The Coronavirus Relief and Economic Security Act (CARES Act) was signed into law by President Trump on March 27, 2020. The stated purpose of the act is to "[provide] emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic."
The CARES Act provides economic stabilization and relief primarily through four broad channels: (i) Direct cash payments to Americans below specified income thresholds, (ii) Expanded unemployment benefits, (iii) The provision of loans to small businesses to pay workers, rent, and other expenses during the duration of the crisis as revenues collapse, and (iv) Targeted industry stabilization for sectors principally affected by coronavirus pandemic.
The act also includes a variety other emergency appropriations, including funds to purchase medical care equipment and increase hospital infrastructure investment. This section provides additional details regarding the first three policy interventions. Over time, this page will be expanded to incorporate most dimensions of the act.
The Act provides tax credits for the 2020 tax year and makes provisions to issue these funds to taxpayers soon after passage of the act. The value of the tax credits a household receives depends on each household's specific circumstances:
- Each qualifying taxpayer will receive $1,200 so long as their adjusted gross income (AGI) is below a certain threshold. These thresholds depend on the tax-filing status of the taxpayer. Those thresholds are: $75,000 for individual filers, $115,000 for those filing as head of household, and $150,000 for those filing jointly.
- An additional $500 tax credit is provided for each qualifying child.
- Taxpayers with AGIs above these thresholds will see the tax credit reduced by five percent of their income above the threshold. For example, an individual filer with an AGI of $100,000 will not receive a tax credit.
Since the formulary disbursement of cash payments across the U.S. is allocated irrespective of the severity of the local coronavirus outbreak, one might wonder what the relationship is between cash disbursements and the number of confirmed covid-19 cases. Using 2017 IRS tax return information (the most recent year publicly available), we calculate a rough estimate of what each county is to receive in terms of cash disbursements (see Notes section below)---focusing only on those counties with at least one confirmed case. We also drop a few outliers and will include them in subsequent versions of the site once we have investigated them further. We use only IRS tax return data, as it is publicly available. (Individuals are still eligible for cash payments regardless of whether they recently filed their taxes. For example, one way an individual can receive a cash payment is if they receive social security benefits. Since we are are only using IRS tax return data, our current estimate of the average stimulus payment by county is lower than what will likely occur.)
In the scatter plot below, we plot the relationship between confirmed cases per thousand people and projected cash payments per capita at the county level. Each observation is sized and colored according to a measure of how fast confirmed cases is growing (the ratio of cases observed today plus one to the number of cases one week prior plus one). At the moment, there is essentially zero correlation between these two series, potentially because the coronavirus outbreak is still in its early stage.
Projected Cash Payments by CountyEstimated Cash Payments per Person using 2017 Tax Returns and 2010 Census
Of course, the economic disruption associated with the coronavirus crisis is not itself confined to areas with the largest number of confirmed cases. Indeed, proactive shelter-in-place policies that essentially halt some economic activity are directly intended to diminish the growth and magnitude of the covid-19 outbreak. In this way there may actually be a negative correlation, at least initially, between the local severity of the coronavirus outbreak and how deep is the local economic downturn. Over the long-run, there is evidence that this correlation reverses. Correia, Luck, and Verner (2020) present suggestive evidence from the 1918 influenza pandemic that areas implementing mitigation strategies akin to those in place today grow faster in the long-run after the pandemic subsided. This longer-run relationship would suggest that areas harder hit by the coronavirus outbreak may ultimately require more fiscal relief.
We thank Christopher Q. Campos for contributing this section.
While the use of the tax code to administer social policies—such as the Earned Income Tax Credit (EITC)—is common, this method of transfer consistently misses some of the most in need (Currie 2004). For example, employed workers with earnings less than $12,200 (the TY 2019 standard deduction) are not mandated to file. Furthermore, filing thresholds are higher for the elderly and the blind, and disabled veterans typically fall in these group due to disability benefits not being taxable.
The CARES Act, in contrast to the Economic Stimulus Act of 2008, does not require individuals receiving Supplemental Social Insurance (SSI), Social Security Disability Insurance (SSDI), or Social Security payments to file taxes. Instead, the IRS could in principle use the information available via social security or railroad retirement benefits to provide them with a stimulus check. Nevertheless, on March 30, 2020, the IRS issued a memo stating that those who are not typically required to file tax returns will need to do so in order to receive their payment, adding an unnecessary barrier for such individuals to receive aid. A few days later, on April 1, the decision by the IRS to require SS recipients to file was reversed even as others, such as those receiving pension or disability payments, are still required to file.
Even with this additional method of qualifying, not all tax-filers below income phase-out thresholds qualify—thousands of tax-paying immigrants and citizens won’t be eligible for stimulus checks. The CARES Act requires taxpayers or dependents to have a “valid identification number,” which is defined as a Social Security number. Many immigrants, such as Dreamers, don’t have Social Security numbers, and instead pay their taxes using an Individual Taxpayer Identification Number (ITIN), effectively excluding them from a payment.
Even more worrisome is the disqualification of eligible individuals for having a spouse without a valid identification number. This effectively penalizes the presence of immigrants in a household, even if the household consists of children who are US citizens. (Notably, this penalty is waived for members of the armed forces.) While the CARES Act took some steps forward in terms of accessibility—mainly for the elderly and disabled---it explicitly penalizes families with immigrants and still faces challenges in identifying low-income households that don’t typically file.
Even if low-income households that do not receive social security benefits can file taxes this year to receive their stimulus checks, it is not obvious that all will do so. Every year thousands of families qualify for the EITC do not file taxes, typically foregoing amounts greater than the stimulus credits. Although the availability of the stimulus credit is likely to encourage some non-tax filers to file (Ramnath and Tong 2017), the federal government and policymakers can do more to ensure families are well-informed of the requirements. For starters, the IRS should create easy-to-read instructions for households informing them of the action needed on their part.
Unfortunately, this may not be enough. Researchers that have studied the EITC take-up gap have highlighted the potential benefits and limitations of information campaigns administered by state and federal agencies (Bhargava and Manoli 2015, Chetty and Saez 2013, Guyton et al. 2017, Linos et al. 2020). Inequities in the access to stimulus payments further highlights the potential benefits of pre-populated returns in reducing administrative barriers for subsets of the population most in need.
At its core, the CARES Act expands unemployment benefits in four key ways:
- Incentivizes states to waive the one-week waiting period so that claimants can immediately receive unemployment benefits. Whether and how many states ultimately do so remains to be seen. States that waive this waiting week will have the first week of funds fully paid for by the Federal Government.
- Increases the unemployment benefit amount received by $600. Because replacement ratios vary by state, how much additional lost income is covered by this benefit depends upon the pre-existing unemployment benefit generosity of each state as well as the income lost as a result of unemployment.
- Extends the maximum duration a claimant may receive unemployment benefits by 13 weeks.
- Expands coverage so that workers, such as those working part-time, for themselves, or as a part of the so-called gig-economy, have access to unemployment insurance benefits.
The CARES Act guarantees $350 billion in lending to small businesses to assist them in retaining workers, covering necessary expenses (such as rent/interest payments/utilities), and surviving the economic disruption brought on by the coronavirus crisis. In part, the PPP’s focus on small businesses is a recognition that many such firms lack access to other sources of credit, such as the commercial paper market or capital markets—markets that have already received substantial support from the Federal Reserve. Historically, the evidence is that, without such access, small firms are substantially more vulnerable to changes in credit conditions (see, for example, Gertler and Gilchrist (1994) and Kashyap, Lamont and Stein (1994)) and play an important role in aggregate movements in production.
The PPP expands the definition of firms typically eligible for Small Business Adminstration (SBA) guaranteed loans to include businesses, nonprofits, veteran organizations, and self-employed/sole proprietors/contractors with fewer than 500 employees (some firms with more than 500 employees may still qualify under industry-specific guidance). Additionally, firms with multiple establishments in the accommodation and food services sector (NAICS 72) qualify so long as they have fewer than 500 employees per location.
Loans extended under the PPP do not require collateral or a personal guarantee by the borrower; additionally, the typical SBA lending requirement that firms be unable to access credit elsewhere is waived. As a part of their application, firms must certify “in good faith” that the economic disruption arising from the coronavirus pandemic necessitates their borrowing funds to sustain operations. Firms are able to apply for PPP loans between April 3rd, 2020 and June 30th, 2020.
The CARES Act specifies that PPP funds may be used for the following expenses:
- Payroll costs and other forms of employee compensation
- Continuation of group health care benefits for employee on paid sick, medical, or family leave
- Payments on interest on mortgage (not principal), rent, utilities, and interest on debt obligations incurred over the prior year
Guidance by the Treasury makes it clear that all PPP borrowers will have the same loan terms. Firms eligible for PPP loans are able to borrow under the following terms:
- Up to a maximum of 2.5 times their average eligible monthly payroll from the previous year (eligible payroll is capped at $100k compensation per employee) or $10 million, whichever is larger;
- At a fixed interest rate of 1% (the CARES Act specified that the interest rate be below 4 percent; however, Treasury guidance clarified this point);
- With a deferral on required payments for 6 months; and,
- A loan duration of 2 years (with no prepayment penalty)
A subset of allowable expenses under a PPP loan is eligible for loan forgiveness. In order to have qualifying expnses forgiven, firms must provide appropriate documentation on expenses incurred in the 8 weeks following receipt of the loan. Expenses potentially eligible for forgiveness include: (i) payroll costs, (ii) most types of mortgage interest payments, (iii) rent, and (iv) utility costs. The amount of loan forgiveness a firm receives is eligible for is reduced if payroll expenses decline (either because of layoffs or wage/salary reductions).
While not stipulated in the CARES Act explicitly, the Treasury has since provided guidance that “due to likely high subscription” no more of than 25% of loan amounts forgiven may be for non-payroll expenses. This guidance appears directly related to the formula for determining PPP loan amounts. Specifically, eligible firms may borrow 2.5 times their monthly payroll costs. Over an 8-week period, that is roughly two months’ worth of payroll expenses (80%) and a half-month of other qualifying expenses (20%).
Firms are able to borrow from pre-existing SBA lenders or additional lenders who the Treasury deems to have the “necessary qualifications to process, close, disburse and service loans” guaranteed by the SBA. To incentivize qualified lenders to process the loans, the CARES Act partially reimburses lenders based on the loan amount: 5% of loans less than $350K, 3% for loans between $350K and $2M, and 1% for loans greater than $2M. Moreover, lenders are not implicitly penalized for extending PPP loans with regard to risk-weighted capital requirements because PPP loans receive a risk-weight of 0 percent.
Firms seeking PPP funds were able to submit applications for loans to participating lenders on April 3rd, 2020—a day and a week after the CARES Act was signed. The swift opening up of the PPP program was intended to get funds to firms already affected by the economic disruption wrought by the coronavirus crisis and the accompanying shutdown of large portions of the economy.
Crucially, the PPP relies upon participation of financial institutions to process loan applications and extend loans to eligible borrowers. Despite the importance of getting funds out quickly, on April 3rd a number of prominent banks were not yet accepting PPP loan applications, with some banks stating that their delay was related to limited guidance from the SBA and the Treasury as to how to actually implement the PPP.
Bank of America (BOA) was one of the larger banks that began accepting loan applications on April 3rd; however, BOA initially restricted eligibility to existing customers who had outstanding borrowing balances, denying applications from new borrowers. BOA later relaxed this restriction by also extending eligibility to firms without borrowing relationships at other banks (other major banks have outlined similar policies).
This illustrates an important institutional detail regarding borrowing by small businesses in the U.S.—the reliance upon long-term borrowing relationships with particular banks. As argued in a seminal paper by Berger and Udell (1995), banks maintain these long-term relationships in order to partially overcome the asymmetric information problem inherent to lending. These long-term relationships allow banks to learn valuable hard-to-acquire information about the firm’s long-term viability and profitability—and adjust terms of financing accordingly. Bank of America is presumably willing to prioritize pre-existing customers because it has detailed information about the firm’s performance in normal times.
While relationship lending may be optimal from the perspective of the bank in normal-times, in the current crisis it may limit the pace at which funds are disbursed to firms in need of aid. In particular, to the extent that most banks limit eligibility to pre-existing customers, firms may have difficulty accessing PPP funds if the bank from which they typically borrow is either unwilling to lend or incapable of processing all PPP applications quickly enough. (During the financial crisis, firms without access to loans through their historic lender experienced larger employment declines during the recession; see Chodorow-Reich 2014).
By April 16, the PPP funds allocated under the CARES Act were exhausted, with the SBA announcing they would no longer be accepting loan applications. The rapid exhaustion of these funds likely represents the pronounced need by small businesses in the U.S. as well as the broad eligibility of small businesses to seek funds. The CARES Act requires only that small businesses "that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient." Economist Daniel Greenwald, in an opinion piece, has argued that this vague formal requirement leaves open the possibility that otherwise financially stable (or even thriving) small businesses can apply for and receive forgivable loans—thereby making the PPP less effective than it otherwise could be.
Using data from 2019Q1 from the Quarterly Census of Employment and Wages (QCEW), it is possible to get a sense for (a) whether the value of PPP loans allocated under the CARES Act is large or small relative to the wages paid by small businesses and (b) where funds have gone relative to potential need. In particular, in the figure below, we calculate for each state the ratio of PPP loans received through April 16th divided by 8 weeks worth of the wage-bill for establishments with fewer than 500 employees. This is a back-of-the-envelope calculation, as size-eligibility differs somewhat across industry and across firms with single or multiple establishments. The 8-week horizon is chosen because that is the horizon over which wages/expenses are potentially forgivable.
PPP Loans Through April 16 Divided by 8-Week Wage Bill of Estabs. <500 EmployeesEstimated using 2018 QCEW and SBA Data
The places with the lowest ratio include Washington D.C. (20%), California (28%), and Nevada (29%); the states that have received the largest amount PPP lending relative to the wage bill are Maine (65%), Nebraska (65%), and South Dakota (69%). In general, there is a clear pattern in this figure: small businesses in the midwest and upper midwest have received relatively more funds relative to the small business wage bill in those regions. In total, the 8-week wage bill among establishments with fewer than 500 employees was approximately $875 billion, so that the $350 billion in lending made available through PPP represented roughly 40% of that amount.
On April 23, Congress passed a second relief program, the principal component of which is allocating an additional $321 billion in funds to the PPP.