John Locke Update / Research Brief

North Carolina’s COVID-19 Response: Workforce and the Economy

posted on in COVID-19 Series, Economic Growth & Development, Fiscal Insight, Spending & Taxes
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It’s the perfect setup for a late-night comedian’s monologue: The coronavirus is so serious it has President Donald Trump and House Speaker Nancy Pelosi agreeing on something and caused the Senate to cancel its recess this week. North Carolina policymakers can still take steps to ease the health and financial effects of the virus on companies, workers, and parents even as more of the economy shuts down to protect the vulnerable.

The economic fallout is a cascading cash flow crisis. The Federal Reserve injected $1.5 trillion last week to keep liquidity in debt markets and mitigate the damage that otherwise would be done if companies could not meet their immediate payment obligations. In general, helping one group get through means that another group will have less cash in the future. Paid leave can keep hourly workers whole, but it could mean that their employer might not be able to stay in business without someone else to help cover the cost. Free testing and treatment today could mean higher health care costs and insurance premiums next year. We’ve already seen the effects of artificially low food prices and supplies of toilet paper on the ability to find essentials at the grocery store.

Fortunately, many people and organizations have voluntarily taken steps to limit the fallout. Private coronavirus testing was freed to supplement public tests earlier this month. The current reported daily capacity of 26,860 is still just a fraction of the number that will be needed, but more are coming online every day.

With Trump’s declaration of a national emergency last Friday, North Carolina has even more reason to roll back rules that limit access to health care, as Jordan Roberts discussed. Billions of dollars will begin to flow from Washington, D.C. to the states as a result of the emergency declaration, an earlier $8.3 billion spending package, and the latest bill with untold billions more in spending for Medicaid, unemployment payments, food assistance, and other programs.

The bill is a blank check that passed the House before the Congressional Budget Office could even provide a cost estimate. It creates a new three-month paid leave mandate for businesses, extends unemployment benefits to a full year, and creates new levels of benefits in existing relief programs. Treasury Secretary Steven Mnuchin has indicated even more spending will follow as will a reprieve for most Americans from the April 15 tax filing deadline.

North Carolina should match the IRS deadline for filing taxes. Although it requires legislative action, the Department of Revenue has acted independently to tax internet sales and out-of-state trusts and to deny payments to companies that had invested in solar tax credits, so it should not be asking too much for the department to show forbearance in anticipation of the session that is scheduled to start on April 28.

For additional relief, state legislators face difficult choices between speed, size, and specificity. State government could never match the amount of assistance available from the federal government with its lack of budget constraints. Nor could it have the knowledge of individual circumstances that those in the community have.

Companies and communities are doing their part. Utilities have promised they will not cut off services, and internet providers are even offering 60 days of free service to families with students (if they are new customers). Zion Williamson, Mark Cuban, and other players and owners around the NBA are covering the pay of arena workers. The XFL is continuing to pay all of its employees. Uber, Lyft, DoorDash, and other ride-sharing and food-delivery companies “may set up a fund to compensate drivers affected by the novel coronavirus,” according to the Wall Street Journal.

Nextdoor is filled with offers to run errands for neighbors. Families near college campuses are offering free storage to suddenly displaced students whose classes have migrated online as have those of their younger siblings. Religious gatherings, scout meetings, and even our Shaftesbury Society lunches have also moved to the online-only format. These actions are among the countless beneficial reminders of the steps, both large and small, that people are willing to take to help others, regardless of government mandates.

There are limits to what can be done neighbor-to-neighbor when the watchword is “social distance.” As more schools, bars, restaurants, and other public places close voluntarily, compulsorily, or due to lack of demand, the economic impact will be significant. If state government dedicates $1.1 billion of the $2.2 billion unspent revenue to shore up finances next year, it can use the remainder for direct assistance to families and businesses around North Carolina.

Greg Mankiw, a former economic adviser to President George W. Bush, recently wrote, “Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start.” An employer payroll tax cut could provide more direct relief for companies and regular employees at a fraction of the cost, but would still leave significant gaps. Here in North Carolina, the General Assembly could pass the Taxpayer Refund Act to provide an additional $125 to $250 to most North Carolinians at a cost of $688 million according to the fiscal note.

Why distribute checks to everyone? First, we are all affected, and everyone is taking steps to mitigate the impact on one another. On the practical side, there is no easy way to identify every small business, much less those that provided paid leave to their employees or lost money as a result of the coronavirus or the public health response. Cutting the franchise tax would not help most businesses because sole proprietors and general partnerships do not pay the tax. The state could eliminate the minimum $200 payment or reduce it to the $35 as it had been until 2015 to help smaller corporations and LLCs. Some companies will apply for assistance from the Small Business Association, but that will be a cumbersome process with loans not coming until much later.

It would be even harder for the state to identify individual hourly or contract workers and the impact on their earnings. Better to include them in a general tax refund and leave private employers to do the right thing, which most of them are trying to do.

If legislators were looking to do more with their money, they could provide, at a cost of $230 million, an additional payment of $100 to families with children under the age of 18. (It costs no additional money to continue paying teachers and other state employees for work when school is closed. That money is built into the budget. If the school year runs long, payments will fall into the next fiscal year.) Or they could refund small corporations and LLCs that paid the minimum $200 franchise tax that amounts to roughly $30 million. That would still leave $100 million in the unreserved balance to get through the rest of the year with slower revenues in May and June.

The economic effects of reducing the burden on our health system will be significant. Reducing barriers to health care would require no new spending and could actually save money. State government’s greatest monetary contribution may be to add $1 billion to the Savings Reserve (aka the rainy day fund) and return last year’s $900 million in surplus revenue to taxpayers.

Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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