Update Three: The War on Small Business Escalates Via the CARES Act
In the my past two blog posts on the $2 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed into law on Friday, March 27th, I focused largely on the Paycheck Protection Program (the “PPP” program) and the greatly expanded Economic Injury Disaster Loan Program (the “EIDL” Program). These provisions are in place to support small businesses, defined as companies with 500 or fewer employees.
My chief concern has been the outsized support in these provisions for big corporations – twice as much – versus the undersized support for small businesses, not to mention the diminutive support for health care, which is another topic all together. This disparity is important, because small business accounts for 50% of our workforce employment and two-thirds of net new job gains; this sector also drives innovation in the U.S. Its health and well-being are important to a rapid recovery and to long term Gross Domestic Product growth prospects. Furthermore, while large corporations have access to private equity, public markets, bank loan facilities and more to secure additional money to keep up and running, small businesses do not. Finally, the Treasury guidelines for these loans remained a moving target and ultimately allowed not-so- small businesses to also apply for earmarked loans.
The funding in programs, which kicked off on Friday April 3rd, a full week after the passage of the CARES Act, completely dried up less than two weeks after launch. The Small Business Administration (“SBA”) reported on Thursday, April 16th, that more than 1,637,000 loan applications, valued at “over $339 billion” had been approved. But this number covers just 5.5% of the 30 million small businesses currently in the U.S.
Forecasting this shortfall, earlier during the week of April 13th, the Treasury was already requesting an additional $250 billion authorization for small business programs. However, what went under-reported in non-financial news networks was the Federal Reserve’s April 9, 2020 announcement that it had launched its own unprecedented $2.3 trillion relief package.
What raised my eyebrows was not only the vastness of the Central Bank’s (Federal Reserve’s) stimulus, but also the addition to it of whole new and expanded programs. What I did expect in the announcement was the $600 billion allocated to purchase loans from banks to small and midsize businesses and the $500 billion to buy state and municipal bonds.
But what I did not expect to see was the participation in the “Main Street Lending Program” of businesses with up to 10,000 employees and with under $2.5 billion in revenue. Is that really “Main Street”?
The most eye-popping number was the $1.2 trillion to bolster the Central Bank’s own ongoing purchases of treasuries, corporate, consumer and municipal securities. Within this announcement, The Fed expanded another facility so that it could begin to buy highly rated new issues of collateralized loan obligations and commercial mortgage-backed securities.
What did this achieve? The Central Bank’s facility for buying corporate bonds can now buy debt from sub-investment-grade issuers, or “junk”-rated companies, as long as they were rated as “investment-grade” a day before the Fed’s programs were first announced on March 23rd. Another facility could also buy exchange-traded funds (i.e. ETF’s) holding such debt.
YIKES! Could small business be made to feel even smaller?
Without doubt, the Fed’s actions are allowing our credit and bond markets to remain stable and liquid, relatively speaking. But the unprecedented involvement in immense amounts of financial aid to below-investment-grade markets does drastically interfere in the natural, and typically robust, process of competitive market actions. It props up bad investments, something we have seen before.
This involvement by the Fed unnaturally helps alleviate concerns that large companies that are downgraded due to unfavorable economic conditions, would not receive support from the Fed. Hence, it artificially supports, if not boosts, market pricing.
The net effect of all of this is that large corporations—even unhealthy ones – will win again – at the expense of everyone else. Let’s add it up.
|CARES Act||#Phase I & II Acts||Central Bank Stimulus||Total|
|Big Corporations||$500 billion||$350 billion est.||$850 billion|
|Small Business Loans||$377 billion||$250 billion est.||$627 billion|
|Sick Leave and Unemployment Benefits||$260 billion||$104 billion||$364 billion|
|Direct Payments to Individuals and Families||$250 billion||$250 billion|
|Assistance for States and Localities||$150 billion||$500 billion||$650 billion|
|Research and Equipment and Infrastructure for Hospitals||$150 billion||$8.4 billion||$158.4 billion|
|Market Liquidity and Bond Purchases Benefiting Market Prices for “Big” Corporations||$1.2 trillion|
# Phase I was an $8.3 billion bill for coronavirus vaccine research and development, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020), which was signed into law on March 6, 2020. The second phase was the $104 billion package for paid sick leave and unemployment benefits for workers and families, the Families First Coronavirus Response Act, which was enacted March 18, 2020.
Adding up funds from Congress and the Federal Reserve, $1.45 trillion in allocations is going to support big business. Indeed, large corporations are by far the biggest beneficiaries of aid – by a factor of more than two hundred per cent.
But wait! There’s more. Did I tell you about the tax credits?
Don’t get me wrong, the CARES Act does many good things. And it’s clear our lawmakers have not been sitting on their hands. However, so many things have sneaked into the law that look like, literally, Congress throwing money away. Where these giveaways show up are in provisions within Title 2, Subsection C of the Act. Namely:
- 2303. Modifications for Net Operating Losses,
- 2304. Modification of Limitation on Losses for Taxpayers Other Than Corporations; and
- 2307. Technical amendments regarding Qualified Improvement Property (QIP)
It is within these sections that the Joint Committee on Taxation calculated approximately $275 billion in tax cuts over the next 10 years, although some experts are expecting the actual cost to tax revenues to be much higher. These tucked-away sections bring total benefits to large corporations and wealthy individuals to upwards of $1.725 trillion!
In a nutshell, these provisions, among others, allow:
- Cost recovery for investments in Qualified Improvement Properties (QIP), which will allow businesses that made these investments in 2018 and 2019 to receive tax refunds now. What is most significant about this is that tax recovery is at a 35% rate versus the 21% that resulted from the 2017 tax law change. Note that a QIP is any improvement to the interior of a non-residential building that is placed in service after the building is first placed in service.
- A corporation’s losses from 2018, 2019, and 2020 to be carried back for five years, and would allow corporate Net Operating Losses (“NOLs”) to fully reduce taxable income (rather than only 80% of taxable income under current law).
- Temporary increases in the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30% limitation to 50% taxable income (with adjustments) for 2019 and 2020.
- Businesses (particularly retail establishments, restaurants, and hotels) to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. This provision corrects an error in the Tax Cuts and Jobs Act.
In the meantime, small business owners have no illusions. In a survey released April 14, 2020 by the Small Business Majority, small business owners reported devastating impacts of COVID-19. Nearly half say they have closed their business or are planning to do so in the next two months. 69% say that the CARES Act favors large corporations over small businesses. 84% say that increased funding is needed for community development financial institutions among many other suggestions. Legislators take note. 38%, 24% and 32% of respondents identified themselves as Republican, Independent and Democrat respectively. The hurt goes across the political spectrum.
As of this date, Congressional negotiators are trying to reach a deal to expand the provisions for small business. Treasury initially asked for another $250 billion. However, it appears that the amended bill could include as much as an additional $370 billion. Accommodations that the Democrats have been fighting for include $75 billion for hospitals, $25 billion for testing, and additional funding for state and local governments.
Will they prevail against the interests of big business that the CARES bill and the Federal Reserve’s actions, together, foreground? Your guess is as good as mine.
Watch Naomi’s interview/discussion with Charlotte: https://www.youtube.com/watch?v=Vo9wFEKKC-w