Targeted Tax Relief for Industries Impacted by the Coronavirus: Selected Policy Issues

INSIGHTi

Targeted Tax Relief for Industries Impacted

by the Coronavirus: Selected Policy Issues

Gary Guenther

Analyst in Public Finance

March 20, 2020

One of the policy options being considered to minimize the damage to the U.S. economy from the

domestic spread of the coronavirus is tax relief targeted at industries that have experienced substantial

drops in revenue. To date, growing numbers of cruise lines, airlines, hotels, restaurants, retailers, and

energy producers seem to have been hit the hardest by the economic impact of the virus. Depending on

what happens to the spread of the coronavirus within the United States in coming weeks, other industries

could be similarly affected. The prospect of a prolonged domestic coronavirus outbreak raises concerns

about the solvency of severely affected companies and the job security of their employees. This is a

particular concern for smaller firms. Without lines of credit, many of them may find it difficult to stay in

business.

According to the Congressional Budget Office, fiscal policies for reviving a slumping economy can be

evaluated on the basis of their timing and cost-effectiveness. Timing refers to the period when a fiscal

stimulus would have the greatest effect. Cost-effectiveness refers to the cumulative growth in output and

jobs created by a particular stimulus measure per dollar of budgetary cost. Timely and cost-effective fiscal

stimulus measures are seen as recommended ways to boost an economy at a relatively low revenue cost.

The same considerations may be useful in assessing the potential benefits from proposals to provide

federal tax relief for industries directly affected by the coronavirus pandemic. Lawmakers may want to

focus on proposals that would be likely to deliver the maximum benefit when it is most needed, at a

relatively low revenue cost.

Tax Policy Options

There are several policy options for granting federal tax relief to U.S. industries that have been hit hard by

the coronavirus pandemic. One option is to defer payment of federal employment, income, and excise

taxes by eligible companies for a period that coincides with the time it takes for the coronavirus outbreak

Congressional Research Service

7-....

www.crs.gov

IN11263

CRS INSIGHT

Prepared for Members and

Committees of Congress

Congressional Research Service

2

to run its course. Most companies are required to deposit the federal income, Medicare, and Social

Security taxes they withhold from employees’ paychecks biweekly or monthly with the U.S. Treasury

Department. At the moment, it is unclear how long it will take for the current outbreak to run its course.

Another option is to provide a refundable tax credit for affected companies, up to a certain amount. This

would benefit firms with net operating losses—as well as those with reduced profits—because of the

pandemic. Both sets of firms could claim the full amount of the credit. The timing of this option may be

problematic, if, as is typically the case under current law, the credit could be claimed only at the end of a

company’s tax year. The credit could be given in advance, as is the case with the refundable health

insurance premium tax credit under the Affordable Care Act (P.L. 111-148).

A third option is to allow affected companies to carry back any net operating loss (NOL) to offset taxes

paid in previous years, producing an immediate refund. Before the 2017 tax revision (P.L. 115-97),

companies could carry their NOLs back up to two years as an offset to previous profits, or forward up to

20 years as a deduction against future profits. There was no limit on the amount of the NOL a company

could use for either purpose. Under P.L. 115-97, however, NOLs may not be carried back, but they may

be carried forward indefinitely; use of the NOL deduction is capped at 80% of a company’s taxable

income.

Targeted tax relief is unlikely to keep businesses operating and workers employed if public health

measures to contain the virus’s spread (e.g., self-quarantines and sheltering-in-place) cause demand for

their products and services to decline sharply. The same outcome could happen when a shortage of parts

and supplies makes it impossible for them to stay in business. In this case, tax relief may need to be

coupled with federal loans, loan guarantees, or grants to prevent an increase in business failures in

affected industries. Numerous small businesses may be especially vulnerable to insolvency during the

current coronavirus outbreak, as they have limited or no access to bank loans.

Policy Issues

Granting targeted tax relief to businesses hit hard by the economic effects of the coronavirus raises

several policy issues. One is where to draw the line between eligible and ineligible companies. If a major

hotel chain, for instance, were to qualify for a refundable tax credit, would that credit also be available to

firms providing online room rentals (e.g., Airbnb)? What about companies that supply food, laundry,

security, and cleaning services to the hotel chain as contractors? Should the tax relief be extended to

lawyers and accountants who derive much of their income from work they do for the hotel chain? In

crafting targeted tax relief for industries affected by the virus, Congress may have to deal with the

question of how far downstream in the supply chain tax relief should be available.

Another issue concerns the eligibility criteria for any tax relief. Should the benefit apply only to

companies whose revenue falls by 10%, or 20%, or some other percentage? Or should the benefit be

targeted instead at profits? Should a company have to demonstrate to the Internal Revenue Service that its

revenue or profit declines or operating losses were due to the coronavirus? If so, how would it do so?

Should the tax relief be limited to small companies only? If so, how should a small company be defined?

There is no certainty that whatever cash infusion impacted companies receive from targeted tax benefits

would filter down to employees. Owners could be the biggest beneficiaries. Such an outcome would do

little to maintain or grow aggregate demand for goods and services.

IN11263 · VERSION 1 · NEW

EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the

Library of Congress, charged with providing the United States Congress non-partisan advice on

issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The

reports are not classified, and Members of Congress routinely make individual reports available to

the public.

Prior to our republication, we redacted phone numbers and email addresses of analysts who

produced the reports. We also added this page to the report. We have not intentionally made any

other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in

the United States. Any CRS report may be reproduced and distributed in its entirety without

permission from CRS. However, as a CRS report may include copyrighted images or material from a

third party, you may need to obtain permission of the copyright holder if you wish to copy or

otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public

understanding of information that has been provided by CRS to members of Congress in

connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim

copyright on any CRS report we have republished.