The CARES Act: What's New and What's Next

Nicole Kaeding, vice president of policy promotion and economist with the National Taxpayers Union Foundation, discusses the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

For additional coverage, read these articles in Tax Notes:

• CARES Act Means Crunch Time for IRS and Treasury
• CARES Act Retirement Relief Appears Optional
• Coronavirus Relief Act Fixes NOL Legislative Quirks
• CARES Act Has Negative ‘Knock-On' Effects for International Tax
• Business of Tax: Planners Should Take Care Giving CARES Act Advice
• Trump Signs $2 Trillion Coronavirus Aid Bill

All Tax Notes news coverage and analysis of the coronavirus pandemic is now free and accessible to the public: taxnotes.com/coronavirus-tax-coverage

Transcript

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David Stewart:   0:00
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: don't call it a stimulus. On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, into law. This is a $2 trillion package aimed at combating the economic damage from the coronavirus crisis. Here to discuss the CARES Act and what it means for tax practitioners and taxpayers alike is Nicole Kaeding, vice president of policy promotion and economist with the National Taxpayers Union Foundation. Nicole, welcome to the podcast.

Nicole Kaeding:   0:35
Thanks for having me, David.  

David Stewart:   0:36
Just to start off, you've been very active on Twitter talking about this act, and very vociferous in that it is not stimulus but instead relief. Can you explain the difference between the two?

Nicole Kaeding:   0:47
It is an important difference, and I know that sounds pedantic coming from the economist that these terms should be interchangeable. But they're not, and it's important why. It influences the approach we have to the bill and its structure. So traditionally, when we have economic downturns, we think of stimulus to be just like in 2009, right? And it's based on this idea coming from Keynesian economics that if we get consumers money, consumers will go out and spend it, and that will have an increase in aggregate. We know that will not work right now. If I give individuals money, they don't really have a place to spend it. They can't go to the movies. They can't go to the bowling alley. They can't go to a store or a restaurant, and they cannot book travel. So I cannot approach a federal intervention from that perspective.

Nicole Kaeding:   1:34
Instead, what the CARES Act was all about was about economic relief. It was based on this idea that for the next several weeks, perhaps next several months, we have told businesses to shut their doors. Except for a few favorite industries, like groceries and banks, everyone else is at home. And we need them to do that to control the public health response to the virus. But that means that those businesses are taking a hit to revenue, and every day in the newspapers we're seeing more and more examples of that.  

Nicole Kaeding:   2:04
So what the CARES Act was about was not trying to boost aggregate demand. It was about trying to put a floor underneath people. And to make sure that businesses can stay afloat, and so that they don't have to lay off as many people as they are. And that we can then help affected individuals that are laid off meet their obligations. We want them to be able to pay their rent and their mortgage, and we want them to be able to buy groceries. But we know that they're not going to go out and book a vacation right now. And we know that businesses largely aren't going to be expanding operations. So this bill is about economic relief. We are not trying to grow the economy with this. We're just trying to prevent it from backsliding even further.

David Stewart:   2:42
All right. And before we go deeper into the bill itself, I want to ask a little bit about the process of this bill. As I mentioned, you were very active on Twitter all through this process. Can you tell me how this differed from the passage of other major pieces of legislation like the Tax Cuts and Jobs Act?

Nicole Kaeding:   2:57
The Tax Cuts and Jobs Act was quick. We passed that bill in about two months. Obviously there has been lead up to the federal tax reform going back to 2010 and 2011 in some of those previous versions. But we, in essence, did the legislative process over two months.

Nicole Kaeding:   3:12
Here, with the CARES Act, we did it over two weeks. From the time that we actually saw legislative text from the Senate until the time they voted on it was six days. It moved at lightning speed. And so for everyone who said the TCJA was quick, this was even faster. We saw 10 different versions of legislative text in six days. That is a big effort, and so we should obviously be glad that Congress is active. But we should be really thankful for legislative councils and for staffers and for everyone who burned the midnight oil for that entire week because I know I got little sleep, and I imagine they got even less than I did.

David Stewart:   3:51
Well, can you give us an overview of the key provisions of the act?

Nicole Kaeding:   3:55
As we think about the CARES Act, there are a number of things in the bill. The first major provision that's been discussed is, of course, the loans to small businesses. Again, getting at this idea of relief. Businesses that have been affected by the virus can apply to the Small Business Administration to get a loan to help make payroll for several months. And those loans will be forgiven, if they meet certain criteria.  

Nicole Kaeding:   4:17
There are also expansions to unemployment insurance. Those unemployment insurance payments have been boosted by $600 a week for the next several months. There were changes to other loan provisions. There were some expanding funding for health care providers, et cetera.

Nicole Kaeding:   4:32
But in the tax space, there were a couple of very key provisions. For individuals, the most important is the so-called recovery rebates. This is the $1,200 per person and the $500 per child payments that will be coming out over the next several weeks. For businesses, there is the delay of employer side payroll tax liabilities for a fairly significant amount of time -- up to the end of 2022. This isn't a payroll tax holiday. The economics of it are slightly different, but it is a delay of those payments, giving this some cash at this moment. And then there are also some other changes related to net operating losses and interest deductions and some of those other corporate income tax base provisions.  

Nicole Kaeding:   5:13
But the bill was pretty wide ranging. It was about $2.2 trillion in relief. For context, the federal government was going to spend about $4 trillion. So it's a fairly significant increase in federal spending in one year. Thankfully, bond markets have given us a bit of leeway on that. Interest rates are fairly low right now for the federal government, meaning that action made even more sense. But it is a large increase in spending over the next several months.

David Stewart:   5:40
Now I know there was some concern about how to get the money into the hands of the people that are entitled to it. How is that being addressed?

Nicole Kaeding:   5:48
On the recovery rebate, Treasury's going to use a few different avenues to get individuals money. The first is they're actually going to use direct deposit information they already have. If we look at filing season data from last year, there were approximately 156 million tax returns filed in the United States. Of that 156 million, 93 million individuals and households received direct deposit tax refunds, about 60 percent of total returns. So the IRS has direct deposit information for those 93 million households, and they will use that. They will also use some of the direct deposit information they have for Social Security beneficiaries. And Treasury is suggesting for those individuals they should start to receive their deposits in only a few weeks. This should be fairly quick. For everyone else, they will need to wait for a check to be printed and mailed to them. Traditionally that's taken about six to eight weeks for those to be processed and mailed.

Nicole Kaeding:   6:41
But we are still waiting for Treasury guidance on a few key sorts of situations. The rebates are going to be advanced to taxpayers based on their 2018 or their 2019 tax information, whichever the IRS has access to. But they're based on the 2020 tax year. And so it's very easy to imagine a scenario in which someone did not qualify based on 2018 or 2019 because their income was too high. But suddenly in 2020, they are eligible because they have been laid off, their hours have been reduced, or some sort of change to their income. Will Treasury set up a mechanism to allow those individuals to get access to their credits now or will they need to wait until next filing season? And then other situations too could arise, such as someone who perhaps had a child in 2020. Can they alert Treasury of that now? Do they need to wait until tax filing? And some of those more detailed scenarios.  

Nicole Kaeding:   7:37
But the people that I'm thinking about a lot right now are low-income individuals who do not receive Social Security benefits. Not everyone in the United States has to file a tax return. If you're very low income, we actually don't require you to do that. And so how do we help those people? How do we find those people? How do we get them that money that they so desperately need right now?

David Stewart:   8:00
All right, so let's turn to the support from the bill of small business and of multinationals. How much support are those two groups getting?

Nicole Kaeding:   8:07
They're getting a lot of support, and they're getting it in different ways. So for small businesses, of course, the loans will be one way. There's about $360 billion in loans set aside for small businesses, though I don't think that's likely enough. If this is to go on for the next several months, we likely would need to expand that pool of resources. We've also provided them some additional flexibility in those delays of employer-side payroll tax liabilities. But if you take the loans, you don't qualify for the payroll tax delays. I actually think the payroll tax delays are going to be very valuable for the much larger corporations. Those that cannot access the loan portfolio.  

Nicole Kaeding:   8:46
We also saw some changes to net operating losses, which I think is a key change to this bill, both for C corporations and for the passthrough community. Congress has lifted the cap created by the TCJA on net operating losses. This is really important for ensuring that companies do not pay taxes on income they didn't have this year. But more importantly, we're going to allow them to carry back previous losses for up to five years. And so that's going to allow them to go back and amend previous returns and get this money fairly quickly.  

Nicole Kaeding:   9:18
And then also for particularly the larger company, we have loosened the cap on the interest deduction that the TCJA created. Prior to the CARES Act, the TCJA said that in 2020 your interest deduction was capped at 30 percent of your earnings before interest and taxes and depreciation and amortization, known as EBITDA. We've loosened that from 30 percent to 50 percent. And the idea of being here that particular as large businesses start borrowing a lot this year to help meet payroll and to continue their operations while they take this hit to revenue,  that deduction was becoming even tighter in a way that policymakers really didn't intend with the TCJA. And it also interacted with some of those NOL provisions. So they did make that looser, which is really going to help the larger companies with access to borrowing capacity.

David Stewart:   10:09
Now I understand that the CARES Act made a few technical fixes to the Tax Cuts and Jobs Act. Were these changes necessary and was this the appropriate vehicle for it?

Nicole Kaeding:   10:17
Shortly after the TCJA was passed, the Joint Committee on Taxation and Ways and Means released about 80 different technical corrections that were needed to the TCJA. But two of them really jumped to the top of the list for most individuals. The first was the qualified improvement property technical correction. And the second was a net operating loss technical correction.  

Nicole Kaeding:   10:39
So the quick technical correction had to do with a legitimate drafting error in the bill text. Instead of improvement property like sinks and shelving being being allowed to be expensed like everything else in the bill, it instead moved them to up to 39-year asset lives, being a pretty dramatic change even for where they were prior to the TCJA. This benefited restaurants and retail in particular, and it's been probably the most debated technical correction since the TCJA passed. And in fact, had wide bipartisan support. Several hundred members of Congress had signed on to the bill to change QIP, but it had not been able to get over the finish line. It did here.  

Nicole Kaeding:   11:20
The NOL provision also had a technical correction. It had to do with the difference between beginning and end. There was a drafting error in the years in which the NOL cap applied. So that got changed. So that was good.  

Nicole Kaeding:   11:35
Those to me were the two most important technical corrections that were out there that needed to be fixed. The downside is that the other seventy-odd technical corrections are likely to have a bit more difficulty getting over the finish line. They were in a lot of ways riding the coattails of those two provisions, and things like downward attribution, which is really important to multinational companies, is not the most politically palatable technical correction. And so it's going to be a bit more difficult to get those completed without QIP and NOL to pull them along.

David Stewart:   12:07
Now, as you mentioned earlier, the price tag of this bill is about 50 percent of what the federal government had been planning on spending this year. Does that raise any concerns about how much additional spending or reduced taxes that this bill creates? 

Nicole Kaeding:   12:56
In the short run, it does not. In the long run, absolutely. We could easily see a $3 or $4 trillion deficit in the next year. That is significant and unprecedented. And even if I could look at that as a percent of GDP, that is an astronomical figure for U.S. budget deficit. As I mentioned earlier, the bond markets are giving us a little flexibility here. Short-term interest rates for the federal government are functionally negative. We look at inflation, that gives us a bit of flexibility. We also know that tax revenues will be down even without the changes in the CARES Act. That we will just naturally see a decrease in income of corporate income tax revenues. So at this moment, it's OK. We have a lot of flexibility. We could easily finance this. This is why you use fiscal policy. This is one of those times where it makes perfect sense to do that.

Nicole Kaeding:   13:13
The concern is going to be the long run, and that making sure that these programs and these changes do not become part of permanent law. That's going to be a big concern. There would be a lot of pressure, for instance, on those unemployment insurance changes that expire at the end of July. Rolling those back, it took after the 2009 stimulus until 2011 to roll back unemployment insurance expansion. So there's been a lot of debates, even starting this summer here in D.C., on how do you roll back a lot of these provisions that were truly envisioned to be temporary? Because if you don't, the federal budget, which was already fairly expansive and fairly large as some percent of the economy and national debt being almost 80 percent of the national economy. We were getting some fairly large numbers before, and those are going to be even larger now.

David Stewart:   14:01
Looking at the CARES Act in its entirety, is there anything in there that you would have liked to see changed?

Nicole Kaeding:   14:05
I would say that there are some things that I wish would have been in there that did not make it through, and so hopefully they'll make it through at stage four. And a couple of things come to mind. The first is delay of further tax payments. So Treasury has given taxpayers a bit of relief, and they are delaying all the April 15 deadlines, both for the 2019 tax year, but also for the 2020 first-quarter estimated payments. Unfortunately, they have not done Quarter 2, and so Quarter 2 is currently still due on June 15 while Quarter 1 is due on July 15. One, I think we need to delay it. I don't think by mid-June we're going to be at a place to pay those. I also think it's going to be confusing to many business owners that they're not going to understand that distinction between Quarter 1 being due after Quarter 2. And so I'd like to see further delay. Thankfully, Treasury does have this authority, and we don't even need to wait for Congress to act. So I'd like to see more delays of those sorts of payments.  

Nicole Kaeding:   15:00
I would also like to see -- and one of the things I've been spending a lot of time thinking about the last several days -- is with the expansion of telework, and in the last few weeks, how the federal government could play a role as it relates to state and local tax. And many states have reciprocity agreements. For instance, I work in Virginia and I live in the District of Columbia and those two jurisdictions have a reciprocity agreement, so I only pay Virginia income taxes. But many states do not. I'm thinking a lot about New York, New Jersey, and Connecticut and the fact that many people who work in Manhattan don't live in New York, and so there's going to be some complications in those areas. Perhaps Congress can help provide some guidance on the best way to go forward with this.  

Nicole Kaeding:   15:42
And then the other thing I'm thinking about a lot too is also with state and local issue, but it has to do with property taxes. So most business property taxes are actually based on some calculation involving income or gross receipts or some sort of measure of the business. And those property tax payments are going to go out in the next month or so, and they're going to reflect 2019.  And so businesses are going to see these property tax payments, which are generally paid in arrears. But they're not going to be the most reflective of the current environment. And to the extent that businesses start to appeal them, that puts a strain on state and local budgets.  

Nicole Kaeding:   16:20
And to what extent can the federal government play a role here in helping state and local budgets in the short run to give businesses, again, more relief. At this point, I still think more relief is needed, and it's really about trying to get creative and think what are the policy levers that we can pull on at this moment to help those affected businesses and individuals.

David Stewart:   16:39
Well, speaking about the potential policy measures going forward, we've heard a few things from the White House recently. We heard mention of expanding the meals and entertainment deduction. Would that help?

Nicole Kaeding:   16:49
The question to me -- the question that I would ask the president -- is what exactly are you trying to accomplish with that change? Perhaps he's trying to boost demand for restaurants. I think it's a great sentiment. I think restaurants are one of the most affected industries at the moment. I don't think this is how you do that. Again, the biggest constraint is that they have to keep their doors closed, and that they can only do carry-out or delivery. And so that becomes a bit difficult.  

Nicole Kaeding:   17:16
It's also likely just bad policy. So traditionally, we think about the business income tax and the individual income tax as being symmetric. So if we allow a business to deduct something, it's because we tax it to the employee or vice versa. If we don't allow the business to deduct it, then we don't tax it on the individual side. And part of the reason we do not allow businesses to deduct many of these expenses is because it's actually really hard to tax them on the individual side. If my employer pays for my meal, it's hard to get a sense of what is the value that I got from the free meal that was provided to me. These things are a little complicated, and so the solution is, well, just don't deduct it on the business side. So if we do allow for the deduction, and we don't change the individual income tax, which doesn't sound like the president is suggesting, then we're opening up another hole in the income tax base. Where businesses will get the deduction for the expense, but it's not taxed on the individual side. And then as we've seen in other markets such as health care, it can then create this incentive to try to stuff compensation into one specific sort of bucket instead of in a broader wage income bucket.

David Stewart:   18:22
Now, the other thing we heard, and we're recording this on March 31, the president tweeted out this morning that he wants to take the zero interest rates -- this is lending that the U.S. government is getting at basically zero  -- and funnel that into infrastructure. Is that something that would help?

Nicole Kaeding:   18:36
I don't think infrastructure is also what we need at this moment. The challenge is for phase four, we first are going to need to  decide is this still economic relief? Where are we in this public health fight? Or is this traditional stimulus? And so partly where we are in the economic cycle will impact when we begin it. The challenge to infrastructure in either sort of scenario is that infrastructure takes awhile. We saw this coming out of the 2009 stimulus. Infrastructure takes three to seven years, and so it's really not the best way to provide timely economic relief or timely economic stimulus. Obviously, Congress has been trying to pass an infrastructure bill for years. The joke up here in D. C. is that its infrastructure week again when it is always infrastructure week. But it doesn't strike me is the best use of resources because it's really not going to match either one of those things we need to do. Be it relief or recovery.

David Stewart:   19:30
Now after the acute situation of the coronavirus is over, what would you like to see in order to kick start or stimulate the economy?

Nicole Kaeding:   19:37
So I think again it's going to depend when phase four hits. Anyone that follows me on Twitter knows of my love of the expensing of capital investment. I would love to see further changes here. The TCJA accelerated expensing for some assets. That, however, is not permanent. We could make changes there to permanency that would have a boost as we come into recovery. We could look at expensing of structures, which we didn't do in the TCJA. So expanding it to residential or commercial property, which could have asset lives reaching 39 years. If we're concerned about budgets, we could use something called mutual cost recovery to try to mitigate the budgetary impact of those changes. That would be something that's front of mind as a way to help boost the economy once we get back to those sorts of conversations. 

Nicole Kaeding:   20:22
I think the way that we really just have to remember this is if we think of the economy as a car. We drove the car into a brick wall at 80 miles an hour. It's obvious the car was going to fall apart. We knew the car would fall apart. You can't design a car that wouldn't fall apart in that scenario. But now we have to go in reverse and rebuild the car at the same time, and hope that in six weeks or two months we can then go around this wall and get started again. And we'll probably need a bit more of support to get that push to get started. But it's going to be difficult to do. But it sounds like policymakers here in D.C. are up for the challenge.

David Stewart:   20:57
All right, and my last question is so thinking forward to a day when the car is fixed. But now we look at the credit card bill. What would you like to see as the means of getting that bill paid in the future?

Nicole Kaeding:   21:08
Yes, so I think we're going to need to look significantly at spending. Obviously, this is a lot of new spending, so we need to ensure that that doesn't become permanent. I think if you looked at the federal budget even before all this happened, and you get to the mid to late-2020s, and the entitlement programs are suffocating everything else. We are going to need to confront entitlement spending at some point. We can't just let it continue on as it is. And so there's going to need to be a pretty strong conversation here. I think we've now got even more tax cliffs. So before this all happened, we have the 2025 TCJA cliffs. We've got the 2021 corporate TCJA cliffs. We've now got even more tax cliffs that we have added. And so there's going to be both sides and both parties to come together and really confront this challenge in a way that we've never been able to do. And I hope that they could do it. But they're going to need to find some real long-lasting solutions to this problem.

David Stewart:   22:01
Well, Nicole, it's been great talking to you. Thank you for being here, and I hope you stay healthy.

Nicole Kaeding:   22:05
Thank you. You too.

David Stewart:   22:06
And now coming attractions. Each week we preview commentary that'll be appearing in the Tax Notes magazines. Joining me now from her home is Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?

Faye McCray:   22:17
Thank you, Dave. In Tax Notes Federal, Guinevere Moore and Elizabeth Yablonicky argue that notice 2017-10 is invalid when applied to transactions before 2016. Reuven Avi-Yonah writes that the overreliance on textualism will have disastrous effects on tax law administration. In Tax Notes State, Robert Plattner summarizes the crucial role business investment tax credits have played in the economic war among the states. William Thistle II and Bruce Ely survey key developments of passthrough entity taxation. In Tax Notes International, Nathan Boidman and Michael Kandev examine the cashbox notion and its role in Canada. Members of Flick Gocke Schaumburg examine the implementation of Germany's license barrier rule. And on the Opinions page, Robert Goulder asks whether Congress's pandemic response package will destroy whatever was left of fiscal discipline.

David Stewart:   23:12
You can read all that and a lot more in the April 6 editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.