Fast and Feasible: Using Payroll Processors to Respond to the Coronavirus Recession

The Coming Recession and How to Fight It

Beyond the large and growing public health emergency, the U.S. now faces the prospect of a very severe Coronavirus recession. Three features differentiate this recession from a “normal” one: (1) the public health nature of the problem requires that most workers and consumers must stay home for an extended period of time and many businesses must cease operations immediately (2) layoffs are already occurring at an unprecedented pace (3) as weeks go by, many otherwise-viable businesses will be forced to liquidate and go bankrupt and will therefore be unavailable to reopen and rehire once the virus has been contained, thus destroying the aggregate capacity of the economy. The unprecedented nature of the Coronavirus crisis recession has understandably led to many proposed policy responses, from mailing checks to households, to extending unemployment benefits, to creating new loans for businesses. However, I believe most proposals to date do not pass a basic implementation test — Can the government provide adequate help in time?

Below I outline an alternative plan that I believe is both fast and feasible because it recognizes that private-sector payroll processing companies can provide help to workers and businesses much more rapidly than alternative approaches.

The Solution — Run Immediate Economic Aid Through Payroll Processing Companies

Businesses of all sizes rely on third-party companies to pay their workers at regular frequencies (weekly, biweekly, monthly, etc.) and to remit taxes to federal and state governments. The largest such company, ADP, processes payroll for 15% of the private sector workforce alone. These companies are ideally situated to act as a conduit to deliver rapid aid to workers and businesses for two reasons. (1) They have well-established relationships with existing businesses and workers including up-to-date direct deposit information necessary for sending paychecks to workers and businesses within days (2) They also have well-established relationships with federal agencies such as the Social Security Administration and the IRS in order to prepare quarterly 941 forms for remitting FICA and Medicare taxes and annual W-2 forms for income tax purposes. In other words, the federal government already knows who they are and can quickly send them money.

How it Would Work

I propose that Congress allocate funding to temporarily take over the payment of private-sector workers via third-party payroll processors.

· Congress would establish a Coronavirus crisis date when restrictions on economic activity began. Weekly unemployment insurance claims began to spike for the week 3/8/2020–3/14/2020. For the sake of argument, let’s define here the crisis begin date as the start of that week: 3/8/2020.

· Payroll processors would be instructed to calculate payment owed to all workers that were on payroll for the most recent pre-crisis pay period ending on or before 3/7/2020.

· Based on the assumption that payments equal to the above calculated amount will be issued to workers at regular frequency for all pay periods throughout the next 3 months, the payroll processors would then report the following numbers to the IRS: (1) the total dollar amount owed to employees (2) the total amount to be remitted to the federal government (3) the total amount to be remitted to state/local governments.

· The federal government, instead of businesses, would send money to the payroll processors to cover the total three-month cost. In exchange for not having to cover payroll, businesses would not lay off any workers who were on payroll during the most recent pre-crisis pay period. To reverse recent layoffs, businesses would be required to formally recall those workers, and they would also be paid an amount according to the pre-crisis pay period. (Workers would still have the option to quit and businesses that are still operating could still fire workers for cause — both situations would result in a cessation of government payments). For businesses that are still operating, if they were to schedule workers for even more hours going forward than during the pre-crisis pay period, they would be responsible for covering the additional pay (and required taxes) at the prevailing pay rates.

Benefits of this Proposal

· Provides rapid and sustained relief to workers first — Workers continue to receive steady paychecks based on their pre-crisis pay. Funds are disbursed in a manner that workers are already accustomed to. Given that mass layoffs are already occurring, it is crucial to get aid to workers as soon as possible. In addition, this program can be reviewed and extended by Congress almost instantaneously as the situation requires.

· Keeps workers attached to businesses — By preventing further layoffs and undoing recent ones, workers will be best positioned to go back to work as soon as it is safe. This also ensures aggregate demand can recover more rapidly. Further, by having workers stay formally attached to their employers, workers who rely on their employers for health insurance will remain under group coverage during this critical time period.

· Helps defray a large cost for struggling/shuttered businesses — Temporarily covering payroll costs ensures many more businesses will not have to liquidate/declare bankruptcy and thus will be ready to resume normal operations once the virus is contained. While this may not be enough for some businesses with high fixed costs, this program could be quickly extended to cover additional costs (see below for a discussion of this proposed extension).

· Does not rely on setting up new government programs and/or using outdated government data to administer benefits — Although not widely appreciated by the public, it is not the case that the federal government maintains universal, up-to-date name/address/bank account information and stands ready to send all households checks at a moment’s notice. This is why some recent proposals focused on the federal government sending out checks as soon as possible, have relied on 2018 Tax Year information, which is inappropriate given that income and family situations have changed dramatically for many people since 2018. In addition, setting up new government programs or even simply having the Treasury perform non-routine calculations and mail out checks requires time. Many needy citizens cannot afford to wait.

· Takes pressure off overburdened Social Insurance and Safety Net Programs — The most useful and well-targeted program during a “normal” recession is Unemployment Insurance (UI). However, eligibility for this program has eroded over time. Many of the most likely workers to experience a layoff do not qualify for benefits. Moreover, while extending coverage of UI is an important idea, these extensions cannot go into effect immediately, especially given current circumstances. The offices administering UI are already facing unprecedented burdens even serving the workers who do currently qualify for benefits. This has resulted in crashing websites and long phone wait times delaying payments for many needy workers. The reality is that extending the caseload further may not even be administratively feasible for considerable time. Furthermore, in the face of a pandemic, one wonders whether it is a good idea to have large crowds lining up to apply for benefits. The Social Security Administration, for example, has already discontinued most in-person meetings for public safety reasons. Other safety net programs are likely to face similar burdens as well. Keeping workers paid and attached to their employers reduces the burden on all such programs and allows them to better focus on those who truly have no other source of income.

· Coverage can be limited/targeted as desired — Given the ease of the paycheck calculation, it would certainly be possible for the government to instead cover a percentage of each employee’s paycheck and/or cap the amount the government will pay. In addition, the program could be limited based on employer size (based on total employment for the pre-crisis pay period) and sector. These limitations could significantly reduce the cost of the program (see below for a very rough cost estimate of a comprehensive program).

· Coverage can be expanded in certain respects — While the core business of most payroll processors focuses on traditional wage and salary workers, some processors offer businesses the option of payments for 1099 independent contractors and other workers in the “Gig Economy”. Businesses that make use of those services could potentially have the costs of gig economy workers covered as well (although their payments may be more variable, requiring a more complex formula). This is important because gig economy workers are less likely to be eligible for UI.

· Part of the program costs will be recouped — Direct outlays for this program will overstate the total cost for several reasons. First, social insurance and safety net programs will be less burdened. Second, some businesses will become more profitable as a result of having payroll costs paid, as even versions of this proposal that attempt targeting will do so imperfectly. More profitable businesses organized as C Corporations will end up paying more in TY 2020 corporate income tax while various “pass-through” businesses will have more taxable income show up on individual tax returns. Third, this proposal ensures economic activity can resume more readily once the virus is contained, resulting in more government revenues and fewer expenditures in the future.

Costs of Proposal — Crude Estimate

Suppose we were to run the program for 3 months, how much would it cost? While a more detailed estimate of this program and its variants is surely necessary, we can at least establish its order of magnitude and compare to other proposals. Quarterly GDP is around $5.5 trillion and total private sector wages and salaries are around 36.6% of GDP. Thus, the cost to funding total gross pay (before employee deductions) for 3 months is around $2 trillion. However, one could easily lower the price tag if the government pays 80% (as in the recently announced UK plan[1]), by capping the weekly-equivalent amount the government would cover (also in the UK plan), or by limiting to small/medium sized businesses and certain sectors. As noted above, part of the cost will be recouped by savings on other programs and higher tax revenue. As of March 21, 2020, there are reports of White House and Congressional plans already topping $2 trillion, so my proposal with some type of targeting could end up costing less than what is already being considered.[2]

Extensions to Help with Other Labor Costs and Business Expenses

Other Labor Costs

While this baseline proposal will cover all employee gross pay, including take-home pay as well as all employee deductions and taxes, businesses also face additional labor costs including employer-side taxes, and employer contributions for benefits such as health insurance and retirement. For employer-side taxes, it would be easy to implement additional federal government payment on behalf of employers (or simply have a moratorium remitting those taxes and transfer revenue to those federal and state programs instead) to further reduce labor costs. For employer contributions for benefits such as health insurance premiums, it might be more difficult to uniformly track these expenses for each employer within the payroll processor ecosystem. In that case, using a simple supplemental markup by employer size/industry may have to suffice. To get a sense of the total markup required, data from the BLS Employer Costs for Employee Compensation suggest that private-sector employer non-wage costs (including social-insurance taxes) average about 23% percent of wages.[3] The payroll processors could remit an appropriate “guestimate” amount to each employer to cover the additional benefit costs where company-specific data is not readily available.

Proxy for Other Business Expenses

Several recent plans propose revenue relief rather than payroll relief to businesses. They make the valid point that compensation for revenue loss (not just payroll costs) may be necessary to keep many small/medium sized businesses afloat, especially if they face high fixed costs such as rent.[4] While these revenue or loan-based proposals make a lot of theoretical sense, I believe they suffer from real-world hurdles. Specifically, they would be very difficult to implement quickly given that they require establishment of new programs. In some cases, the proposals do not fully recognize that the federal government does not currently maintain high frequency data on business revenues and fixed cost expenses to support the proposal. Even proposals that run aid through private banks require establishing an entirely new federal program to oversee the banks. Banks would need time to digest any new law and communicate the terms of the program with businesses before issuing loans. Oversight to make sure businesses were spending the money appropriately would surely be required (causing additional delays, not to mention political difficulties as well). My guess is it would likely take months to carry all of this out. I don’t believe we have that kind of time.

As an alternative, my payroll-based proposal can be extended to provide a rapid though very approximate solution to the problem of covering other business expenses. Once again, the government can send via payroll processors a payment to employers that represents a percent markup over their payroll costs to cover expenses such as rent. This can happen almost immediately since payroll processors have business bank account information. One could attempt to tailor this percent markup by industry, geography, and employer size to the extent that information is available. Undoubtedly some employers will receive too much (although windfall gains will be partially recouped in 2020 taxes as discussed earlier) while others will receive too little, but if we wait to set up a loan program, I fear that all struggling businesses will receive too little too late. Further, even if loans are deemed the only appropriate way to deal with this problem, the baseline payroll-only part of the proposal can be implemented right away to provide relief to workers and businesses now and buy additional time for loan approaches to be set up.

Other Countries Are Already Pursuing Payroll-Based Approaches

As noted above, the UK is already pursuing a payroll-based approach known as the Coronavirus Retention Scheme designed to keep workers attached to their employers and cover 80% of payroll costs up to a cap. However, as the government makes clear, they are still working “urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.”[5] Evidently, the U.S. isn’t the only country that is stifled in an emergency as a result of inadequate government data. Denmark, on the other hand, appears to be implementing a payroll-based plan more swiftly.[6]

Final Thoughts

Obviously, there are many possible improvements to this proposal. Suggestions/feedback are welcome. My hope is that this will be passed along to policymakers so that economic relief can begin as soon as possible.

Contact

Email me: mitchelj@nber.org

Follow me on Twitter: @Mitchell_JoshW

About me:

Senior economist at Welch Consulting with extensive experience working with administrative data in the federal government as well as with private sector company payroll data. Views expressed are my own.

Full bio: https://welchcon.com/economists/joshua-mitchell-ph-d/

Google scholar: https://scholar.google.com/citations?user=v6ng1EAAAAAJ&hl=en&oi=ao

[1] https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

[2] https://www.bloomberg.com/news/articles/2020-03-21/virus-response-plan-to-total-about-2-trillion-kudlow-says

[3] BLS Employer Costs of Employee Compensation. December 2019. https://www.bls.gov/news.release/pdf/ecec.pdf I include Supplemental Pay and Paid Leave as part of Wages to be consistent with typical payroll reporting practices. These data are similar to BEA-based data reported in Biggs (2019) https://www.aei.org/research-products/working-paper/the-growth-of-salaries-and-benefits-in-the-federal-government-state-and-local-governments-and-public-education-1998-2017/

[4] See, for example: Hubbard and Strain https://www.aei.org/wp-content/uploads/2020/03/hubbard-strain.pdf; Hamilton and Veuger https://static1.squarespace.com/static/59b0bb01f9a61e09f11924fa/t/5e7143b9c53bc84841f00ff4/1584481210134/How_to_Help_American_Businesses_Endure_and_Jobs_Survive.pdf; Saez and Zucman http://gabriel-zucman.eu/files/coronavirus2.pdf; Rothwell https://www.brookings.edu/blog/up-front/2020/03/19/keep-your-distance-and-your-income-a-policy-proposal-for-covid-19/

[5] https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

[6] https://www.theatlantic.com/ideas/archive/2020/03/denmark-freezing-its-economy-should-us/608533/