The $78 billion bipartisan proposal that would expand the child tax credit and renew key business investment deductions is meant to be fully paid for — here is how.
The House Ways and Means Committee advanced the bipartisan bill on Friday in an overwhelming 40-3 vote, moving it one step closer to becoming law. The legislation enhances the child tax credit while restoring some major business tax provisions and would pay for it through changes to the pandemic-era employee retention tax credit, or ERC.
The $78 billion bill, which came after weeks of negotiations, would be offset by stronger enforcement and penalties tied to fraudulent ERC claims and would bring an early end to the processing of claims. The Joint Committee on Taxation, Congress’s in-house tax scorekeeper, estimates that the ERC changes would result in just over $77 billion in savings, making the overall bill deficit-neutral.
What is the employee retention tax credit?
The ERC is a payroll tax credit that was designed to make life easier for businesses during the pandemic and keep the labor market afloat by incentivizing employers to hold on to their workers instead of laying them off.
“The idea in theory was, ‘OK, we know businesses aren’t getting any revenues to pay, so what if we have some sort of tax credit to help employers keep their employees — it will be good for employers, it will be good for employees,’” Joshua McCabe, the director of social policy at the Niskanen Center, told the Washington Examiner.
McCabe said that was all good “in theory,” but “trying to figure out who would be eligible for the credit and implementing it turned out to be a lot harder than folks thought,” noting that the parameters of the ERC have been amended several times.
Garrett Watson, a senior policy analyst at the Tax Foundation, pointed out to the Washington Examiner that the ERC evolved over time and is now, more than three years out, still open for claims despite the pandemic being largely in the rearview mirror.
Originally implemented as part of the CARES Act of 2020, it was initially worth 50% of qualified employee wages but had a $10,000 cap per employee, granting employers a maximum credit of $5,000 for wages paid from March 2020 through the end of December 2021.
It was later expanded to increase the percentage of qualified wages to 70% for 2021. Additionally, the per-employee cap was raised from $10,000 per year to $10,000 per quarter. When the ERC was first introduced, employers had to choose between taking the ERC or the Paycheck Protection Plan, which offered businesses forgivable loans for keeping staff on payroll.
Watson said that many employers chose the PPP over the ERC, which motivated policymakers to expand the ERC and allow both the PPP and the ERC to be claimed.
But in late 2022 and in 2023, a wave of fraud swept the IRS as firms and scammers, which can take a 20% cut of payments, began popping up and caused the IRS to pause processing of claims last September.
“We started to see a lot of folks, those promotors, coming out and basically aggressively campaigning and advertising for businesses to basically go back and look at their 2020, 2021 books and find any sort of rationale for why they may be eligible to claim for qualified wages and other expenses for the credit,” Watson said.
What would the legislation change?
The legislation, which was negotiated between Ways and Means Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR), would move the filing deadline for backdated ERTC claims to Jan. 31. Under current law, taxpayers can claim pandemic-related ERC until April 15, 2025.
Watson said that while it makes sense that legally, people could still go back years and claim the credit, from a policy perspective, it is reasonable that lawmakers would now want to sunset it because of how far removed the United States is from the first year of the pandemic and the employment disruptions that it brought.
“The rationale — if you haven’t claimed it by now, it’s much more likely that you weren’t eligible for it to begin with,” Watson said, adding that he thinks the credit has already fulfilled its central purpose.
The legislation would also go after fraud in the system and use increased penalties to help pay for the child tax credit and business tax bill. It would levy much heavier fines on promotors involved in aiding and abetting in the understatement of the tax liability of business owners.
“Originally designed to help small businesses impacted by COVID lockdowns, the pandemic-era program has ballooned in cost and suffered from rampant fraud,” a news release from Republicans on the Ways and Means Committee said.
How accurate is the estimate?
Watson said that it is reasonable to presume that the Joint Committee on Taxation’s scoring is accurate, although he pointed out there is still much uncertainty about how much the IRS could claim from employers who wrongly took the credit and how aggressively the IRS will use the judicial system to assure the penalties are assessed.
If the JCT overestimated the amount, it could mean that the child tax credit expansion and renewal of the business tax provisions might end up not being fully offset, although it is impossible to predict exact numbers given the nature of projections.
McCabe noted that the Committee for a Responsible Federal Budget also pegged its revenue estimate for the ERC changes at $79 billion.
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The White House has thrown its support behind the proposal, with a spokesman releasing a statement indicating President Joe Biden’s backing.
“We are also pleased that the proposed tax package is fully paid for with other revenue measures, consistent with the president’s commitment to fiscal responsibility,” spokesman Michael Kikukawa said. “While the president will continue to fight to restore the full expanded child tax credit that helped cut child poverty in half, the bipartisan tax bill is a welcome step forward, and Congress should pass it.”
