It goes without saying that 2020 was an awful year. It brought the worst pandemic in a century, the nastiest presidential election campaign in modern US history, and an extraordinary example of failed policymaking in the face of an historic public health and economic crisis.
Nonetheless, it is time for Tax Vox to nominate the 10 worst tax policy ideas of 2020. The first three come from the states, courtesy of my Tax Policy Center colleague Richard Auxier. The rest are all about the 2020 presidential campaign and pandemic relief.
10. Illinois’s bungled progressive income tax initiative. A more graduated income tax would have helped address the state’s long-standing fiscal problems. But instead of putting something simple on the November ballot, the legislature sent voters a needlessly complex plan and started an unpopular debate about taxing retirement income. It was no surprise that voters rejected the plan. Now, the governor says he needs to cut spending by $700 million this year.
9. Proposals to kill state income taxes from Mississippi, West Virginia, and Arkansas. Republican state lawmakers often look for ways to swap the income tax, which they hate, for higher sales taxes. But why did they try to do it in the midst of a pandemic, when sales tax revenues fell along with consumer spending? None of these proposals will become law, but they are a case study in fiscal denial.
8. Missing out on a tax windfall. You might think that cash-strapped states would look for tax revenue anywhere they can get it. Yet Florida and Missouri still have not organized themselves to collect taxes from online retailers, even though it’s been more than two years since the Supreme Court’s Wayfair decision allowed states to require online sellers to collect and remit those levies. In case Florida and Missouri haven’t noticed, online sales are booming.
7. Delaying required distributions from retirement plans. Congress decided that it didn’t want to force retirees to take their required 2020 minimum distributions (RMDs) in the face of a falling stock market, so the CARES Act allowed them to put off the mandatory withdrawals until next year . In the best case, the delay was little more than a give-away to the wealthiest retirees. But it did nothing for the vast majority of seniors, who take distributions because they live on them, not because the IRS requires it. Oh, and the stock market is up by more than 60 percent since the CARES Act passed in late March.
6. Loss carry backs. A third really bad idea in the CARES Act. This one allowed firms to use losses to offset profits, and thus reduce taxes, from prior years. If Congress had done this only for pandemic-related losses in 2020, it might have been defensible. But it allowed businesses to use losses from as far back as 2018 to offset profits from as long ago as 2013. Back To The Future was a fun movie. The concept makes for terrible tax policy.
5. President-elect Joe Biden’s promise to not raise taxes for those making $400,000 or less. There were two things wrong with this central promise of Biden’s campaign. The first is the underlying assumption that $400,000 in annual income somehow defines a struggling middle-income household. Brief reminder: The median household income in the US in 2019 was $68,703. Second problem: It will be really hard for Biden to fulfill his promise.
4. President Trump’s tax black box: No major party presidential candidate in living memory said less than Trump about what he’d do to voters’ taxes if he was elected. Five bullet points isn’t really a campaign platform.
3. Return of the three-martini lunch. Before 2017, businesses could deduct 50 percent of the cost of business meals and entertainment. The Tax Cuts and Jobs Act eliminated the tax deduction for business entertainment and further limited the meals deduction. But President Trump, owner of hotels and golf resorts, demanded Congress restore the 100 percent business meals deduction. And Congress accommodated him. Let’s raise a fully tax-deductible toast to one of the bill’s worst tax provisions.
2. Trump’s payroll tax sort-of holiday. What if you threw a holiday party and nobody came? In August, Trump announced an executive order that let workers put off paying payroll taxes during the last quarter of 2020. Trump not only called it a holiday, he vowed to “terminate” the tax, which supports Social Security. Except that his order only deferred the tax. That meant workers must make up their unpaid 2020 payroll taxes in 2021. Fortunately, few private employers took Trump up on his idea, though federal workers had no choice.
1. The winner is: The failure of Congress and President Trump to agree on additional pandemic relief for nine months. When the pandemic first hit, Congress responded rapidly and prudently. But then a toxic combination of campaign politics and a near-complete absence of presidential leadership stalled the effort until lawmakers finally passed a bill this week. Since they last acted in March, more than 310,000 Americans have died from COVID-19, and 9 million fewer are working. Tragically, this epic fail of policymaking wins the 2020 Lump of Coal Award.
