The voices of Tax Policy Center's researchers and staff
President Trump seems to want Congress to pass tax breaks for industries hard-hit by collapsing demand in the wake of the coronavirus outbreak. While we don’t know exactly what Trump has in mind, industry-specific benefits like this are a terrible idea. They are unworkable and unfair. And they almost certainly will turn into a money-wasting Christmas tree of goodies that will do little or nothing to protect the economy from a recession driven by fear of a disease.
A big part of the problem is knowing where to draw the line. Airlines appear to have been hard hit. So have cruise lines. But what about hotels (including Trump’s own properties)? And if hotels get a tax break, what about Airbnb or VBRO hosts? How about the firms that supply food or laundry services to the travel or hospitality industries?
Then there are the banks that lend to these businesses, the cleaning companies and security firms that provide their services, and even the lawyers, accountants, and PR firms that rely on these clients for a large share of their income. How far downstream do policymakers want to go? How far should they go?
Even when Congress passes targeted tax breaks with the best of intentions, as it did after Hurricane Katrina and similar storms, it creates serious unintended consequences, as this nice 2006 paper from law professors Ellen Aprill of Loyola University and Richard Schmalbeck of Duke shows. And let’s not kid ourselves, Congress’ intentions often are far from pure. Industry-specific tax breaks won’t always benefit the firms that need the most help. They’ll often go to those with the best lobbyists.
Then, there is the problem of Congress and the president trying to keep up with what could be a rapidly spreading disease. Today, the most hard-hit industries appear to be travel-related. But suppose COVID-19, the disease caused by coronavirus, becomes much more widespread. Factories could close, perhaps because they cannot get needed parts and supplies or because public health concerns force them to shutter. Does Congress then pass another special tax cut to provide relief to those businesses?
And how is the benefit triggered? Does a firm get the tax break if its revenue is off by 10 percent? 20 percent? Or should tax relief be based on declining profits, rather than falling revenue? I could go on, but you get the drift.
Helping shareholders, not workers
Of course, there is no guarantee that any of these tax benefits would filter down to the other victims of a slowing economy—those workers who lose their jobs. Most likely the biggest beneficiaries of targeted business tax breaks would be shareholders. This might make the stock market a bit happier, but it is hard to see how it would stabilize the economy.
In a normal economic slump, a firm might use some of that extra after-tax money to stay open and keep its workers on the payroll. But the risk today is that fear of a disease will slow the economy. If there is no demand for a company’s goods or services because people are afraid to shop, no tax cut will restore production and keep workers employed. Similarly, if a firm cannot get parts or supplies, a temporary tax cut will not keep it operating.
The economic risks of a widespread outbreak of COVID-19 are not typical, and they may not respond to standard fiscal policy. But even if they did, tax relief targeted to specific industries would be a bad idea.
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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