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Gig Workers, Entrepreneurs Need Tax Help Now More Than Ever

Posted on May 29, 2020

The pandemic is hitting small businesses and gig economy workers especially hard, but enacting carefully targeted tax changes could help ease their burden.

Many public officials have expressed hope that the economic recovery will be V-shaped — a rapid decline followed by a rapid recovery — but that outcome isn’t guaranteed, according to Garrett Watson of the Tax Foundation. “It’s important to recognize we’re not out of the woods yet,” he said. “We need smart public policy and smart tax policy.” 

The worst-case scenario is a wave of small business bankruptcies and insolvencies that risk destroying the links between workers and their employers, so future relief efforts should continue to focus on ensuring liquidity for small businesses and support for vulnerable individuals, Watson said on a May 28 Tax Foundation webinar.

One tool policymakers have already exercised is expanding the use of net operating loss carrybacks, but they can further expand on that by allowing small businesses to immediately cash out NOLs they already have on the books, Watson said.

That would be particularly beneficial for start-ups and entrepreneurs who entered the recession with losses they incurred in getting their business off the ground, but without much taxable income to apply them to, according to Watson. From a revenue perspective, such a provision would be little more than a timing change, but for firms in desperate need of cash, “it’s a major lifeline,” he said.

To best assist small businesses, the provision should be designed with guardrails to limit it to small businesses that need it most, and it should be simple for taxpayers to claim the accelerated losses, Watson added.

Gig economy workers, like ride-hailing drivers, are also in desperate need of targeted help. Watson said many of those workers have struggled to claim the unemployment compensation benefit under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) not only because of their status as independent contractors but also because the overloaded state unemployment insurance systems haven’t changed to accommodate them. Those workers may now be using up the cash flow that they would have set aside for estimated tax payments to make ends meet instead, he added.

Watson suggested that policymakers consider providing targeted relief to gig workers by offering a simplified method of calculating their expenses, similar to the simplified home office deduction, and encourage tax compliance by allowing them to voluntarily withhold their taxes through the platform they operate under. Lawmakers should also consider staggering gig workers’ tax filing and payment deadlines beyond the extensions that have already taken place, he said.

Don’t Let a Good Crisis Go to Waste

Some panelists on the webinar suggested the pandemic could finally spur lawmakers to take action on the national debt.

The federal government is appropriately spending trillions of dollars this year to blunt the economic impact of the COVID-19 crisis, but the government quickly has to reckon with the federal budget’s woes, according to House Ways and Means Committee member Jodey C. Arrington, R-Texas.

“We can seize this crisis as an opportunity to do some things and put provisions in place that will force Congress to deal with this issue so that we can stave off the ultimate [budget] crisis,” Arrington said. He added that while he’d prefer the issue be addressed exclusively through spending cuts, realistically, new revenues will have to be part of the solution.

Ben Ritz of the Progressive Policy Institute said policymakers should start planning for a consumption-based tax, like a VAT, to accompany the current income tax system. Ideally, that tax would be generationally neutral while producing the fewest economic distortions and avoiding increasing tax burdens on low-income taxpayers.

To do that, the VAT should be accompanied by an expansion of the earned income tax credit, including a rebate for taxpayers on income assistance programs, and a scaled-back payroll tax, Ritz said. “So there are ways to make a consumption tax hit those on the lower end of the income spectrum a lot less,” he said.

The Tax Foundation’s Karl Smith maintained that the real budget concern is the country’s debt-to-GDP ratio, and the key part of that is GDP. “There’s really no way to bring down the ratio without bringing up GDP,” he said.

To boost GDP, Smith recommended that policymakers make the Tax Cuts and Jobs Act’s expensing changes permanent and then expand that benefit to structures through a neutral cost recovery system by letting businesses index depreciation on structures every year at a rate of 3 percent plus inflation.

“That maintains the economic value of the depreciation over time and gives companies the same incentive to invest in structures that they would have under full expensing,” Smith said. That would also have a further benefit of encouraging companies to move manufacturing and other operations back to the United States, which could help address concerns over supply chain weaknesses revealed by the pandemic.

A neutral cost recovery system would also help businesses weather the pandemic by making investments that alter their structures to become more compliant with coronavirus restrictions, Smith said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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