As policymakers consider ways to provide relief during the public health crisis and economic downturn, taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy can provide a set of tools to increase stability for both individuals and businesses.
Instead of simply reaching for fiscal stimulus with the goal of increasing economic activity, tax policy changes can give vulnerable individuals and businesses additional liquidity and space to survive the reduction in economic activity needed in light of the coronavirus outbreak. This reduces the impact of the economic downturn and public health problem in the short term while decreasing the amount of time needed to rebound once the crisis ends.
Each of the options below can be combined with policy proposals that provide economic support beyond the tax code and are separate from the White House proposal to suspend or cut the payroll tax. Each of these tax options have costs and trade-offs. Temporary tax policy, while providing short-term relief, may not make sense in the context of normal conditions, and each policy change should be revisited when the crisis is over.
Permit Net Operating Loss (NOL) Carrybacks and Accelerated NOL Drawdowns
The Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. of 2017 reformed how firms may take net operating loss (NOL) deductions, which reduce taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . NOLs ensure that firms are taxed on average profitability over time, and firms with a variance in their profitability are not penalized by the tax code.
Prior to the TCJA, firms could carry forward unused NOLs up to 20 years into the future or apply the NOLs up to two prior tax years by amending their return via a carryback. The TCJA eliminated carrybacks and permitted unlimited carryforwards of NOLs instead. While this change lets firms stretch out their NOLs over a longer time period, it does not help firms in the short term. Firms that experience losses this year cannot use them to get an immediate benefit by amending a previous year’s tax return. Additionally, firms may only deduct NOLs up to 80 percent of their taxable income in a given tax year.
Policymakers could permit firms to take their NOLs during this tax year by permitting NOL carrybacks. This policy change would only benefit firms with profits during the carryback period, however. Alternatively, firms could be allowed to accelerate the NOLs they have on the books by making them refundable. This would increase business liquidity without a big long-run revenue impact, as firms would not take NOL deductions against future income. (Some firms may not earn future income, which would be a revenue loss for the federal government as they would take a loss deduction without paying future tax.)
Delay the 2019 Tax Filing Deadline and Quarterly Estimated Payments
The economic downturn and public health crisis has hit as many firms and individuals are completing tax returns for the 2019 tax year. Independent contractors, gig economy workers, and firms are also looking forward to quarter 1 and quarter 2 estimated tax payments on April 15th and June 15th, respectively. One way to relieve some of the pressure from firms and independent contractors is to delay the tax filing deadline for 2019 tax returns and quarterly estimated payments for the first two quarters of 2020.
The Trump administration has announced that individuals and firms can delay paying their tax returns up to 90 days if they are negatively impacted by the coronavirus outbreak; this is intended to cover most taxpayers. It will be important for the Treasury Department to provide clarity on who may delay tax filing and payment, and Treasury should give delay preference to a broader range of taxpayers to provide room for them to focus on dealing with the crisis and not on their tax returns.
Similarly, policymakers should consider delaying quarter 1 and 2 estimated payments. Independent contractors and gig economy workers are facing some of the biggest economic impact from the downturn. Quarterly estimated payments are a source of complexity for these workers, who would benefit from a delay in collection until later in the year.
Suspend or Repeal TariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s Imposed in 2018 and 2019
International supply chains are under strain due to travel restrictions and public health measures associated with the coronavirus outbreak. Suspending or repealing tariffs imposed on China and other countries over the past two years would help relieve pressure on importers paying the tariffs and ensure our supply chains remain as free from disruption as possible. Removing tariffs would also reduce one source of uncertainty that is roiling financial markets and creating financial volatility for businesses.
Ensure Timely Provision of Refundable Tax CreditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. s
Refundable tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s may be one tool policymakers rely on to provide economic support to workers and firms. For example, the legislation passed by the House last Friday reimburses firms for paid sick and family leave taken by workers through refundable tax credits offsetting payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. liability paid each quarter.
One limitation of this approach, however, is firms may not have the liquidity to provide these benefits in the time between when the benefit is taken and when the firm receives the tax credit (which could be up to three months in the case of the House bill). One way to get around this would be for interest-free lending in lieu of the tax credit, to be paid back when the credit is remitted. Policymakers could explore acceleration of the tax credits themselves, but the complexity involved may make this option less optimal when compared to enhanced lending options.
Strengthen Unemployment Insurance
Economists and policymakers are considering direct cash payments to individuals to support vulnerable populations and ensure economic stability for Americans. An alternative option that may be better targeted at individuals most affected by the economic downturn is enhanced unemployment insurance (UI).
Enhancements to unemployment insurance may include increasing the benefit replacement rate, reducing or eliminating work history or work search requirements, increasing work-sharing provisions that lowers the chance that workers are laid off, and increasing federal support of state UI programs.
It is important that long-run incentives to work are not undermined. However, short-term enhancements in unemployment insurance could be a more fiscally conservative and targeted alternative to direct cash payments for unemployed and under-employed workers.
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