President Trump's Aug. 8 Tax Executive Orders

Brownstein Hyatt Farber Schreck

Impact on Taxpayers and COVID-19 Negotiations

President Trump’s Aug. 8 Tax

Executive Orders

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Executive Order Overview

• On Saturday, Aug. 8, 2020, President Donald Trump signed four Executive Orders (EO) to defer payroll

taxes; set up an assistance program for lost wages to supplement unemployment benefits; extend the

federal moratorium on evictions; and defer student loan payments.

• Payroll Tax Deferral. The EO calls on the secretary of the Treasury to defer the withholding, deposit and

payment of payroll taxes from Sept. 1, 2020, through Dec. 31, 2020.

• Assistance Program for Lost Wages. The EO provides that the federal government will set up a federal

assistance program for lost wages to supplement unemployment benefits. The federal government would

provide a $300 payment per week, with states covering an additional $100 payment, for a total of $400 for

eligible claimants.

• Eviction Moratorium Extension. The EO extends a federal moratorium on evictions for renters living in

homes with federally backed mortgages through Aug. 31, 2020. The eviction moratorium expired two

weeks ago.

• Student Loan Assistance. The EO pauses monthly payments and interest for student loan borrowers until

Dec. 31, 2020. Student loan payment relief granted under the CARES Act expires on Sept. 30, weeks before

the November elections. In a speech earlier today, the president promised to further extend payment

relief after Dec. 1, 2020.

• The slides that follow focus on the first two EOs related to payroll tax deferral and the assistance

program for lost wages.

• These slides will be updated periodically. Updates are summarized on Slide 3 and are in red in the deck.

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Updates: August 13

– Payroll Tax

• Updates and key details on implementation.

• Links to the AICPA and Chamber of Commerce letters that provide context on

common issues employers are grappling with.

• Updated Slides: 7, 8, 9, 10, and 11.

– Unemployment

• Updates and key details about implementation from the state perspective based on

Aug. 12 Department of Labor Guidance.

• Updated Slides: 16, 18, 19, and 20.

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Payroll Tax Deferral

How Will It Work and What Choices Will Taxpayers Have?

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Payroll Tax Deferral – Overview

• The EO calls on the secretary of the Treasury to defer the withholding, deposit and payment of the

employee portion of the 6.2% Old Age, Survivors, and Disability Insurance (OASDI) segment of Federal

Insurance Contributions Act (FICA) taxes imposed by I.R.C. § 3101(a)—often referred to as Social

Security taxes.

• The deferral does not apply to the employer or employee portion of Medicare taxes (1.45% each) or the

employee share of Additional Medicare taxes (0.9% for employee’s earning over $200,000). The

Additional Medicare tax only applies to employees, not to employers.

• In order to qualify, an employee’s compensation during a biweekly pay period must be less than $4,000,

calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods—this is about

$104,000 annually.

• The deferral applies to taxes on wages paid from Sept. 1, 2020, through Dec. 31, 2020.

• The EO does not specify when deferred payroll taxes must be repaid.

• The EO seems to apply to self-employed individuals, but it is unclear as to how the deferral would be

implemented for these individuals.

• In remarks accompanying the release of the EOs, the president said he hopes to make the deferral

retroactive to July 1, 2020. The president also said he hopes to further extend the payroll tax deferral.

The EO directs the secretary of the Treasury to explore avenues, including legislation, to eliminate the

obligation to repay the deferred taxes.

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Impact

What is the value of the deferral and who benefits?

• Payroll taxes consist of: (1) Old Age, Survivors, and Disability Insurance (OASDI), i.e., Social Security tax: 6.2% for

the employer and 6.2% for the employee, or 12.4% total; and (2) Medicare and Additional Medicare taxes: 1.45%

for the employer and 1.45% for the employee, or 2.9% total. The Additional Medicare tax is 0.9% for those

employees earning over $200,000. Social Security taxes have a wage base limit of $137,700. The wage base limit is

adjusted annually for cost-of-living. This EO only provides for the deferral of the 6.2% employee Social Security tax.

• The CARES Act already deferred payroll taxes for businesses/employers from March 27, 2020, through Dec. 31,

2020.

• The EO is very limited in scope—it calls for the voluntary deferral of payroll taxes for a four-month period for

workers earning less than $4,000 during a biweekly pay period—about $104,000 annually. As a result of wage

base limit, many high-income earners have already fulfilled the bulk of their payroll tax obligation for 2020.

• The maximum value of the deferral of Social Security taxes in the EO is about $2,232 for someone earning just

under the wage cap of $104,000.

• According to the Bureau of Labor Statistics, median weekly earnings for full-time wage and salary workers was

$1,002 in July, which is about $52,100 annually. The average worker would be able to defer about $1,076 between

September and the end of the year. This is about $62 extra per week or about $124 reflected in each biweekly

paycheck.

• While this might feel like a tax cut to many Americans, it is only a tax deferral, which means the taxes will need to

be paid back at a later date. President Trump is urging Congress to extend the deferral and to forgive the taxes.

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Impact

What is the impact on Social Security if the payroll tax deferral were converted to a payroll tax holiday, as

the president suggests?

• The Trump administration is exploring avenues, including legislation, to eliminate the obligation to repay

the deferred taxes.

• There are serious consequences to a payroll tax holiday. Social Security is designed to replace a

percentage of a worker’s pre-retirement income based on their lifetime earnings. These benefits come

from the taxes paid by the worker and the employer into Social Security.

• A Social Security payroll tax holiday potentially impacts an employee’s retirement if the unpaid

employee payroll taxes are never remitted. If this happens, the employee will not earn any credit for the

quarter worked. Those missing quarters can make a difference as to when Social Security benefits

commence at a later date.

• Congress normally adds a provision to hold the Social Security Trust Fund harmless and grant workers

full credit for their work, regardless of whether the 6.2% in OASDI is actually paid. This is what Congress

did in 2011 under the Obama administration. (See slide 13 for more information on the Obama-era

payroll tax holiday.) President Trump said on Aug. 12: “At the end of the year, the assumption that I win,

I’m going to terminate the payroll tax…We’ll be paying into Social Security through the General Fund.“

• Further implications on deferral versus forgiveness of payroll tax obligations are discussed on slide 10.

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Implementation: Mandatory or Elective?

• On Wednesday, Aug. 13, Treasury Secretary Steven Mnuchin confirmed the voluntary

nature of the EO, saying “We can’t force people to participate, but I think many small

businesses will do this and pass on the benefits.” Although some businesses may pass

on the benefits, Mnuchin said the administration will “create a level of certainty for

employers that want to participate” through regulatory guidance.

• Employers who choose to participate can proceed in at least one of three ways:

Mandatory

Employer pays

6.2% to all eligible

employees

Opt Out

Employers pay

workers 6.2%

unless employee

opts out

Opt In

Employer

withholds 6.2%

unless worker opts

into deferral

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Implementation: Variable Compensation

• It is not clear how employers should treat employees with variable

compensation due to commissions, raises and bonuses. The EO calls for

not withholding if the comp generally is less than $4,000 per two week

period.

• Options for employers:

All or nothing each pay period. If the compensation exceeds

the equivalent of $4,000 per two weeks, then 6.2% is

withheld.

Annualization principle. If compensation is on track to be less

than the annual equivalent of $4,000 per two weeks, then

taxes are not withheld.

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Implementation: Forgiveness

• The EO does not address ultimate liability, but directs Treasury to explore how to

forgive the tax.

• Problem: Congress is likely to forgive the tax, but what about workers who opted

out of the deferral and paid the tax?

• If Congress does not forgive, then the IRS likely will tell workers how to pay on

their 2020 return. Employers would prefer withholding from an employee’s

bonus paycheck(s) in early 2021.

• If the worker does not pay, then employers could be liable and workers could

have cancellation of debt income.

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Next Steps and Other Unanswered Questions

• The EO does not contain information on several key details, which means the Treasury

Department and the Internal Revenue Service (IRS) will need to issue regulatory guidance on the

following:

• When must taxes be remitted or repaid by individuals who take advantage of the deferral?

• How will repayment work? Will additional amounts be deducted from future paychecks until

the deferred amount is repaid, or will the deferred taxes be due as one or more lump sum

payments?

• How will a deferral work for employees? Will they need to fill out a form and elect to have the

deferral apply?

• How will this be implemented for self-employed individuals?

• What happens if an employee is terminated or changes jobs prior to Jan. 1, 2021? How will

repayment of deferred amounts work?

• What happens if an employee has several jobs and collective compensation is above the

$4,000 threshold?

• It is unclear as to when the Treasury Department and IRS will release guidance. It could come as

early as next week.

• The AICPA sent a letter on Aug. 12 requesting clarification on several of the issues listed above,

including guidance that states that it is the responsibility of the employee and not the employer

to pay the deferred payroll taxes. The Chamber of Commerce also requested similar clarifications.

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Legality

• The EO states that the president is invoking his authority under 26 U.S.C. 7508A, which allows for

the postponement of certain deadlines by reason of a presidentially declared disaster. The president

declared a state of disaster on March 13, 2020, under § 501(b) of the Robert T. Stafford Disaster

Relief and Emergency Assistance Act.

• One Republican senator has criticized the EO—Sen. Ben Sasse (R-NE) said that the president “does

not have the power to unilaterally rewrite the payroll tax law.”

• While a payroll tax deferral does not impact Social Security because the taxes must be repaid,

Democrats have criticized this as an attempt to gut Social Security down the line, and potentially

Medicare as well, if the president is looking to permanently eliminate the tax. However, White

House advisors have already walked back President Trump’s statement that he would make

“permanent” cuts to the payroll tax.

• Brownstein Observation: President Trump appears to have acted within the authority granted to

him by the Internal Revenue Code.

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Historical Perspective

• The last payroll tax holiday was implemented under the Obama administration. The Tax

Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-

312) (Dec. 17, 2010) implemented a temporary 2% reduction in the payroll tax rate for

employees and self-employed individuals in 2011. Thus, the payroll tax rate for employees

went from 6.2% to 4.2% for employees and for self-employed workers went from 12.4% to

10.4%.

• The tax holiday was extended twice and was ultimately effective for two years.

• A worker’s future Social Security benefits are not affected. It provided general revenue

transfers to the Social Security trust funds to make up for the loss of payroll tax revenues.

• There has never been a payroll tax deferral in the past. There will be significant pressure on

Congress to convert the EO’s payroll deferral into a payroll tax holiday and ensure general

revenue transfers to make up for the loss of payroll tax revenues.

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Impact on Negotiations

Impact on negotiations

• The president has previously pushed for the inclusion of a payroll tax holiday in COVID-19

stimulus legislation. However, the idea has failed to gain traction amongst both Republicans and

Democrats.

• While it is clear the president does not have the authority to eliminate the obligation to pay

payroll taxes, as this is a power that only Congress has, the EO simply delays the date on which

the taxes are due. If employers stop withholding payroll taxes from employee paychecks, there

will be immense pressure down the line for Congress to forgive the accumulated taxes. The

outcome of the election will also determine how much consideration Congress gives to

converting the payroll tax deferral into a holiday.

• If the payroll tax deferral takes effect, Democrats may view this as part of the GOP’s list of

priorities for the next package. If the payroll tax deferral is converted into a tax holiday, it

amounts to a regressive additional stimulus check for individuals earning below the threshold

amount. Democrats may demand additional funding for low-income refundable tax credits, such

as the Earned Income Tax Credit and the Child Tax Credit.

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Lost Wage Assistance Program

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Lost Wage Assistance – Overview

Benefit amount and eligibility

• The EO provides that the federal government will set up a lost wage assistance (LWA) program to supplement state

unemployment benefits. The federal government would provide a $300 payment per week, with states covering an

additional $100 payment, for a total of $400 for eligible claimants.

• To qualify, claimants must receive at least $100 per week in any of the following benefits: (1) Unemployment

compensation, including Unemployment Compensation for Federal Employees (UCFE) and Unemployment

Compensation for Ex-Service members (UCX); (2) Pandemic Emergency Unemployment Compensation (PEUC); (3)

Pandemic Unemployment Assistance (PUA); (4) Extended Benefits (EB); (5) Short-Time Compensation (STC); (6)

Trade Readjustment Allowance (TRA); or (7) Payments under the Self-Employment Assistant (SEA) program. The

CARES Act stated that in order to qualify for the FPUC, claimants had to receive at least $1 per week from any one of

the aforementioned programs. The LWA is not payable to individuals collecting Disaster Unemployment Assistance

(DUA) or who have exhausted traditional UI benefits and are on Additional Benefits (AB) or extended benefits.

 The increase in the threshold amount could result in 10% to 15% of lowest-earning UI recipients from receiving FPUC payments,

according to Jeff Stein, economist for The Washington Post. This may also limit aid for tipped workers and self-employed

individuals.

• This would replace $600 Federal Pandemic Unemployment Compensation (FPUC) payments, authorized by the

CARES Act, that expired on July 31. FPUC payments were in addition to regular state unemployment compensation.

• The EO does not specifically reference the FPUC program, instead setting up a new grant program for lost wages

pursuant to 42 U.S.C. 5174(f)(1)(A). The EO does provide that the lost wage assistance program shall terminate upon

the enactment of legislation providing FPUC, or similar compensation for unemployed individuals. Congress has

been attempting to negotiate a package that potentially includes an extension for FPUC payments. However,

negotiations are at an impasse.

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Lost Wage Assistance – Program Funding

• The EO states that the CARES Act included $150 billion in funding for state and local governments

through the Coronavirus Relief Fund (CRF) to cover costs incurred due to the COVID-19

emergency. As of the latest report from the Treasury Inspector General regarding state

expenditures, more than $80 billion of CRF dollars remain available. States dispute that this much

remains.

• In addition, the Department of Homeland Security’s Disaster Relief Fund (DRF) has more than $70

billion in emergency assistance funding available. The president directs the Federal Emergency

Management Agency (FEMA) to assist in providing up to $44 billion from the DRF to cover the

federal portion of unemployment benefits (75% or $300 per week), and calls upon the states to

use their CRF allocation to pay their portion (25% or $100 per week) of continued FPUC benefits.

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Lost Wage Assistance—Program Funding

How long will the funding last?

• Assuming the program is successfully implemented, the EO notes that funding expires on

Dec. 6, 2020, or when the Disaster Relief Fund (DRF) being used to pay for this program is

depleted to $25 billion. The DRF has about $70 billion in funding available and the EO directs

$44 billion to go toward this program.

• The CARES Act FPUC benefit of $600 per week cost about $176 billion for about four months

(April 4, 2020, through July 31, 2020). Accordingly, the program spent about $10 billion per

week. Even at half the cost ($5 billion per week), with coverage for fewer claimants due to

new restrictions, the funding is unlikely to last until December. If all states adopted the

program, $44 billion would cover about two months. The lost wage assistance payments in

the EO is likely a very temporary fix, assuming that states are able to stand up a program in

the next few weeks.

• Additionally, per Aug. 12 DOL guidance, if the DRF balance decreases to $25 billion, the

program will be terminated. The DRF is also used to cover the cost of damage from natural

disasters.

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Implementation

What is the impact on states?

• On Aug. 12, the Department of Labor issued guidance to the state workforce agencies on the

implementation of the LWA grant program.

• The guidance confirms that the states and territories will distribute the funds through their UI

system, as a supplemental payment. The guidance also provides a link to an application for states

to apply for a grant to assist with the costs of implementation.

• Upon a grant award by FEMA, states and territories may provide eligible claimants $400 per week,

with a $300 federal contribution, in addition to the individual’s underlying unemployment benefit.

If states wish to provide this maximum $400 benefit to their claimants, they may fund $100 out of

amounts allocated to them out of the Coronavirus Relief Fund (CRF). States are not required to

provide the $100 match—traditional state UI benefits suffice. Therefore, some individuals may

only receive an additional $300.

• On Aug. 12, a number of states, including Ohio, said they would not be spending the state match

for the extended unemployment insurance, pointing to already strained budgets.

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Next Steps and Unanswered Questions

• Apart from the legality of the program, which is currently in question,

there are several unanswered questions with regard to the EO,

including:

• Can states administer the LWA program using their current UI systems, or will they

be required to set up a parallel system?

• Will states be able to take action in time for this program to have an impact. For

example, some states may need to legislatively allocate the money and if the

legislature is not in session, it will take time for the EO to take effect.

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Legality

• The EO funds lost wage assistance by redirecting disaster relief money from FEMA. However, according

to some legal experts, it is unclear if the administration can repurpose disaster relief funds for

unemployment benefits without violating the Antideficiency Act.

• Additionally, the EO does not direct more money toward the FPUC program created by the CARES Act.

Instead, it creates a new lost wage assistance program and directs states to use existing UI systems to

administer the program. Several experts have questioned whether this is legal.

• Some states have not been receptive to the EO. According to a press release on Aug. 8, Senate Finance

Committee Ranking Member Ron Wyden (D-OR) reported that states have “grave concerns” and “are

simply going to opt out” as “they cannot afford a 25 percent match.”

• David Levine. David Levine, professor at the University of California Hastings College of Law,

disagrees, saying, “From the state’s point of view, States would say under the 10th Amendment you

can’t force us to participate in this program, particularly with money we don’t have.”

• Larry Kudlow. Appearing on the Aug. 9 Sunday talk shows, National Economic Council Director Larry

Kudlow said it was unclear whether states have enough funds to provide the additional benefits,

saying, “we’ll probably find that out.”

• President Trump. When asked what happens if governors do not have enough funds to pay the

benefits, President Trump said “If they don’t, they don’t. That’s up to them.”

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Impact on Negotiations

• White House negotiators have reportedly offered Democrats a number of short-term UI

extensions, all of which were rejected by the Democrats.

• Republicans have also attempted to pass on the Senate floor a number of extensions, all of which

were rejected along party lines.

• The leading Republican UI proposals are:

 The Republican proposal in the HEALS Act would replace the $600 FPUC payments that supplement state

UI benefits with a $200 per week FPUC through Oct. 4, after which states must match 70% of workers’ prior

earnings or continue to pay the flat FPUC amount through November.

 Sens. Mitt Romney, Susan Collins and Martha McSally introduced a bill that would extend currently expired

coronavirus unemployment insurance benefits through the end of the year. The bill would extend UI

benefits by allowing states to either provide an immediate 80% wage replacement or phased down

payments over the next three months. Those who choose the latter option are eligible for an extra $500

per week in August, $400 per week in September, and $300 per week in October. It would also allocate $2

billion to the states to update their UI systems.

 One potential compromise is a higher FPUC benefit (e.g., $400 per week), capped at 100% of income, so

that workers cannot earn more on UI than they would have earned through pre-COVID-19 wages.

 According to American Action Forum’s Analyst Isabel Soto, even a $100 FPUC would result in 25% of

workers making more on maximum unemployment than pre-COVID-19 wages.

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Impact on COVID-19 Negotiations

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Impact on Negotiations

Reactions from Democratic leadership

• In a joint statement, Speaker Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer

(D-NY) criticized the EOs, saying the “meager announcements” from the president “provide

little real help to families.” Schumer and Pelosi called on Republican negotiators to return to

the negotiating table and “meet [them] halfway.”

 Last week, Democrats offered to reduce their topline number by $1 trillion if Republicans

were willing to increase theirs by the same amount. This would have resulted in a deal

around $2.4 trillion. Republicans rejected the offer, saying it was too expensive for many

members.

• On Aug. 9, Pelosi said the EO, even if successful, is not enough. Another package that

addresses major priorities such as funding for schools; stimulus checks for individuals; state

and local aid; and tax credits for rehiring workers and cleaning and Personal Protective

Equipment (PPE) is still necessary.

• Similarly, Schumer said on Aug. 9 the presidential action “doesn’t do the job,” arguing the EOs

will not “go into effect in most places for weeks or months.” Schumer continues to push for a

deal on a stimulus package.

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Impact on Negotiations

Reactions from Republican leadership

• Sen. Chuck Grassley (R-IA), chair of the Senate Finance Committee, released a statement applauding

the EOs. In a Tweet, Grassley said, “I applaud [the president’s] executive actions to help the

American [people.] Democrats all or nothing strategy jeopardizes the certainty Americans need to

pay their bills. President Trump puts the American [people] first compared to nonstop political

games by Democrats.”

• Senate Majority Leader Mitch McConnell (R-KY) said, “struggling Americans need action now. Since

Democrats have sabotaged backroom talks with absurd demands that would not help working

people, I support President Trump exploring his options to get unemployment benefits and other

relief to the people who need them the most.”

• Sen. Lindsey Graham (R-SC) highlighted congressional inaction in a Tweet: “I appreciate the

President taking this decisive action but would much prefer a congressional agreement. I believe

President Trump would prefer the same.”

Reactions from business groups

• Prominent business groups, including the Chamber of Commerce, have emphasized the need for

Congress to pass a full stimulus package in addition to the EOs.

• The AICPA and other organizations have also requested timely guidance from the administration on

the implementation of the EOs.

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Impact on Negotiations

Next steps

• Rep. Pelosi (D-CA) and Sen. McConnell (R-KY) have both left the door open

on continuing negotiations and resolving differences. Both face significant

obstacles within their respective parties. Both party leaders hope to reach

a potential deal, given that there are several key elements that both

Republicans and Democrats agree upon.

• Reports indicate that a deal might be pushed to September and may be

included in a Continuing Resolution to fund the government. The

upcoming fiscal year deadline is Sept. 30, 2020.

• For now, both the House and the Senate are on recess.