Democrats are waltzing into political disaster with their COVID bill.

At the moment, Democrats in Washington appear to be at risk of somnambulism toward a major political and public relations disaster.

The problem? With the tax season underway, millions of Americans who lost their jobs thanks to the coronavirus crisis may soon discover that they unexpectedly owe thousands of dollars to the IRS. Lawmakers could avoid this wave of surprise tax bills by adding a correction to the $ 1.9 trillion coronavirus relief package currently underway in Congress. But so far, efforts to do so seem to be running out of steam.

A senior Democratic aide told me that, from now on, he thought the chances of lawmakers acting were “almost nil” and described the failure as “political negligence”.

Although unemployment insurance was considered taxable income, beneficiaries are often unaware of it until it is time to submit an application. Under normal circumstances, this is not necessarily a disaster, as people tend to be unemployed for relatively short periods of time. But the past year has been different. A historic number of families have turned to unemployment insurance to survive the pandemic, and some have raised well over $ 10,000 or even $ 20,000 in aid, thanks to the enhanced benefits that Congress has enacted.

Stories of people who clicked send in their statements are already beginning to arrive, only to be surprised by a tax bill. See this example, courtesy of an excellent article by HuffPost reporter and Slate Money co-host Emily Peck:

Julie Evans thought she would get an IRS refund this year, so she started working on her taxes in January. A former administrative assistant, Evans was unemployed throughout 2020. To save money, she is living with her adult children in Kent, Washington, and surviving unemployment insurance. “The idea of ​​$ 400 or more [refund] it was attractive, ”she said.

Instead, Evans was shocked: a $ 1,600 tax bill. “I don’t know where I’m going to get the money from,” the 59-year-old told HuffPost.

It is not entirely clear how many families will be affected by this problem, but a recent report by the Century Foundation suggests that the total could be very large.

By law, states are obliged to give applicants the option of withholding some of their unemployment benefits for tax payments. Some people refuse the opportunity, either because they need the money immediately or simply because they don’t realize the option. But in the bureaucratic haze of the pandemic, some states have offered no withholding tax for federal unemployment benefits created especially for the crisis.

Ultimately, the authors of the Century Foundation report estimate that states withhold taxes on only 40% of unemployment payments, meaning that many people could inadvertently be owed money.

You don’t have to be a political scholar to find out why this is problematic. From the point of view of basic decency, struggling families do not need the difficulties of a surprise tax bill. From the point of view of economic policy making, it makes no sense to tax billions on unemployment benefits and, at the same time, spend huge amounts of money on a new round of aid. And from the point of view of pure politics, people will obviously be irritated if they are struck down with a tax bill they cannot pay or if their new stimulus check is essentially devoured by the IRS. Voters will feel angry and deceived, and as one after another is shown on cable news, it can undo much of the goodwill that the COVID bill could generate for Democrats and the Biden government.

Again, some Democrats are trying to avoid this problem before it potentially explodes, including a correction to the $ 1.9 trillion COVID relief bill that is currently underway in Congress. The Senate majority Whip Dick Durbin and Iowa’s Cindy Axne, for example, introduced legislation that would forgive taxes of up to $ 10,200 in unemployment benefits. But the Chamber’s Methods and Resources Committee chose not to include the provision. And it is not clear, at best, whether the idea will reach the Senate version. “While there is support for tax relief, there are many priorities that members are fighting for,” another Democratic aide told me. “Conversations are ongoing.”

Why wouldn’t Democrats just fix this? Part of the answer has to do with the mysterious rules governing budget reconciliation, the procedure that Democrats are using to get around the obstruction and pass their COVID bill with only 50 votes in the Senate. According to the process, each committee is given a section of the legislation, along with a ceiling on what they can spend. If the Senate wanted to add a correction to the SD tax, the House Finance Committee would have to cut something else out of its section of the bill, since the matter would fall under its jurisdiction. And finding things to cut is complicated.¹

But there may be an obvious point at which Democrats can cut. At the moment, Democrats plan to give state and local governments $ 350 billion in unrestricted aid to help fix their budgets, as well as additional money for schools and public transportation. As I wrote last week, it is probably a little more than they need right now, and conveniently, state and local funding is allocated to the bill section of the Senate Finance Committee. Democrats would almost certainly be able to shrink the pot by $ 50 billion, which is how much Goldman Sachs estimates Americans are expected to pay in taxes on their unemployment benefits. If Democrats find that states need more help in the future, they can add it to a bill next year.

If Congress fails to act, it is possible that the Biden administration could intervene. The Century Foundation report argues that unemployment benefits approved to deal with the pandemic should never have been considered taxable in the first place because the IRS code excludes government payments made “in connection with a qualified disaster in order to promote general well-being. “Under the Trump administration, the Treasury Department decided that unemployment benefits were subject to tax anyway. But under Secretary Janet Yellen’s new regime, this could turn the tide.

So far, the White House has shown no signs that it is willing to do so. Instead, Democrats appear to be moving slowly towards completely predictable and totally preventable self-determination.