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Tax Policy Observations Of COVID-19 Legislation



Tax Policy Observations Of COVID-19 Legislation

The FFCRA and CARES Act enacted in March 2020 and CAA-21 enacted Dec. 27, 2020 provide a variety of financial relief to individuals and small businesses. The recovery rebates (called “economic impact payments” by the IRS) in the CARES act ($1,200 per adult and $500 for child under age 17) helped over 160 million people. The $600 payments in CAA-21 should help a similar number.

Is that the best way to help? There was also increased and longer payments of unemployment compensation to clearly help those who lost their jobs. There were changes to allow those with sufficient retirements accounts to pull out up to $100,000 without penalty and even to pick it up into income over three years as well as to pay it back.

The changes also included odd ones or odd features. I call them odd because the purpose was to help people in financial need. Yet rebates went to retired individuals who likely continue to have their same income despite the pandemic. While they may have extra costs of obtaining food and household items, perhaps a greater benefit would have been for state and local governments to get funds to help people unable to get to the store safely to get items delivered or to help them make online orders.

The recovery rebates phase-out at specified income levels shown below without any child credit:

The way the phaseout works, is that individuals continue to get them the larger their original credit is. So the more children, the more income someone can have and still get a credit. For example, a married couple with four children under age 17 can still get a very small credit at just under $238,000 of adjusted gross income (AGI).  The full credit would be $4,400 [($1,200 x 2) + ($500 x 4)]. Here is that formula:

($AGI – $150,000) x .05 = $4,400

AGI of $238,000 brings the credit to $0

Is that the right policy? Does anyone with over $150,000 of AGI need assistance? Certainly some might, but most likely do not. Per the U.S. Census Bureau, for 2019, median household income was $65,712.

It will really depend on many factors as to need. For example, some people continue to earn the same amount of income before and during the pandemic. Again, there might be increased costs, but also likely some decreased costs (such as travel, gasoline, etc.).

Some people needed more than what they got while some got money they did not need. And some of these folks found ways to get the money to those in need.

The cost of the CARES Act recovery rebates was $292 billion. Some of this went to people who didn’t need it and some needed more. What is an alternative to better target these needed funds?

A bigger policy issue with CARES and CAA-21 is that limited funds were used for.  Here is an example from both acts.

CARES – The IRC Section 461(l) loss limitation of the Tax Cuts and Jobs Act was delayed three years. The estimated cost was $170 billion. That is 58% of the cost of the recovery rebates. The policy issue is that the roughly 130,000 individuals who got the benefit of the $170 billion are generally very high income individuals who most likely don’t need assistance. How does a bill get enacted that provides $292 billion to over 160 million individuals and 58% of that amount to benefit 130,000 individuals? Or stated another way: how is relief designed to help less than 1% of individuals who don’t need it by giving them 58% of what is given to help 160 million individuals?  Without the section 461(l) change, the 160 million could each have received about $1,060 more!

CAA-21 – Included extending 33 items that expired at 12/31/20. While some are likely worth extending, there was no policy discussion on this and it wasn’t an immediate need. The cost of the CAA-21 recovery rebates was $164 billion. The cost of the extenders was $104 billion or 63% of the cost of the rebates. So, the rebates could have been $650 higher and we could have delayed or ended a special 7 year life for motor sports complexes and 3 year life for racehorses, among many other extended tax rules.

How did the above happen? It is puzzling. The House passed the HEROES Act in May 2020 with  various COVID change including putting back the effective date of section 461(l) on losses. But why didn’t they notice the effect or realize that only a few thousand individuals had losses subject to that TCJA provision?

Possible solutions:

1. Require a distributional analysis of all provisions before a vote.

2. Show the tax benefit (or cost) per person affected.

3. Make the above available not only to lawmakers, but also the public.

What do you think? Annette Nellen

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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One thought on “Tax Policy Observations Of COVID-19 Legislation

  1. Avatar Russ Soule' says:

    Why would you expect the CARES or the CAA-21 be any different than other tax rules in its lack of intelligent distribution? Why do Long-Term Capital Gains Rates apply the same to property held 12 months or 120 months or 360 months? Why does IRS penalize taxpayers so heavily for having foreign trusts and not reporting them as opposed to not reporting actual INCOME subject to tax? Why are MFS filers treated differently than other singles? Or for that matter, Why are MFJ treated differently than two (2) single filers? Because it is politicians who write these rules and laws and they base it on how many votes it will generate for themselves.

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