By Richard Rubin 

WASHINGTON -- As unemployment rises and the first wave of federal economic relief nears expiration, lawmakers are increasingly looking to expand an existing wage subsidy to keep workers on payrolls and help businesses stay afloat.

The $3 trillion package passed by the House this month features an expanded wage subsidy, known as the employee retention tax credit. That proposal, which would add about $194 billion to a $55 billion tax credit created in March, is gaining bipartisan support even as lawmakers clash over other legislation to aid the economy during the pandemic.

For Democrats, the subsidy offers an alternative to the payroll-tax cut President Trump is seeking, which they oppose because it does little for the unemployed. Republican supporters prefer the subsidy to spending programs favored by Democrats and see it as a way to link aid to work.

The House plan would give employers enough money to cover up to 80% of their wages and benefits, up to $45,000 per worker, plus a credit for fixed expenses like rent. Eligible companies would simply keep taxes withheld from employees' paychecks. If that isn't enough to equal the credit, they could get additional money from the Internal Revenue Service.

Smaller businesses would get the subsidy for all workers, while larger ones would get it only for furloughed workers still receiving wages or benefits. The break would be scaled to each employer's revenue loss during the coronavirus pandemic.

The prospect that unemployment will remain high even after the economy begins to recover creates a need for continuing federal support, supporters say. The nonpartisan Congressional Budget Office projects unemployment averaging 8.6% in the fourth quarter of 2021.

Employers would claim the expanded credit for 59 million workers, according to estimates from Congress's Joint Committee on Taxation.

The wage subsidy tries to resolve a nettlesome problem for policy makers.

They want to provide support to workers suffering hardship. They also want to help viable businesses through the current disruption. And they want to tie the two together -- keeping that link so that businesses don't have to rehire and retrain their staffs when business conditions improve.

The tax credit, or subsidy, is more efficient than the payroll-tax cut touted by President Trump, proponents say, because aid would be limited to companies hurt or closed by the downturn and because the incentive for each affected worker would be larger.

The credit also could avoid some criticisms dogging other programs. It would be available in some fashion to employers of all sizes, unlike forgivable small-business loans offered by the Paycheck Protection Program. In contrast to unemployment insurance, the subsidy keeps workers tied to jobs.

"It can be a cost-effective way of doing this," said Joe Davis, global chief economist at the investment firm Vanguard Group, which worked with the House Ways and Means Committee to develop the plans. "If you can, try to maintain the employer-employee relationship and not sever it."

The tax credit also avoids creating a disincentive to work, a criticism aimed at $600-a-week supplemental jobless benefits. And unlike those extra payments, which expire in July, the House's proposed tax credit would last through the year's end. Coordinating an expansion of the tax credit with those other programs will prove tricky, as many Democrats want to keep larger unemployment insurance in place for those who can't find jobs quickly.

"We wanted to make sure that there was a long horizon so that both businesses and workers would know this was going to be in place," said Rep. Suzan DelBene (D., Wash.) "The goal is to do whatever we can so people don't have to be on unemployment at all."

A stand-alone tax-credit bill proposed by Ms. DelBene and Rep. Stephanie Murphy (D., Fla.), largely incorporated into the House package, has support from six House Republicans. Senate Democrats, led by Mark Warner of Virginia, have proposed an even larger version that would offer up to 100% of wages and benefits up to $90,000.

Rep. Kevin Brady of Texas, the top Republican on the tax-writing House Ways and Means Committee, says he is open to expanding the credit.

"It's an important tool. So we're interested in continuing to make that credit work," he said.

Sen. Josh Hawley (R., Mo.) has been offering similar proposals. Some Senate Republicans, including Lindsey Graham (R., S.C.) have been seeking an off-ramp from the supplemental $600-a-week unemployment benefits. Republicans are considering other ideas, including bonuses for rehired workers and tax credits tied to hiring.

An expanded credit has the support of trade groups representing hotels and manufacturers. The list of companies using the existing version of the credit indicates its potential reach. It includes The Walt Disney Co., casino operator Red Rock Resorts Inc. and Steelcase Inc., an office-furniture manufacturer.

The House's expanded credit responds to employers' complaints about the existing rules. The credit rate would increase from a maximum 50% to 80% of wages and benefits. So for as little as 20% of normal costs, large employers could keep workforces on standby, avoiding the need to rehire and retrain when they can reopen.

Under the House plan, the credit would rise to cover $45,000 of wages and benefits instead of the $10,000 offered now. State and local governments, which aren't now covered, would qualify, too. And the threshold for small employers was raised to 1,500 employees in the House bill, so companies too big for small-business loan forgiveness could benefit from the more generous version of the credit.

Eric Zwick, a finance professor at the University of Chicago, is concerned that smaller companies might be daunted by the complexity that often surrounds tax breaks.

"If it's complicated, basically, you're going to have the more sophisticated firms be able to take it up," he said.

But for Ms. Murphy, whose Orlando-area district is home to workers at Walt Disney World and other theme parks, the credit is appealing because it can keep people off unemployment insurance and help employers quickly restart operations.

"We're so heavily dependent on tourism and hospitality," Ms. Murphy said. "It's their runway back to being fully back in business."

--Siobhan Hughes contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 26, 2020 05:44 ET (09:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.