Democrats are waltzing to political disaster with their COVID bill.

Right now, Democrats in Washington appear to be in danger of sleepwalking their way toward a major policy and public relations debacle.

The problem? With tax season underway, millions of Americans who lost their jobs as a result of the coronavirus crisis may soon discover they unexpectedly owe thousands of dollars to the IRS. Lawmakers could prevent this wave of surprising tax bills by adding a fix to the $ 1.9 trillion coronavirus relief package currently running through Congress. But so far efforts to do so seem to be winding down.

A senior Democratic aide told me that from now on he thought the likelihood of lawmakers acting was “low to none,” describing the failure as “political malpractice.”

While unemployment benefits have long been considered taxable income, recipients are often not aware of it until it is time to apply. Under normal circumstances this is not necessarily a disaster as people tend to be unemployed for a relatively short period of time. But the past year has been different. A historic number of households relied on unemployment insurance to survive the pandemic, and some have raised more than $ 10,000 or even $ 20,000 in aid thanks to improved benefits that Congress enacted.

Stories are already starting to trickle in of people who have printed their returns, but are blinded by a tax bill. Take this example, courtesy of a great piece from HuffPost reporter and Slate Money co-host Emily Peck:

Julie Evans thought she would get money from the tax authorities this year, so she was the first to get started with her taxes in January. Evans, a former administrative assistant, was out of work throughout 2020. To save money, she lives with her adult children in Kent, Washington, scraping off unemployment benefits. “The $ 400 idea or so [refund] was enticing, ”she said.

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

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

By law, states are required to give applicants the option of withholding a portion of their unemployment benefits for tax payments. Some people turn down the opportunity, either because they need the money immediately or because they simply don’t notice the option. But in the bureaucratic fog of the pandemic, some states offered no withholding at all for federal unemployment benefits created specifically for the crisis.

Ultimately, the authors of the Century Foundation report estimate that states have only withheld taxes from 40 percent of unemployment benefits, meaning tons of people may unknowingly owe money.

It doesn’t take a political scientist to find out why this is problematic. From a basic decency standpoint, struggling families don’t need the hardships of a surprise tax bill. From an economic policymaking standpoint, it makes no sense to tax billions in unemployment benefits while spending huge sums on another round of aid. And from a purely political standpoint, people are clearly going to be pissed off if they’re hit with a tax bill they can’t afford, or if their new stimulus check is essentially eaten by the IRS. Voters will feel angry and cheated, and as the cable news is paraded one after another, it could very well undo much of the goodwill that the COVID law could otherwise generate for the Democrats and the government- Biden.

Again, some Democrats are trying to fix this problem before it potentially explodes by including a fix in the $ 1.9 trillion COVID bill currently passing through Congress. Senate Majority Whip Dick Durbin and Iowa Rep. Cindy Axne, for example, introduced legislation that would forgive taxes up to $ 10,200 in unemployment benefits. But the House Ways and Means Committee chose not to include the provision. And it’s unclear at best whether the idea will make it to the Senate version. “While there is support for tax forgiveness, there are many priorities that members fight 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 secretive rules for matching the budget, the procedure Democrats use to bypass the filibuster, and pass their COVID bill by just 50 votes in the Senate. During the process, each committee is assigned a portion of the legislation, along with a cap on what they are allowed to spend. If the Senate wanted to add a UI tax fix, the chamber’s finance committee would have to cut something else from its section of the bill as the matter would be within its purview. And finding things to cut is tricky.¹

But there may be an obvious place where Democrats can downsize. Right now, Democrats plan to give state and local governments $ 350 billion in unrestricted aid to patch up their budgets, on top of extra money for schools and transit. As I wrote last week, that’s probably a little more than they need at the moment, and for the sake of convenience, state and local funding is being allocated to the Senate Finance Department of the bill. Democrats could almost certainly get away by shrinking the pot by $ 50 billion, which is how much according to Goldman Sachs Americans will owe taxes on their unemployment benefits. If it turns out that states need more aid later, Democrats can add it to a bill next year.

If Congress doesn’t act, it is possible that the Biden administration can intervene. The Century Foundation report states that the unemployment benefits adopted to address the pandemic should never have been considered taxable, because the IRS Code excludes government payments “ in connection with a qualified disaster to promote the common good. ” Under the Trump administration, the Treasury Department decided that unemployment benefits were subject to tax anyway. But under Secretary Janet Yellen’s new regime, the potential could change course.

So far the White House has shown no sign of willingness to do so. Instead, Democrats seem to be moving towards fully foreseeable and utterly avoidable self-esteem.