WILFORD: Latest Dem COVID Legislation Contains Significant Tax Changes

(Photo by Joe Raedle/Getty Images)

Andrew Wilford National Taxpayers' Union Foundation
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For months now, the House has repeatedly demanded hundreds of billions of dollars in state aid and massive increases in appropriations for existing programs, contributing to congressional gridlock on further aid in response to the COVID-19 pandemic. The latest offer from House Democrats, however, has made some news on account of the concessions to smart tax policy that it includes.

A major sticking point for negotiations up to this point has been the treatment of net operating losses (NOLs). The Tax Cuts and Jobs Act (TCJA), the 2017 tax reform law, had placed some limitations on how pass-through businesses and C corporations could claim NOLs, primarily so that the TCJA could be passed within the rules of budget reconciliation.

But these rules were some of the few negative features of the TCJA. Net operating loss deductions are often derided by progressives because they can significantly reduce a business’s tax liability, but that comes mostly from the nature of corporate taxes. Corporate income is far less steady than most individuals’ income — a year with significant losses due to a weak economy or investment can be immediately followed by a profitable year — and the tax year calendar doesn’t always match neatly with the profits and losses businesses experience. NOL provisions are an important element of the tax code because they help to smooth out tax burdens and ensure that businesses don’t pay tax on more than their actual actual income.

Take the simplified example of a business that spends $20,000 on inputs in December and sells a total of $15,000 of product in January, incurring a $5,000 loss. A tax code without an NOL provision would tax the $15,000 of January sales as pure profit, ignoring the normally-deductible $20,000 expenditure on inputs the previous month. This would mean the business would be forced to pay tax despite a net loss.

Taking this into account, the Coronavirus Aid, Relief, and Economic Security (CARES) Act reversed most of the TCJA’s changes to NOLs to minimize the negative impact the tax code would impose on business liquidity in the face of a pandemic-induced recession. This would allow our aforementioned company to account for the actual loss they suffered, reducing their tax bill to zero.

Democrats immediately cried foul, deriding it as a giveaway to the rich. This is in part the story behind clickbait articles about low tax liabilities for big corporations like Amazon.

Now, however, House Democrats are saying they will “reserve discussion on NOL provisions.” While reading Congressional tea leaves is a dangerous game, one hopes this is a suitably pouty way of waving the white flag on the issue … for now. At the very least, it’s encouraging to see Democrats dropping their resistance to provisions that will be important for all the businesses that have faced losses due to pandemic-induced lockdowns — or at least being willing to stop holding the negotiations hostage over that issue.

Another encouraging sign in Democrats’ latest offer is their willingness to accede to proposals to provide tax certainty and relief to Americans working remotely due to the pandemic. Any American who used to commute to a different state but is now working remotely at home faces the risk of higher taxes and potentially even double taxation. This is particularly concerning for residents of zero income tax states such as New Hampshire, which recently sued Massachusetts for trying to tax its residents who used to work in Massachusetts but now work remotely.

Senate Republicans included a fix to this problem in their initial Phase Four proposal, laying out clear protections against tax threats for remote work. The new Democrat counteroffer agrees to such a fix, though it limits it to COVID-related remote work only. While there is quite a bit more work to be done to fully protect taxpayers, priority one has to be providing relief to American workers now, so this is a welcome development.

Senate Minority Leader Chuck Schumer remains a major hurdle here, as his home state of New York has been one of the most aggressive in claiming the tax income of remote-working Americans. One hopes that the senator will not sacrifice the well-being of millions of American telecommuters in order to provide cover for his home state’s tax grab.

Though there remain sticking points to be worked out, it is encouraging to see Democrats bending on two issues where their positions had been most indefensible. Hopefully these two compromises on NOLs and remote work remain in this form (or better) should they advance to the President’s desk.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.