PPP Extension Retains Flaws at Workers’ Expense

Submitted by mellissa on Wed, 01/20/2021 - 05:20

With the passage of H.R. 133, the Consolidated Appropriations Act, 2021, Congress has decided to grant new life – in the form of $284 billion in fresh appropriations – to the Paycheck Protection Program (PPP). The application portal, which the Small Business Association opened last Monday, will remain open to both new and second-draw applicants through March 31.

This reincarnation of the PPP comes amidst serious doubts about its efficacy. Last autumn, Good Jobs First discovered that businesses with histories of wage theft, worker safety violations, and False Claims Act violations received PPP loans. In December, our analysis of mass layoff notices revealed that the 1,900 PPP recipients had laid off over 190,000 American workers.

Generally, evaluations of the PPP find that its effects on employment were modestly positive. While estimates of jobs saved range from 1.29 million to 3.2 million, the cost-per-job-saved estimates range from $162,000 to $381,000. On the other hand, the program’s effects on businesses have been substantially positive. Firms that received a PPP loan were significantly more likely to survive, more likely to have three months’ of operating expenses in reserve, and less likely to miss fixed payments.

Still, the PPP, which was intended to help small businesses retain workers, has been criticized as structurally inefficient and insufficient. All the while, it has galvanized public outrage for subsidizing private equity portfolios, allocating most of its resources to big businesses, and lining the pockets of affluent members of Congress.

In response to these criticisms, Congress has relaunched the program with new statutory mandates intended to ensure the worthiness of loan recipients. For example, the business size threshold has been lowered from 500 to 300 employees and the maximum loan size has been reduced from $10 million to $2 million. Additionally, applicants attempting to draw on the program for a second time must demonstrate that they had incurred a 25% revenue loss in 2020, and publicly traded companies, as well as companies established in or dealing significantly with China, are outright ineligible.

Old Wine in New Wineskins

Even with these alterations, there is reason to believe that the government is selling old wine in new wineskins. Lost in all of Congress’s modifications of the PPP is any attempt to address the concerns raised in Good Jobs First’s evaluation of the program.

The program has not established any mechanism for layoff monitoring, and loans are still based on 2.5 months’ worth of payroll costs. Now, nearly a year into the pandemic with interminable lockdowns that, in some states, were in place for the better part of 2020 and considerable economic slowdowns, the government has only provided five months of support to struggling businesses and their workers.

Furthermore, and while the program tightened eligibility in terms of business size on one hand, it expanded eligibility to encompass new business and forgivable expense categories. Now, 501(c)(6) nonprofits, such as chambers of commerce and destination marketing organizations, are eligible for PPP support. Additionally, forgivable expenses can include cloud computing software and services, supplier expenditures, and repairs of property damaged during last summer’s demonstrations against racialized police violence.

But what is most notable about the PPP extension is what it is missing. H.R. 133 does nothing to address workers’ most pressing concerns: layoffs and wage reductions. Because loan forgiveness is still optional, businesses can still receive PPP loans and make no attempt to retain workers—a major flaw that could explain why almost 200,000 workers were laid off from firms that received a PPP loan. Moreover, employers can still decrease wages up to 25% and qualify for forgiveness.

Take Public Money, Get a Tax Break: A Double Win for Businesses

A separate, yet related provision, which involves the tax treatment of forgiven PPP expenses, deserves special attention. Some context is necessary to fully appreciate the depravity of this opaque section of H.R. 133, but insofar as this provision is in some way representative of the government’s disposition toward recovery, it portends a deepening of wealth inequality in the post-coronavirus economy.

Under normal circumstances, businesses may deduct certain expenses, including salaries and rent, from their taxable income. When the PPP was established, it was unclear whether these same rules would also apply to PPP loans, but the IRS quickly clarified that expenses paid with PPP loans would be taxed.  

Through H.R. 133, Congress overturned the IRS’s decision, essentially giving businesses tax breaks for taking free public money. Meanwhile, the millions of Americans that lost their job in 2020 will pay an estimated $13.74 billion in federal taxes on their unemployment benefits.[1] 

Toward a Worker-Centered Recovery

Notwithstanding these concerning developments, the inauguration of President Joe Biden represents an opportunity to chart a course away from the government’s prior, flawed approach to supporting workers and businesses. Workers deserve better than what they got in H.R. 133. At best, the new PPP reforms keep some bad actors from exploiting loopholes in an imperfect program.

The PPP’s primary intent was to preserve worker-firm relationships, but policymakers must decide whether these relationships – which are recognized by the Democratic Party platform as unequal and unfair – should be prioritized in the coming months of recovery.

President Biden, Sen. Schumer, and Speaker Pelosi are not bound to hold the bag for a program designed by Sec. Mnuchin, Sen. Collins, and Sen. Rubio. Without addressing the structural flaws in the program that have done real, material damage to American workers, Democrats risk entering the 2022 midterms bearing responsibility for an uneven recovery – the same conditions that had denied them control of Congress in the 2010 midterms.

The political and moral imperatives are clear: if the PPP is to be extended in future economic recovery packages, it must be tailored to suit the needs of American workers.

 

[1] https://www.statista.com/statistics/284857/total-unemployment-benefits-paid-in-the-us/. Calculated based on the standard 10% federal tax withholding on unemployment benefits.