Questionable Moments in Tax History: 2008 Midwestern Disaster Relief

May 27, 2014

Public Law 110-343 is most famous for the Troubled Asset Relief Program (TARP) and the Emergency Economic Stabilization Act of 2008. However, it also included some other provisions – ones that did not inspire heated debate at the time.

The Heartland Disaster Tax Relief Act of 2008 was designed to provide disaster relief to those states that were hit by a series of floods and severe storms in the summer of that year.

There are several reasons to believe that Congress got this one wrong. Not because the people affected by the floods were undeserving of help, but because the tax code was a poor means of delivering that help. Aid should have come through accountable spending programs instead.

First, people affected by disasters most need help in the few months after the disaster hits. In that sense, it was a poor idea to wait until April 15, 2009 to get the money to areas affected in the previous June.

Second, from an accounting perspective, it’s useful to have some idea who is getting the money spent on aid, and where it is going. When we simply offer a random collage of tax breaks for people associated with the areas, we don’t even know what is spent.

Third, it is not clear that the money is matching its intended uses. The expansion of Hope Credits for those going to universities in affected areas is a particularly strong example. The parents of a student attending college in one of the designated Midwestern counties may have no damage to their homes or property, so that sort of tax break seems especially arbitrary.

In the most absurd cases, the tax breaks end up wandering far away from the intended use. The tax-exempt bonds designed for Midwestern relief in 2008 were still being used even recently, by an Egyptian fertilizer company and other unlikely filers who don’t seem to resemble the intended recipients of the tax break.

It is fair to look at disasters in our country and think “we should do something to help these people.” Tax relief is “something.” But it’s not necessarily the “something” that should be done.

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