The Outdated Tax Provision Holding Back Economic Recovery
The economic impact of the pandemic — including job losses — is going to get worse before it gets better.
The short-term fixes under discussion, such as boosting unemployment insurance or shoring up businesses’ balance sheets again, are just that — short term. They won't fix what ails the American worker because the reality is that many of the jobs being eliminated won’t ever return.
What’s needed is a deeper investment in the workforce to upskill millions of Americans for the jobs that will be in demand. Covid-19 has accelerated automation and stands to further disproportionately impact the most vulnerable Americans unless we can equip them with the skills to navigate a technology-intensive economy.
The good news is that Congress can help by updating an outdated tax exclusion provision to better align the interests of employers, higher education institutions, and employees. Making this simple fix — and rectifying decades of inaction — can marshal billions of dollars from employers to help reskill millions of working adults with no additional government outlays.
That’s important because as stimulus measures expire, job losses will likely climb. The Paycheck Protection Program’s half a trillion dollars to employers is proving only to have delayed layoffs, as the pandemic extends and the ensuing cash crunch is more than many businesses can bear. Workers in retail, tourism and hotels will be especially vulnerable.
Covid-19 is also enhancing existing pressure to automate jobs, as employers seek to mitigate health risks in addition to controlling costs and boosting productivity.
Food processing plants have experienced significant outbreaks, for example. Approximately 9 percent of meatpacking workers have contracted the virus. The industry will likely adopt new, automated processes that are less reliant on intensive human labor, like those in Denmark, thereby reducing the health risk — and jobs. Even in industries where automation might not be justified purely on a cost basis, in an era of a viral pandemic, depending on robots instead of people can reduce business interruption risk as well as liability.
Although new stimulus measures may artificially maintain jobs, they won’t create job opportunities, provide economic mobility or prevent Covid-19 from accelerating technological disruptions that predate the pandemic. As the economy heals slowly, new jobs will be created —but they will be different from those that have been destroyed. Low-income workers and those without access to education will be especially affected and in need of support, as nearly 40 percent of those earning less than $40,000 lost their jobs during the pandemic.
Fears of technological change leading to extended joblessness have led to calls for universal basic income, but there is little evidence to suggest that automation will cause a permanent reduction in jobs. We are instead likely to see the balance of the labor market shift toward more middle- and high-skilled jobs. This is a good thing: It will mean that more workers have the opportunity for higher-wage work, but we need to make sure workers have the skills to take advantage of these emerging opportunities.
Reskilling is the only practical response that will address the long-term impact of the recession and the pandemic on the structure of our economy. This is true for workers whose jobs have been eliminated — but it is also true for individuals in industries with rapid automation and technological change whose employers face a choice to either upskill or lay off their current workforce.
An obstacle to employers investing more in their employees’ education is that Section 127 of the tax code has been frozen in time since 1986. It consequently penalizes working adults when employers pay their tuition and expenses above an antiquated low amount of $5,250 per year, as employees are taxed on the excess benefit.
The $5,250 cap made sense in 1986 when it covered total tuition, room and board at most four-year institutions. But it hasn’t been updated in over a generation, so the benefit today covers only about 50 percent of the average yearly in-state tuition and fees at a public four-year institution.
The Upskilling and Re-training Assistance Act, co-sponsored by Senator Maggie Hassan (D-NH) and Senator Todd Young (R-IN), would increase the amount of these credits to $12,000 — in line with the growth of inflation, not skyrocketing college tuition prices. Even as Congress considers further short-term stimulus, it should also take long-term action to allow employers to make significant investments in the skills of their current employees, or even to provide education benefits as part of severance packages when layoffs do occur.
The pandemic isn’t going away anytime soon, nor is the economic disruption that it has created. To ensure that this economic harm isn’t longer lasting, we must acknowledge that the future of work is indelibly different from our past and invest to help workers prepare.
Scott Pulsipher is the president of Western Governors University. Michael B. Horn is the author of “Choosing College” and a senior strategist at Guild Education.