Many on the left are criticizing tax relief enacted through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. A recent New York Times article claims that corporations and “the rich” are prioritized over small businesses and individuals.
This criticism is wrong.
At issue is a provision allowing businesses to carry back losses incurred in 2018, 2019, and 2020 back five years, and a provision that expands the ability of businesses to deduct net interest expenses from 30 percent of EBITDA (earnings before interest, tax, depreciation, and amortization) to 50 percent of EBITDA for 2019 and 2020.
These tax provisions are designed to help businesses keep their doors open so that they can continue paying workers and continue meeting routine business expenses. They are relatively minor in proportion to the overall legislation, just 6 to 7 percent of the $2.2 trillion CARES Act or $2.7 trillion after accountingfor additional $500 billion legislation enacted last week.
They are also non-controversial — similar tax cuts have been supported and enacted into law by Nancy Pelosi, Chuck Schumer and President Obama.
Employers of all sizes have been harmed by the economic damage created by the Coronavirus. The pandemic has forced Americans into self-isolation, causing a dramatic halt in commerce.
CARES Act Business Tax Cuts Are Non-Controversial
The New York Times article criticizes several tax provisions of the CARES Act, such as the expansion of NOLs and expansion of the ability of businesses to deduct interest payments.
The article misrepresents both tax cuts while failing to mention that there is precedent for using business tax cuts to help businesses during an economic downturn.
For instance, the article claims that the relaxed interest deductibility provision enacted in the CARES act benefits big businesses as “only companies with at least $25 million in annual receipts can qualify for that break.” What the article fails to mention is that businesses below $25 million in annual receipts have no limitation on their ability to deduct interest payments.
In addition, the New York Times ignores the fact that the Obama administration included a similar expansion of net operating losses in the 2009 stimulus package.
The legislation, the “Worker, Homeownership, and Business Assistance Act,” described the NoL expansion as “a fiscally responsible economic kick-start,” in an Obama White House press release. As the Obama statement noted:
“The Economic Recovery Act included a provision that allowed small businesses to count their losses this year against the taxes they paid in previous years. Today, the President extended that benefit for an additional year and expanded it to medium and large businesses as well. Business losses incurred in 2008 or 2009 can now be used to recoup taxes paid in the prior five years. This provision is a fiscally responsible economic kick-start, putting $33 billion of tax cuts in the hands of businesses this year when they need it most, while enabling Treasury to recoup the majority of that funding in the coming years as these businesses regain their strength and resume paying taxes.”
The New York Times article also misrepresents the full business expensing provision enacted by the Tax Cuts and Jobs Act by implying that the provision is a loophole that somehow allows businesses to report phantom losses. As the article notes:
“For example, the 2017 law permitted companies to fully write off certain types of investments in the first year, instead of stretching those deductions over several years. That, in turn, meant companies could report profits to their shareholders but losses on their tax returns.”
However, what the provision does is allow businesses to deduct the cost of equipment and investments in the year that they are purchased. This provision encourages businesses to make new investments, which provides a value add leading to long-term economic growth, higher wages, and more jobs.
This provision also has bipartisan support – the Obama White House advocated for expensing, noting that the provision would help businesses and workers:
“If a business bought an additional $1 million worth of equipment next year, they would be able to deduct the full $1 million up front, potentially accelerating hundreds of thousands of dollars in tax cuts. That’s real money that businesses… could use to expand or hire new workers right now, and provides a strong incentive to increase investment now, creating even more jobs.”
Business Tax Relief Is A Small Portion of the COVID-19 Response
It is also important to note that the business tax relief enacted by the CARES Act are just one part of the response to COVID-19. The provisions criticized by the New York Times total approximately $170 billion, which is roughly 6 to 7 percent of total relief provided to individuals and businesses.
One of the goals of the CARES act was to mitigate the economic damage caused by the pandemic through a combination of tax cuts, grants, and subsides provided to workers, individuals, businesses, and state and local governments.
The business tax cuts are one part of this goal.
In all, the legislation contained approximately $2.2 trillion in aid through spending and tax reduction, while legislation enacted last week added an additional $500 billion in small business and hospital assistance.
These bills have allocated significant funding to other priorities — over $250 billion has been allocated to increased unemployment benefits, $350 billion in loans and grants for the Small Business Administration (which has since been increased by an additional $300 billion), $150 billion for state and local governments, $100 billion in hospitals (which has since been increased by an additional $75 billion), and $450 billion for the federal reserve to provide emergency lending.