A tax cut designed to provide businesses with crucial liquidity during the COVID-19 pandemic is under assault by Democrats and the media.
Why is this news? To start with, Democrats in the House and Senate unanimously voted to enact this tax cut in March, which allowed businesses to carryback net operating losses incurred in 2018, 2019, and 2020 for five years.
House Speaker Nancy Pelosi is now proposing to repeal net operating loss carrybacks retroactively in the Democratic “Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act,” a proposal that will raise taxes on struggling businesses by $250 billion.
The shift by Pelosi is particularly difficult to explain because expanding net operating loss carrybacks is a commonly used tax cut designed to help businesses in times of economic downturn. This tax cut has historically had bipartisan support and has even been praised by Pelosi in the past.
In 2009, the Democratic-controlled Congress passed and former President Barack Obama signed into law the “Worker, Homeownership, and Business Assistance Act of 2009” legislation, which allowed businesses to carryback losses incurred by businesses in 2008 and 2009 back five years.
Pelosi specifically highlighted the expansion of net operating loss carrybacks while speaking on the House floor in support of legislation: “The bill also has the net operating loss carryback, which businesses tell us is necessary for them to succeed and to hire new people, and also to mitigate some of the damage that has been done to the economy from past policies.”
She was not alone in supporting this tax cut.
The Obama White House hailed the net operating loss tax cut as a fiscally responsible provision that would allow the government to “recoup the majority of that funding in the coming years as these businesses regain their strength and resume paying taxes.” Several years later, in 2012, Sen. Chuck Schumer proposed five-year net operating loss carrybacks as part of Hurricane Sandy recovery legislation.
Now, Pelosi and House Democrats are planning to repeal net operating loss carrybacks retroactively, a plan that will harm businesses at a time when they are trying to keep the lights on and continue paying their workers.
Although this tax cut has been described by the media as a “stealth bailout” for oil and gas companies and a “tax-break bonanza” that benefited corporations over small businesses and individuals, this criticism is off base.
Net operating loss carrybacks are not a handout to specific industries — they are available to any company and are expected to be industries that have been particularly hit hard by COVID-19, such as restaurants, retailers, and airlines.
They are also not a bailout. Businesses are already able to deduct operating losses under the tax code in the year the losses are incurred and can carryforward losses indefinitely to future years.
As a result, net operating loss carrybacks largely change the timing of taxes paid. In fact, the Joint Committee on Taxation finds that a majority of the revenue loss incurred to the government in the first couple of years that this provision is enacted will be offset because companies will eventually deduct fewer losses throughout the 10-year budget window.
Some have raised concerns that the current net operating loss carryback law allows businesses to receive an excessive windfall as they are able to allocate losses incurred today under the 21% rate against income earned before 2017 when the corporate rate was 35%.
However, this is not an argument against net operating loss carrybacks, but an argument against tax cuts that are perceived to be “too generous.” This also ignores the fact that the pandemic represents a threat to the economy not seen in decades. Experts have predicted unemployment of 20-25% and fear a “flood” of bankruptcies, so businesses clearly need help.
Despite newfound opposition from the Left, the net operating loss tax cut is a commonsense, commonly used provision that helps businesses to keep the lights on and help workers keep their jobs.
As our focus turns towards reopening the country and restarting the economy, we should ignore the Pelosi plan to repeal the bipartisan tax cut, which will harm our economic recovery and businesses across the country.
Grover Norquist (@grovernorquist) is president of Americans for Tax Reform.
