the scope of this challenge.” Hogan argued that another round of federal aid will help keep the nearly 15 million people employed by state and local governments on the job, providing essential services that help keep the country afloat. Forcing those employees off the payrolls would not be “a fiscally responsible choice,” Hogan said, since it would simply increase the unemployment rolls while further slowing the economy. “In past times of war, natural disaster and economic depression, Americans have put aside partisan bickering to find common ground on the urgent challenge right in front of us,” Hogan pleaded. “In that spirit, Congress came together to swiftly pass the CARES Act to deliver aid for America’s businesses and workers. That is what is required of us once again.” Next Coronavirus Bill Should Address Rising Debt, Says Bipartisan Group of House Members Congress is likely to pass another coronavirus relief bill at some point, but doing so may require addressing the mounting deficit concerns of a bipartisan group of lawmakers. A group of 60 House members from both parties wrote a [letter]( to House Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy on Monday asking that any further pandemic response ensures that the nation will address the national debt, budget reforms and projected trust fund shortfalls for Social Security and other programs once the economy is stronger. “Though emergency borrowing is necessary now, we must have a credible plan for responsibility to bring the debt burden to sustainable levels as the pandemic recedes and the economy recovers,” the group, led by Reps. Scott Peters (D-CA) and Jodey Arrington (R-TX), wrote. The members of Congress behind the new letter aren’t calling for specific future tax increases or budget cuts. Instead, they propose a few steps to ensure a future focus on budget and debt issues: - They want the Government Accountability Office to issue an annual report on the fiscal health of the nation. - They back a [bill]( introduced last year that would create bipartisan, bicameral “rescue committees” to recommend fixes for Social Security, Medicare and other federal trust funds facing future insolvency. - They propose establishing goals for managing the budget and national debt, such as setting targets for the ratio of debt to gross domestic product. Such a process, they say, would reduce debt-limit brinkmanship as well. The Congressional Budget Office [projected]( in April that the federal deficit would be close to $4 trillion for fiscal year 2020 and debt held by the public would likely exceed the size of the economy by the end of the year. Senate Republicans have cited debt concerns in recent weeks as they advocated a “pause” before any additional coronavirus aid. Poll of the Day: Coronavirus vs. the Economy Most Americans think it’s more important to control the coronavirus than to reopen the economy, according to a Washington Post-ABC News [poll]( released Monday. Fifty-seven percent of respondents said controlling the virus is the top priority right now, even if it hurts the economy. The partisan split on the question is stark, however, with 81% of Democrats focused on the virus, as opposed to just 27% of Republicans. A majority of Republicans (66%) say that opening the economy is most important, even it if harms efforts to control the virus. IRS Letting High-Income Tax Cheats Dodge Billions in Payments: Watchdog The Internal Revenue Service is failing to crack down on hundreds of thousands of high-income people who owe billions of dollars in taxes, according to a new [report]( by the agency’s government watchdog. The Treasury Inspector General for Tax Administration identified almost 880,000 individuals making $100,000 a year or more who didn’t file tax returns from 2014 to 2016. Collectively, those “nonfilers” owed an estimated $45.7 billion in taxes. An estimated 1,891 nonfilers owed more than $1 million apiece, or about $13.5 billion collectively. The top 100 nonfilers owed an estimated $9.9 billion in total. The inspector general’s audit found that the IRS did not investigate or try to collect in more than 40% of those roughly 880,000 cases, representing an estimated total tax bill of $20.8 billion. The IRS never entered 326,579 of the cases into its compliance system, and another 42,601 cases were closed out of the system without the agency ever working on them. The more than 510,000 remaining cases, with $24.9 billion in estimated taxes due, “will likely not be pursued as resources decline,” the report says. The IRS has faced repeated budget cuts until recently and the report says that collections staff declined by 19% from fiscal year 2013 through fiscal year 2018. “Pursuing nonfilers is one of the IRS’s most efficient enforcement strategies because issuing nonfiler notices can be a cost-effective tool that requires little more than automated notices,” the report says. “Previous IRS research studies from decades ago noted that at that time, the IRS pursued most nonfiler leads. However, with some exceptions, that no longer appears to be the case.” The watchdog report makes seven recommendations, including that the IRS reallocate resources to ensure that most or all high-income tax cheats are subject to enforcement action. It also says that the IRS is missing out on opportunities to fully crack down on repeat tax cheats by working on cases one tax year at a time. IRS management disagreed with one of the recommendations, agreed with two and partially agreed with the other four. Why it matters: Beyond the obvious implications for the federal budget and IRS funding, tax cheats also cost the rest of us who do pay taxes. As Bloomberg News [reports]( “The average U.S. household is paying an annual surtax of [more than $3,000]( to subsidize taxpayers who aren’t paying all they owe, the Taxpayer Advocate Service, an independent oversight office within the IRS, found in January. The calculation is based on the assumption that the government is seeking to collect a fixed amount of revenue, leaving compliant taxpayers to pay more to subsidize noncompliance.” Millions of Tax Returns Piling Up at the IRS About 10,000 IRS employees are returning to their offices today as coronavirus restrictions ease, and it looks they have a lot of work to catch up on: Nearly 5 million paper tax returns are waiting to be processed at various regional offices, the tax agency estimates in a report obtained by [Politico]( part of roughly 10 million pieces of mail that need to be opened and reviewed. More than half of the agency’s 81,000 employees have been working from home during the crisis, though that number is expected to decline in the coming weeks as offices reopen. We've got a new look! Let us know how you like it. [Email us](mailto:yrosenberg@thefiscaltimes.com)[.](mailto:yrosenberg@thefiscaltimes.com) Follow us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. And please tell your friends they can [sign up here]( for their own copy of this newsletter. News - [Trump Urges States to ‘Dominate’ Protesters With Tough Response]( – Bloomberg - [As Protesters Gather, U.S. Officials Worry About a Second Virus Wave]( – New York Times - [Protests Hammer U.S. Cities Still Recovering From Lockdown]( – Bloomberg - [States Brace for Disasters as Pandemic Collides With Hurricane Season]( – Politico - [Trump’s Domestic Policy Chief Says W.H. ‘Working Through’ Proposals to Unify Country]( – Politico - [McConnell Says Senate to Take Up House’s PPP Flexibility Bill]( – Roll Call - [McConnell and Pelosi's Next Battle: How to Help the 40 Million Unemployed]( – Politico - [Coronavirus Surprise: IRS Allows Midyear Insurance and FSA Changes]( – Kaiser Health News - [Fauci: "My Meetings With the President Have Been Dramatically Decreased"]( – Axios - [Democrats Stick With Tax-Rise Policies as They Make Plans for 2021 Majority]( – Wall Street Journal (paywall) - [Cities’ Next Coronavirus Dilemma: Cut Essential Services or Take On More Debt]( – Wall Street Journal (paywall) - [WHO Chief Hopes to Keep 'Generous' U.S. Aid After Trump Pullout]( – UPI - [Former FDA Commissioner: "This Is Not the Time to Be Pulling Out of the WHO"]( – Axios - [Trump Allies Try to Slash COVID Benefits for the Undocumented]( – Daily Beast - [COVID Survivor Receives $840,000 Statement for Treatment, With More on the Way]( – The Denver Channel Views and Analysis - [As Upheaval Mounts, Trump Has No Plan]( – Jonathan Bernstein, Bloomberg - [The Virus Could Cost States Like Mine Billions of Dollars]( – Gov. Larry Hogan (R-MD), New York Times - [The GOP Doesn’t Want More Stimulus Checks. How That Could Change]( – Annie Nova, CNBC - [Is the Worst of the Coronavirus Behind Us Now?]( – Lionel Laurent, Bloomberg - [The HEROES Act Fixes What the CARES Act Broke]( – Tressa Pankovits, The Hill - [100,000 Deaths Later, There Are No More Excuses. We Know What We Need to Do.]( – Leanna S. Wen, Washington Post - [Fed Should Resist Market Pressure to Do More]( – Mohamed A. El-Erian, Bloomberg Copyright © 2020 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, [thefiscaltimes.com]( or through Facebook. The Fiscal Times, 399 Park Avenue, 14th Floor, New York, NY 10022, United States Want to change how you receive these emails? [Update your preferences]( or [unsubscribe.](