The voices of Tax Policy Center's researchers and staff
The pandemic relief bill Congress is about to pass is loaded with tax provisions. Some deliver important assistance to households and businesses damaged by COVID-19 and the economic downturn, some represent sensible long-term tax policy that has little to do with pandemic relief, and some are awful special interest giveaways.
Here is a quick first look at a few examples from each category.
Relief payments. The single most important tax provision for low- and moderate-income families is a somewhat revised version of the CARES Act’s special tax credits, (aka recovery rebates or economic impact payments). In the new bill, each adult and child in a household will get a payment of up to $600 that begins to phase out at income of $75,000 for singles and $150,000 for joint filers.
A better targeted bill could have distributed bigger payments to fewer households at the same cost—perhaps by phasing out $700 payments starting at incomes of $50,000. But this assistance still will help many households, especially those in states that are slow to distribute unemployment benefits. Treasury Secretary Steven Mnuchin says direct deposit payments could start going out within a week.
Earned income tax credit/child tax credit. These credits are an important source of support for low- and moderate-income workers with children. But for some families, a drop in income can reduce the size of the credit. The new law would allow people to avoid this by choosing their credit based on income from either 2019 or 2020. It also prevents unemployment insurance benefits from reducing credits this year. However, it will make it tougher for the IRS to track family circumstances that changed from 2019 to 2020.
Payroll tax delay. In August, President Trump used an executive order to allow employees to defer their payroll taxes for the last few months of 2020. While Trump promoted the idea as a tax holiday, it required workers who took the deferral to pay the tax, plus any regular tax they will owe, over the first three months of 2021. Fortunately, few businesses took Trump up on his offer. But workers at firms that did-- and federal employees who had no choice—now will have a year to make up the unpaid tax.
The bill includes several clunkers, but let’s focus on three.
Business meals deduction. Since 1993, firms have been allowed to deduct only 50 percent of the cost of business meals. President Trump, who owns hotels and golf clubs, pressed Congress to restore the full deduction. And Congress did so, at least through 2022. Full deductibility will do little to increase sales in the vast majority of restaurants that serve few if any business meals. And it won’t help restaurants that the government has shuttered due to the pandemic. On the other hand, it will subsidize expense account meals.
Deducting costs paid by Paycheck Protection Program loans or grants. The CARES Act distributed hundreds of billions of dollars in loans and grants to firms that spent the funds on labor, rent, and the like. Now, businesses that got PPP grants want to deduct those costs as ordinary business expenses. But taxpayers already paid for those expenses once through the PPP program. Why should they pay for them again? Well, because business lobbyists are very good at what they do. Many lawmakers acknowledge this is a classic tax policy double-dip, but they are allowing it anyway.
Cutting taxes for beer, wine, and liquor. The TCJA temporarily reduced excise taxes for booze but the tax rates were supposed to return to higher pre-TCJA levels starting on Jan 1. The new bill makes those tax cuts permanent. Lawmakers claim the bill supports local craft brewers and distillers. But the reality is that all producers benefit. and craft beer, for example, represents only about one-quarter of the US beer market. Remember too that many craft beer labels are owned by industry giants such as Anheuser-Busch, itself owned by the Belgian-Brazilian brewing company InBev. The excise tax cut will save consumers no more than few pennies on a beer.
Alternative energy credits. Dozens of long-standing tax provisions were scheduled to expire on Dec. 31. In what has become an annual ritual, Congress eventually gets around to extending them for another year or two. That’s what lawmakers did with a fistful of alternative fuel tax subsidies. Whatever you think of the merits of using tax subsidies to help the environment, it really is hard to justify them as pandemic relief.
Overall, this long-overdue relief bill will help an economy staggered by COVID-19. But like most end-of-the year congressional catch-all bills, this one is loaded with some tax cuts whose benefits are valuable and others that are dubious at best. The real tragedy though is the opportunity cost: Junk provisions crowd out more important ones. And in the midst of a pandemic, it is a shame to waste precious tax dollars on special interest give-aways.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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