Democrats waltz after a political disaster with their COVID bill.

At the moment, it seems that the Democrats in Washington are in danger of walking their way in the direction of a major debate on policy and public relations.

The problem? With the start of the tax season, millions of Americans who lost their jobs due to the coronavirus crisis may soon discover that they unexpectedly owe thousands of dollars to the IRS. Legislators can prevent this wave of surprising tax bills by adding a solution to the $ 1.9 billion coronavirus relief package currently moving through Congress. But so far, efforts to do so appear to be stalling.

A senior Democratic assistant told me that from now on he thought the chances of lawmakers acting ‘slim to none’, describing the failure as ‘political malpractice’.

While unemployment benefits have long been considered a taxable income, recipients are often unaware of it until it is time to file. Under normal circumstances, this is not necessarily a disaster, as people tend to stay on unemployment for a relatively short time. But the past year has been different. A historic number of households have fallen back on unemployment insurance to survive the pandemic, and some have raised more than $ 10,000 or even $ 20,000 in aid thanks to the enhanced benefits introduced by Congress.

Stories are already popping up of people hitting their returns, only to be blinded by a tax bill. Take this example, thanks to a great piece from HuffPost reporter and co-presenter of Slate Money, Emily Peck:

Julie Evans thought she would get a refund from the IRS this year, and she only worked on her taxes in January. A former administrative assistant, Evans, has been out of work all of 2020. To save money, she lives with her adult children in Kent, Washington, and unemployment benefits. ‘The idea of ​​$ 400 or so [refund] was enticing, ”she said.

Instead, Evans got a shock: a $ 1,600 tax bill. “I do not know where I will get the money,” the 59-year-old told HuffPost.

It is not entirely clear how many households will be affected by this issue, but a recent report from the Century Foundation suggests that the total could be quite large.

Legislation obliges states to give applicants the choice to withhold some of their unemployment benefits for tax payments. Some people refuse the opportunity, either because they need the money immediately, or because they simply do not see the option. But in the bureaucratic fog of the pandemic, some states have offered no restraint at all for federal unemployment benefits created specifically for the crisis.

Ultimately, the authors of the Century Foundation report estimate that states only withhold taxes on 40 percent of unemployed payments, meaning many people could unknowingly owe money.

It does not take a political savant to figure out why this is problematic. From the point of view of basic decency, struggling families do not need the hardships of a surprising tax bill. From the point of view of economic policy, it does not make sense to tax back billions of unemployment benefits while at the same time spending massive amounts on a new round of assistance. And from the point of view of pure politics, people will naturally be angry if they get a tax bill that they can not pay, or if their new stimulus check is essentially eaten by the IRS. Voters are going to feel angry and cheated, and because one after the other is flooded with cable news, it could pretty much undo the goodwill that the COVID bill would otherwise generate for Democrats and Biden’s government.

Again, some Democrats are trying to ward off this issue before it could potentially explode by taking a solution in the $ 1.9 billion COVID relief currently moving through Congress. Senate Majority Whip Dick Durbin and Iowa Representative Cindy Axne, for example, introduced legislation that would forgive unemployment benefits tax of up to $ 10,200. But the House Ways and Means Committee chose not to include the provision. And it is unclear at best whether the idea will make it into the Senate version. “While there is support for tax forgiveness, there are many priorities that members are fighting for,” another Democratic assistant told me. “Conversations continue.”

Why wouldn’t Democrats just fix it? Part of the answer has to do with the ominous rules on budget reconciliation, the procedure the Democrats use to occupy the filibuster and pass their COVID bill by just 50 votes in the Senate. In the process, each division is assigned to the committee, along with a ceiling on what they may spend. If the Senate wants to add a tax provision from the UI, the House’s Finance Committee must cut something else from the section of the bill, as the issue will fall under its jurisdiction. And finding things to cut is tricky.¹

But there is perhaps one obvious place where the Democrats can cut. Democrats are currently planning to give state and local governments $ 350 billion in unlimited aid to revamp their budgets, in addition to extra money for schools and transportation. As I wrote last week, this is probably a little more than they need at this point, and comfortably, state and local funding is being allocated to the Senate Finance Committee section of the bill. Democrats can certainly get away with shrinking the pot by $ 50 billion, which is how much Goldman Sachs estimates Americans will pay taxes for their unemployment benefits. If it turns out that states do need more help, the Democrats could add it to a bill next year.

If Congress does not act, it is possible that Biden’s government could intervene. The Century Foundation report argues that the unemployment benefits adopted to deal with the pandemic should never have been considered taxable because the IRS code excludes government payments related to a qualified disaster to promote general welfare. Under the Trump administration, the Treasury Department has decided that unemployment benefits are taxable in any case. But under Secretary Janet Yellen’s new regime, it could possibly reverse the course.

So far, the White House has shown no signs that it is prepared to do so. Instead, it looks like the Democrats want to go for a completely completely foreseeable and completely avoidable self-ownership.