The captain of the USS Nimitz explains in the excellent PBS documentary Carrier that in a national security crisis, the first thing the president and national security advisers ask is where the carriers are. In a financial crisis, even one caused by a pandemic, the tax code can play a similar role to the oceangoing armed cities: It’s a multifaceted behemoth with formidable weaponry readily available.
We can expect the code to be rapidly deployed, even if steering it in the right direction will take some careful maneuvering. However, Congress never gets crisis tax policy exactly right. Recent precedent suggests the usual policy changes for dealing with a recession, but building on the earned income tax credit for taxpayers who receive the payments is a new and attractive option for helping a large swath of financially vulnerable taxpayers get through the national emergency.
A Trip Down (Bad) Memory Lane
The response to the economic crisis that began in December 2007 provides one possible roadmap for a stimulus package, and Congress appears to be using the American Recovery and Reinvestment Act of 2009 (ARRA) as a playbook. Alan D. Viard of the American Enterprise Institute said the current legislative responses to the worsening economy are familiar — stimulus payments, net operating loss relief, and industry-specific assistance. A large portion of the response won’t go through the tax code. The 10-year cost of ARRA’s tax provisions was estimated at $326 billion (JCX-19-09). ARRA included a hefty dose of spending, too. The estimated total fiscal impact of the law was $787 billion.
For individuals, the central feature of ARRA was $116 billion in payroll tax credits, called the Making Work Pay credit. Each eligible individual received a credit of up to $400, and joint filers received up to $800. Senate Majority Leader Mitch McConnell, R-Ky., on March 19 introduced the Coronavirus Aid, Relief, and Economic Security Act (S. 3548). Like the proposed recovery rebates that would go into new section 6428 under that proposal, ARRA included a phaseout beginning at modified adjusted gross incomes of $75,000, or $150,000 for joint filers, and the credit was refundable.
Taxpayers who were ineligible for the Making Work Pay credit but still received it were required to repay the excess. The Treasury Inspector General for Tax Administration wrote a report in 2010 explaining that although the credit was implemented as intended by Congress, many taxpayers owed taxes as a result. The recovery rebates provision prevents interest from being charged on any overpayment in section 6428(g)(4), but it doesn’t prevent an overpayment from being recouped by the government.
ARRA temporarily increased the floor of the alternative minimum tax to $46,700 for individuals and $70,950 for joint filers for two years. It also allowed personal credits to be used against the AMT. That provision had an estimated cost of $70 billion.
There are no changes to the individual AMT in the coronavirus bill. However, the Tax Cuts and Jobs Act effectively reduced the number of taxpayers that pay the AMT by increasing the exemption and phasing it out. The exemption amount for 2019 is $71,700 for individuals and $111,700 for joint filers. With the number of taxpayers subject to the AMT having fallen starting in 2018 and lasting through 2026, Congress doesn’t have quite as much room to maneuver here as it did before enacting ARRA.
The EITC was increased for 2009 and 2010 for taxpayers with three or more qualifying children. The Joint Committee on Taxation’s cost estimate of the increase was $4.7 billion. This time around, Congress should do more for taxpayers who receive EITC payments, as discussed below.
NOLs — Then and Now
The relief for businesses in ARRA began with adjustments to the NOL rules that allowed a five-year carryback in 2008 instead of a two-year carryback for businesses with gross receipts of $15 million or less. The coronavirus bill allows a five-year carryback of NOLs from 2018, 2019, or 2020, and temporarily permits an NOL to fully offset income.
Right now, allowing NOL carrybacks can provide immediate liquidity to businesses, Viard said. He added that the long-term revenue consequences of liberalizing the NOL rules are smaller than they initially appear, because some of the businesses would have eventually received the money through carryforwards.
“It’s good tax policy to have reasonably generous treatment of NOLs,” Viard said, because it reduces the tax penalty on riskier investments. Businesses are subject to tax if their investments are successful, and therefore should be able to deduct their losses if those investments fail, Viard argued. (Prior analysis.)
Viard acknowledged that some NOL restrictions were justified to curb deductions for spurious losses generated by tax shelters, but he added, “The reason we liberalize the [NOL] limits during recessions is that we expect businesses to have more genuine losses than spurious ones.”
Qualified Small Business Stock — Coming Soon?
Congress added special rules regarding qualified small business stock (QSBS) in ARRA for 2009 and 2010. The temporary change meant that for QSBS acquired after ARRA was enacted and before 2011, 75 percent of any gain from the sale or exchange of QSBS held for more than five years was excluded from the gross income of a taxpayer other than a corporation. Before that change, the percentage of gain excluded was 50 percent. The cost of that provision between 2009 and 2011 was estimated at $10 million. Congress could do something similar for QSBS soon, because section 1202(a) now excludes 50 percent of gain.
The EITC Option
The EITC is a potential avenue for routing immediate assistance to taxpayers who are on the cusp of economic hardship, including job loss, missed bills, eviction, and food insecurity, said Elaine Maag of the Urban-Brookings Tax Policy Center. Building on the statutory framework and already collected information from the EITC is a better solution than some of the other alternatives because it’s a targeted approach that should be easy to administer and provide financial assistance quickly, she said.
“We have this group of people who just spent 2019 working, but they aren’t in a great economic position, and they are very likely to be hurt by a job loss or reduced hours,” Maag said. That population is already defined, and the IRS has fresh bank information because most of the EITC recipients have either already filed their 2019 tax returns or will do so shortly. “We already know how to find them, so it would be relatively simple for the IRS to take that information that just came in and provide a second payment,” she said.
The cost of sending out another EITC payment this year is $70 billion, Maag said. “Almost all of that would go to people in the bottom 40 percent of the income distribution,” she noted. If that strategy is supplemented with legislation targeted to people who rely on transfer benefits such as Supplemental Nutrition Assistance Program payments and Temporary Assistance for Needy Families, the goal of helping the most vulnerable families would be accomplished, she said. That makes another EITC payment a more appealing option than changes to unemployment insurance or payroll tax cuts, because those approaches are less targeted and even people with relatively high incomes qualify for those benefits.
One possible objection to using the EITC to deliver relief is that it would miss low- and moderate-income workers who don’t have qualifying children under the credit. Maag said a solution might be to expand the assistance payments to that group, especially since, with the income, filing status, and investment income information the IRS has already collected this year, it should be relatively simple to target payments to them.
Maag said Congress might also consider changing the phase-in of the EITC to provide everyone who falls into the phase-in the maximum payment. “That would also be a mechanical change that could be done without collecting additional information from taxpayers,” she said.
The perennial concern about erroneous EITC payments should be secondary as the nation addresses the pandemic, Maag said. The legislation could be drafted to prevent accidental overpayments of the one-time payment from being collected through offsets in the future, and including that protection for recipients is probably a good idea, she said.
“I hope the aid package is targeted to people who need the assistance the most,” Maag said. Taxpayers who receive the EITC are a good place to start, because they are a discrete group that Congress has already identified for assistance, but expanding targeted assistance to taxpayers with incomes above the EITC range would also be possible.