Tax Policy Options After Hurricane Katrina

Publication Date: October 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The damage from Hurricane Katrina raised at least four issues that might be addressed by tax policy.

The first issue was 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 indicated that it would not propose a tax cut, but supports making the existing tax cuts permanent. Congress acted by appropriating $62.3 billion in direct assistance, followed by $6.2 billion in tax relief.

Preliminary indications were that the effect of the hurricane on the national economy would be limited, and in subsequent weeks, the economy has resumed its growth path. If Congress determined that an immediate stimulus were needed, timing would be an important factor. Relying solely on tax cuts (rather than spending or a monetary stimulus) raises issues related to timely delivery and the spending of those funds. Making the tax cuts permanent is unlikely to have much stimulative effect in the short term, since the tax cuts do not, in general, expire until 2011, and there would be no immediate effect on disposable income.

A second issue was whether the rise in energy prices should be addressed by some redistribution from energy producers to consumers, or some general relief. An initial proposal to suspend the gasoline tax would not have been expected to have an effect on prices in the short run due to the market mechanism allocating supply. Income tax rebates could be used to target benefits to poor people, but this approach would also face administrative difficulties. Proposals have been made for a windfall profits tax, which has some historical precedence, but the tax is difficult to administer.

A third issue was whether tax measures might be used to provide relief for the victims. In general, tax benefits cannot easily be targeted to lower-income individuals who have little or no tax liability. There are some current tax provisions and administrative actions already providing some relief. H.R. 3768 provided 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 would aid the victims, or at least those who have tax liability, the tax benefits for charitable giving in the Senate bill would have been unlikely to do so. The final legislation included more focused charitable provisions.

A fourth issue is what role tax subsidies might play in the longer-term rebuilding of the area, and such incentives are in H.R. 4440 and S. 2020; this legislation was enacted in December of 2005. 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.