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Summary:
The damage from Hurricane Katrina raises at least four issues that might be addressed by tax policy. The first issue is that the effect of the disaster, particularly given the potential impact on energy prices, might contract the overall economy, suggesting some need for a fiscal stimulus. The Administration has indicated that it will not propose a tax cut, but supports making the existing tax cuts permanent. Preliminary indications are that the effect of the hurricane on the national economy will be limited. Even if a stimulus were needed, there are many problems with relying on tax cuts (rather than spending or a monetary stimulus), given the difficulties in delivery of a tax cut. The Administration proposal is unlikely to have an effect, since the tax cuts do not, in general, expire until 2011 and there will be no immediate effect on disposable income. A related nationwide fiscal policy concern is that the loss of income (and the taxes on that income) and the increased spending will worsen pressures on the budget. A tax cut would exacerbate that effect. A second issue is whether the rise in energy prices should be addressed by some redistribution from energy producers to consumers, or some general relief. One proposal that has been made, to suspend the gasoline tax, would not be expected to have an effect on prices in the short run, but would rather increase profits of producers. Income tax rebates could be used to target poor people, but this approach, as with a stimulative tax cut, faces administrative difficulties. Proposals have been made for a windfall profits tax, which has some historical precedents, but the tax is difficult to administer. A third issue is whether or not tax measures might be used to provide relief for the victims. In general, tax benefits cannot easily be targeted to lower income individuals. There are some current tax provisions and recent administrative actions that are already providing some relief. Two bills in the House (H.R. 3768) and the Senate (S. 1696) would provide additional benefits to help with cash flow, employment, housing, and tax compliance issues of the victims, as well as incentives to increase charitable giving. While some of these proposals will aid the victims, or at least moderate and higher income victims, little of the cost of tax benefits for charitable giving in the Senate bill is likely to do so. A fourth issue is what role tax subsidies might play in the longer term rebuilding of the area. Geographically targeted subsidies exist in the current tax law for economically depressed areas and were enacted for lower Manhattan after the 2001 terrorist attacks. Empirical evidence suggests that these incentives might not be very effective in speeding up or increasing the degree of rebuilding but they may be desirable as part of the means of compensating victims for catastrophic losses. This report will be updated to reflect legislative developments.
