Tax Policy – What Should Coronavirus Response Legislation Look Like?

Right now, the public health emergency and financial crisis created by shelter-in-place, social distancing, and quarantine orders must be met with fast legislative response to provide temporary economic relief. Senate Republicans proposed the CARES Act last week, while House Democrats released their own proposal yesterday. The differences between the proposals are huge, raising the issue of what belongs in an emergency response bill from a tax policy perspective.

As a result of  social distancing and sheltering-in-place orders to mitigate the public health crisis, many businesses will experience a sharp reduction in their cash flow that impairs their ability to pay taxes, rent, and payroll, thus affecting workers and households too. The resulting liquidity crunch, where businesses and households are short on cash needed to meet their continuing obligations, as well as the resulting economic downturn due to the compounding effects of the liquidity crunch, can be mitigated (at least in part) by appropriate government action. Here are three guiding principles for lawmakers crafting this much-needed temporary economic relief.

1. A temporary economic crisis should be met with temporary economic relief

Fiscal policy should be effectively targeted in the short run to provide relief to households and businesses. Proposals to increase tax credits, benefits, or change other policies beyond the immediate term are beyond the scope of what is appropriate for temporary economic relief.

Businesses and individuals need financial support to get through this liquidity crunch; provisions for relief beyond the coronavirus crisis do not belong in an emergency response bill, and any changes used to combat the crisis should not lead to long-term distortions or lingering difficulties for individuals or businesses. 

2. Temporary economic relief should be targeted toward the crisis at hand

Each dollar that lawmakers include in emergency response legislation should be targeted at the emergency. Using temporary economic crisis legislation as a vehicle to pass unrelated policies is not transparent and is not an effective way to target relief to those who need it due to the coronavirus crisis.

Each policy that lawmakers pursue will come with trade-offs and costs; when these policies target relief where it is most needed, the benefit of relief should outweigh the costs imposed. Policy ideas unrelated to relieving the crisis at hand, regardless of their merit, ought to be revisited and debated once the crisis abates.

3. Relief should be consistent with good long-term policy

Provisions to target temporary relief toward the crisis at hand should conform to principles of sound policy. For example, the legislative process and resulting policy proposals should be transparent and easy for the public to understand and comply with.

Additionally, responding to an economic crisis with policies that distort markets today will impede the recovery in the long term. This is complemented by the previous principles.

For example, policies that undermine long-run incentives to work should be avoided. However, there may be good public health reasons to dissuade non-essential work in the short term, and policies that provide short-term relief for individuals and businesses that cannot participate in economic activity due to the public health crisis are appropriate. Or, as we explained in a previous blog post,  direct federal lending or investment in hard-hit industries may be needed as a last resort, but that should be done only on a temporary basis and not become a permanent program. 

Policymakers have a critical opportunity to help ease the strain for illiquid businesses and households and prevent the economic situation from worsening further. As they debate how to respond to the coronavirus crisis, they should focus the legislative response to the emergency at hand, using principled policy solutions to provide relief to those affected. Attempts to use the crisis to make other, unrelated policy changes should be avoided.

Source: Tax Policy – What Should Coronavirus Response Legislation Look Like?