As the U.S. Congress debates over extending the mammoth Paycheck Protection Program for small businesses, a new Brookings Institution report proposes just scrapping the rescue loan program and replacing it with more targeted tax credit measures.

Under its proposal, small firms that have seen a revenue drop of 30% in a given quarter would be eligible for two tax credits that could provide them with as much as $17,000 per employee, per quarter. The funds could go toward both payroll and non-payroll expenses, according to the report from the Hamilton Project, an economic policy initiative at the Brookings think tank.

The idea would create a more sustainable approach than the $669 billion PPP effort, which is credited with rescuing many of the nation’s small businesses, but also panned for providing federal loans to some firms that didn’t need them, according to the Hamilton Project. Six months into the Covid-19 crisis, its report runs counter to broad support in favor of extending PPP -- an idea that has rare bipartisan backing.

“My key proposal -- to provide radically expanded refundable tax credits for small businesses -- improves on the plans put forward to date,” wrote the author of the report, Steven Hamilton, an economist at George Washington University.

Congress has debated extending the PPP, which closed to new application on Aug. 8, while offering the chance for smaller businesses that have been hardest hit by the pandemic to get a second forgivable loan. The proposals have languished as lawmakers and the Trump administration have been unable to agree on a broader stimulus bill.

With more than 400,000 small businesses lost since the onset of the pandemic in the U.S., what’s needed is a more nimble approach that benefits the most at-risk firms and can last the duration of the crisis, according to the report. Any such program also should be handled by the IRS -- akin to how most countries handled small-business relief -- rather than funneled through private banks as PPP was, the report says.

Instead of renewing PPP, the Hamilton Project suggests expanding a little-known existing relief program called the Employee Retention Credit program. Small firms with at least a 30% drop in quarterly revenue could get tax credits against their payroll tax obligations. Essentially, businesses that normally pay into a tax account for such purposes as Social Security and Medicare could instead draw money out of that account and use it for payroll. Businesses could draw as much $12,000 per employee every quarter based on a formula. The IRS would make up for any shortfalls in funds.

A second tax credit program, the Small Business Survival Credit, would be created, using a similar formula to give businesses credits of $5,000 per employee and quarter, and could be put toward non-payroll expenses. Combined, the two programs could give businesses up to $17,000 per employee that wouldn’t have to be repaid. The average would be closer to $13,000 per employee, according to the report’s author.

How much the programs would cost the federal government depends on how long the pandemic’s economic pain lasts. The author contemplates the tax credit program lasting for three quarters. He estimates it would cost about $180 billion assuming that 10% of U.S. small businesses qualify -- and suggests the $130 billion in unused PPP funds could help fund the tax credits.

The proposal from the Hamilton Project, named after Alexander Hamilton, the first U.S. Treasury Secretary, could face opposition among PPP’s supporters. After a poor start that saw many businesses left out of relief, many small-business advocates have come to praise PPP for saving, by one estimate, 2.3 million jobs.

“Congress must move quickly to reinstate PPP and provide additional relief to the small businesses that have long been the backbone of our economy” John Arensmeyer, chief executive of the Small Business Majority advocacy group, said last week.

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