Although the ink is now dry on last week’s broad economic relief agreement, the so-called Coronavirus Economic Relief and Security (CARES) Act, it’s not too late to critique the plan and evaluate who benefits and whether the plan lives up to its promises.
The CARES Act includes rebates to individuals and families, but it also reserves an astonishing amount of tax breaks for wealthy individuals and large businesses. One of these breaks, as noted by the Wall Street Journal’s Jesse Drucker last week, would allow married taxpayers with incomes over $500,000 to use losses to help zero out their personal income taxes. This could benefit all types of business owners, from your local florist to a real estate investor or hedge fund manager—as long as their incomes from non-business sources put them in the top 1 percent stratosphere.
This change is the second most expensive tax provision (after the individual tax rebate) in the CARES Act, according to a March 26 analysis from the Joint Committee on Taxation (JCT). It only benefits owners of pass-through businesses (businesses that do not pay the corporate income tax). This provision reverses one of the few meaningful revenue raisers in the 2017 so-called Tax Cuts and Jobs Act (TCJA), which had restricted the use of losses from pass-through businesses to offset more than $500,000 of non-business personal income for married couples, or $250,000 for unmarried taxpayers.
It’s worth dwelling on this point: even after the 2017 law’s revenue-raiser, a married couple with losses from pass-through businesses could use those losses to offset up to $500,000 of personal income from other sources, such as wages, capital gains or dividends. It’s only when non-business income exceeded $500,001 that the post-2017 limit applied, and even then any losses exceeding $500,000 could be carried forward to the next tax year.
In a tax code littered with high-end giveaways, TCJA’s pass-through loss limit was a rare example of a rule requiring tax payments by the very best-off Americans. But in crafting legislation to address the current health and economic crises, lawmakers decided repealing that revenue-raiser was the second most important change they could make to the tax code.
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JCT estimates that the CARES Act’s provision repealing this part of TCJA will cost $169 billion over a decade, but most of that cost will be incurred this year and next year. That’s because the provision suspends the TCJA pass-through loss limit for 2020 and retroactively for 2018 and 2019, meaning business owners will amend 2018 returns and 2019 returns that are already filed and will receive refunds from the IRS this year and next year.
The entire federal estate tax only raised $16 billion in 2019, which means this change can be thought of as equivalent to a decade-long estate tax repeal. And, logically, we would expect all or nearly all the benefit to go to the richest 1 percent, just as we would with repeal of the estate tax.
The cost of this provision could eventually be much greater than $169 billion over 10 years. Now that the CARES Act has suspended TCJA’s pass-through loss limit, lobbyists and some lawmakers will almost immediately claim that businesses would be harmed if it is ever allowed to go back into effect at all, pushing to extend its repeal or even make it permanent.
At a time when record numbers of Americans are facing unemployment, state and local governments are facing a perfect storm of growing public investment needs and vanishing tax revenues, and small business owners are struggling to avoid even more layoffs, lavishing tax breaks on the top 1 percent in this way shouldn’t be in anyone’s top 20 list of needed tax changes.
The 2017 tax cut contained few meaningful revenue raisers and even fewer progressive changes. Congress’ action last week takes away a provision that was both of these things and turns the 2017 law into even more of a dud than it was as originally enacted.