Tax Relief for Hurricane Katrina Victims: An Introduction
The recent tax relief bill, H.R. 3768 (The Katrina Emergency tax Relief Act of 2005, P. L. 109-73), signed by the President on September 23, contains some measures of these types. It allows individuals affected by the hurricane (through 2005 for employers outside the area and through August of 2007 for employers inside the disaster area), along with an employee retention credit, although limited to firms with no more than 200 employees. It also includes a number of provisions providing benefits to property owners. It allows tax exempt mortgage revenue bond financing for current homeowners and increases the limit from $15,000 to $150,000 for home improvement loans. It eliminates income from the cancellation of indebtedness. The two most significant items are the elimination of casualty loss deduction floors and allowing an extended period of time to avoid gain recognition for involuntary conversions.
There is a significant economic literature discussing both the justifications for geographically targeted subsidies to private business and assessing the effectiveness of these subsidies. Generally, economic theory suggests that private market incentives in most cases make subsidies unnecessary or not efficient. Private innovation should occur in the absence of tax subsidies, although government construction of essential public infrastructure, such as roads, is vital to any area’s recovery. The issue is what speed or magnitude of rebuilding is advantageous. Usually the need for subsidies would take place either to achieve distributional objectives or as a result of market failures circumstances where an efficient allocation of investment does not occur owing to unpriced costs.
Tax Policy Options After Hurricane Katrina
The damage from Hurricane Katrina raises at least four issues that might be addressed by tax policy. This report provides an overview, beginning with national issues and then addressing local issues..........
