Presidential election years tend to worsen Washington’s already-spotty ability to tell the difference between good policy and good politics. But you’d think that any politician even vaguely familiar with the names “Smoot” and “Hawley” would know that you should never raise taxes on business during an economic downturn. Enter Lloyd Doggett and Sheldon Whitehouse.
In what I can only assume is an attempt to reclaim some of the populist vote, Democrats Sen. Sheldon Whitehouse (RI) and Rep. Lloyd Doggett (TX) are leading a charge to eliminate a stimulus measure in the tax code relating to Net Operating Loss (NOL) carrybacks.
Simply put, NOL carrybacks allow a company to manage their tax liabilities over an extended period of time. Instead of having to absorb the massive blow to revenue from the downturn all at once, the provision gives firms the option to spread it out over several tax years. As a small business owner myself, I know firsthand the importance of this kind of flexibility.
NOLs were largely curtailed by the Tax Cuts and Jobs Act of 2017, before being reincorporated under the CARES Act relief bill. Whitehouse and Doggett took to the pages of USA Today to criticize the move and wrote a letter to the Trump Administration making their political case. In a particularly inspired bit of melodrama, they even suggested that the money forfeited by the treasury thanks to NOL provisions could have been used to buy masks for every American.
But the reality is that axing NOL carrybacks would amount to a $250 billion tax increase at a time the economy can least afford it.
In March, the Dow Jones average dropped to a low of 18,591, and the U.S. unemployment rate increased to a record high of 14.7% in April. Congress and the Federal Reserve took dramatic steps and invested trillions of dollars to stabilize big and small firms alike. Our recovery and relief spending dwarfs the Allies' $15 billion investment to rebuild Europe post-World War II.
By July 2020, some four months after states first shut down their economies, the stock market stabilized, factories began producing again and some retail activity resumed. But once-flattening curves are climbing again, showing we are not done yet. California and Texas, for example, both rolled back reopening their economy and local and federal leaders are having a vigorous debate whether public schools or colleges and universities will reopen in the fall across the country. More than a million people each week are filing for unemployment benefits for the first time and the unemployment rate remains in double digits.
Raising taxes is the last thing you should do in the middle of an economic recovery. It shouldn’t even be an idea under discussion. Yet here we are.
And in case you are wondering whether Whitehouse and Doggett are defending a deeply held principle of progressive fiscal policy—they aren’t. Democrats have a long history of supporting NOL tax provisions as an economic stimulus. In fact, Joe Biden, Barack Obama, Hillary Clinton, and John Kerry have all supported legislation including the provision. Twenty current Senate Democrats have also supported a bipartisan Net Operating Loss provision when it was included in previous economic stimulus bills.
The provision is also supported by centrist groups like the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Brookings Institute, who recognize that it gives firms much-needed cash that can be used to pay salaries and keep companies operating.
In their op-ed, Whitehouse and Doggett use their best attempt at oversimplified rhetoric to characterize the carrybacks as “an inside hit job” that benefit “real estate speculators and hedge fund managers.” But there is nothing about the provision that favors any kind of business or industry over another.
Congress should be taking an all-of-the-above approach to getting capital back in the hands of employers so they can keep making payroll for their employees. Tax policy stimulus is not a competitor to other forms of relief like direct payments or loan guarantees. It’s a complement.
On the other hand, raising taxes during a downturn is bad policy. And outside Whitehouse’s and Doggett’s bubble, I’m pretty sure it’s bad politics, too.
Mary Beth Gombita is a small business owner in Pennsylvania and a veteran of several D.C. policy-centric organizations.