Democrats Might Make Sane Political Decision, Move to Spare Millions of Americans From Surprise Tax Bills

Update, 9:56 p.m.: It’s been a long day. After Sen. Joe Manchin initially refused to support the agreement Democrats had struck on unemployment insurance, he finally agreed to a deal Friday evening. It will cap federal unemployment benefits at $300 a week, cut them off in early September instead of early October, and allow only households earning less than $150,000 to get their 2020 unemployment benefits (up to $10,200) tax-free. My colleague Jim Newell has all the excruciating details. Original post below:

In a relieving display of common sense, Democrats negotiating the new coronavirus relief bill in the Senate appear to be closing in on a deal that will keep many out-of-work Americans from having to pay taxes on their jobless benefits, the possibility of which has been quietly threatening to create hardship for millions of families and and become a potential political liability for the party.

The new provision, originally proposed by Senate Majority Whip Dick Durbin of Illinois and Rep. Cindy Axne, would forgive taxes on the first $10,200 of unemployment payments people received last year.

Under the agreement, lawmakers would also keep the federal unemployment benefits at their current level of $300 per week, instead of increasing them to $400 as many Democrats had sought, and to extend them through Oct. 4, instead of cutting them off at the end of August.

Leaving benefit levels at $300 is a bow to Senate moderates such as West Virginia’s Joe Manchin, who had wanted to keep the size of the payments down; some had worried Manchin would join with Republicans in a floor vote to slice them down. However, even with the cutback, research from the University of Chicago suggests that for about half of the unemployed, the lower benefit will still be enough to cover 100 percent of what they earned while working (the $300 is paid on top of normal state benefits). Extending the payments past the end of September, meanwhile, will prevent them from expiring while Congress is out of session for the summer, which Democrats worried might create a sudden cliff where people lose aid.

“I think we’ve made a lot of headway. We’ll have a lot to discuss with the Senate. But I’m really hopeful this can bring all sides of the debate together,” Senate Finance Committee Chairman Ron Wyden said during a floor speech on Friday. “What we’re looking at is making sure that we can get a benefit so that people can make rent and pay groceries, that we prevent that cliff. And by God, we sure as hell shouldn’t let folks who are unemployed pay taxes on those unemployment benefits that they secured in 2020.” The deal is not finalized, but senior Democratic aides I’ve spoken with seem extremely optimistic about its prospects. (UPDATE Friday March 5, 2:21 PM: Well, Joe Manchin is suddenly wavering and the fate of this agreement is now unclear. We’ll keep you posted!)

Progressive lawmakers and policy analysts have been warning for months that people who lost their jobs during the pandemic could soon face surprise IRS bills potentially totaling thousands of dollars when they filed their taxes for 2020. States are technically required to offer the option of withholding tax payments on unemployment insurance, but as a report by the Century Foundation noted last month, some failed to do so for the new federal aid programs Congress created in the CARES Act last spring. Moreover, many beneficiaries either failed to realize that withholding was an option, or may have chosen not to do it because they were facing an immediate cash crunch. The think tank estimated that, as a result, just 40 percent of unemployment payments had any withholding taken out. By February, stories of families ambushed by unexpected tax bills had already begun trickling out, and created the real possibility that many hard-up families were going to see their relief checks devoured by the taxman. (The relief also applies to people who have already filed, but it may be a tiny bit of a hassle since they’ll have to submit an amended return).

This last-minute amendment will not entirely erase the issue, since it only eliminates taxes on the first $10,200 a taxpayer received. According to a press release from Durbin and Axne last month, the number was based on the extra federal unemployment benefits Congress made available in the CARES Act, which amounted to $600 per week for up to 17 weeks.

Some of the 4.1 million Americans who have been unemployed for 27 weeks or more could still face taxes on a portion of their benefits. “Including partial tax forgiveness won’t solve the whole problem,” Elizabeth Pancotti, policy director at Employ America and a co-author of the Century Foundation’s report, told me. “But it will ensure millions of Americans, many whom are still jobless, don’t have to mail their stimulus check back to the IRS, and can instead put food on the table for the families and pay the rent.” Some forgiveness, clearly, is much better than none.