Targeted Tax Relief for Katrina Rebuilding in a Cuno World

September 22, 2005

Federal lawmakers are scrambling to enact measures to provide tax relief for rebuilding in the Gulf region in the aftermath of Katrina. Naturally, Congress is limiting the tax relief to the disaster area. After all, they reason, why should companies get Katrina-related tax credits for hiring additional employees in Seattle or Los Angeles?

Defining the disaster area and how far to extend the tax credits, geographically, was a small source of contention during congressional debate over H.R. 3768, the Katrina Emergency Tax Relief Act of 2005. Representative Bill Thomas, chair of the House Ways and Means Committee, was concerned about the Senate version of the expansion of the Work Opportunity Tax Credit (WOTC) that would have applied more broadly. For example, the Senate version would have applied to a company that hired someone taking refuge in the Astrodome to do work in the Houston area.

“How does that help New Orleans?” Thomas was quoted as asking in the September 16th edition of Daily Tax Report.

Ironically, the Sixth Circuit’s decision in Cuno v. DaimlerChrysler, which ruled that state investment tax credits are unconstitutional if they only apply to in-state activities, would restrict the states of Louisiana, Mississippi and Alabama from using a tax credit like the federal WOTC for rebuilding efforts. Cuno simply would not allow a state to target tax relief to a specific area like New Orleans, even if it were available to any company that invested in new employees in the area.

If Cuno were the law of the land, Louisiana would be restricted from asking the same question that Chairman Thomas asked about the federal WOTC expansion: “How does this help New Orleans?”

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A 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.

A 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.