The Budgetary Effects of the Employee Retention Tax Credit During the Coronavirus Pandemic (July 16, 2021)

Summary

A July 16, 2021 letter from Phillip L. Swagel, Director of the Congressional Budget Office, to the Honorable Kyrsten Sinema, United States Senate, on the budgetary effects of the employee retention tax credit during the coronavirus pandemic. The letter says CBO and the Joint Committee on Taxation originally estimated that the CARES Act credit would increase federal deficits by $55 billion over fiscal years 2020 to 2031. It says CBO later increased projected deficits by approximately $85 billion in total, $54.6 billion upon the CARES Act and an additional $30.8 billion after the CAA and ARPA. It reports that as of July 15, 2021 the IRS had processed claims of $10.5 billion for the second, third and fourth quarters of 2020 and $7.9 billion for the first quarter of 2021, and says the actual budgetary cost remains uncertain.

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          CONGRESSIONAL BUDGET OFFICE                                    Phillip L. Swagel, Director
          U.S. Congress
          Washington, DC 20515




                                         July 16, 2021


Honorable Kyrsten Sinema
United States Senate
Washington, DC 20510

Re: The Budgetary Effects of the Employee Retention Tax Credit
    During the Coronavirus Pandemic

Dear Senator:

As you requested, I am writing to provide information about the budgetary
effects of the employee retention tax credit.

Original Cost Estimates
The Coronavirus Aid, Relief, and the Economic Security (CARES) Act
established a tax credit for wages paid from March 13, 2020, through
December 31, 2020, by employers that were subject to a governmental
order restricting their businesses as a result of the coronavirus pandemic or
that had experienced a significant decline in revenue. The tax credit equals
50 percent of qualified wages plus the employer’s contributions for health
insurance premiums, subject to specific limits, and it is allowed against the
employer’s share of payroll taxes. Near the time of enactment, CBO and the
staff of the Joint Committee on Taxation (JCT) estimated that the provision
would increase federal deficits by $55 billion over fiscal years 2020 to
2031. 1
Subsequent legislation—the Consolidated Appropriations Act, 2021, and
the American Rescue Plan Act of 2021—expanded the credit and extended




1. That cost was expected to be incurred mostly as a reduction in revenues, but also in part as an
   increase in direct spending. See Congressional Budget Office, letter to the Honorable Mike
   Enzi providing a preliminary estimate of the effects of H.R. 748, the CARES Act, Public Law
   116-136, revised, with corrections to the revenue effect of the Employee Retention Credit and
   to the modification of a limitation on losses for taxpayers other than corporations (April 27,
   2020), www.cbo.gov/publication/56334.
www.cbo.gov
Honorable Kyrsten Sinema
Page 2

it through December 30, 2021. JCT estimated that those changes would
increase the cost of the tax credit by about $31 billion. 2
CBO’s estimates of the credit’s effects on revenues and outlays prepared
near the time the CARES Act and subsequent legislation were enacted were
reflected in its budget projections (often called its baseline) over the past
year. On the basis of those original estimates of claims for the credit and
the related behavioral responses, CBO increased projected deficits by
approximately $85 billion in total—$54.6 billion upon the enactment of the
CARES Act and an additional $30.8 billion following the enactment of the
CAA and ARPA. Those amounts were attributed to legislative changes in
CBO’s updates to the baseline following those enactments.

Implications of Recent Information
Since then, some additional information has become available. Over the
past year, tax revenues have been significantly stronger than CBO
anticipated. CBO’s most recent report on the budget outlook noted that tax
collections in 2020 and 2021 have been more than would be expected given
current data on economic activity. 3 The specific reasons for those greater-
than-anticipated collections will become clearer as detailed information
from tax returns becomes available.
Recent information from Internal Revenue Service (IRS) administrative
records indicates that as of July 15, 2021, the IRS has processed employers’
claims for this credit totaling $10.5 billion in the second, third, and fourth
quarters of 2020 and $7.9 billion in the first quarter of 2021.
The actual budgetary cost of the provisions that provided this credit
remains uncertain, however, and, similar to what was reported by the
Government Accountability Office in March 2021, the “IRS continues to
process a paper return backlog, which makes the data … incomplete,
particularly for small employers.” 4 In addition, taxpayers may still file
additional claims and update the amounts on prior claims.



2. See Joint Committee on Taxation, Estimated Revenue Effects of H.R. 1319, the “American
   Rescue Plan Act of 2021, as Amended by the Senate, Scheduled for Consideration by the House
   of Representatives, JCX-14-21 (March 9, 2021), www.jct.gov/publications/2021/jcx-14-21, and
   Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee Print 116-
   18, the “Consolidated Appropriations Act, 2021” (December 21, 2020),
   www.jct.gov/publications/2020/jcx-24-20.
3. See Congressional Budget Office, An Update to the Budget and Economic Outlook (July 2021),
   www.cbo.gov/publication/57218.
4. See Government Accountability Office, COVID-19: Sustained Federal Action Is Crucial as
   Pandemic Enters Its Second Year, GAO-21-387, p. 421 (March 2021),
   www.gao.gov/products/gao-21-387.
Honorable Kyrsten Sinema
Page 3

This recent information is not directly comparable with the original
estimate for the CARES Act for several reasons. Subsequent legislation is
one reason that the use of tax credit for employee retention may be less than
was anticipated near the time of the enactment of the CARES Act. The
incentives to claim this credit are complicated because of the interaction
between it and other policies put in place in response to the pandemic, such
as enhanced unemployment insurance and the Paycheck Protection
Program (PPP). In particular, before the CAA was enacted, the employee
retention credit was not available for employers that had taken out PPP
loans. Those interactions were accounted for in estimates for the later
legislation. For example, the Paycheck Protection Program and Health Care
Enhancement Act was enacted after the CARES Act and represented a large
expansion of the PPP program. In addition, CBO’s projections of the
economy have changed significantly since the provision was first enacted.
CBO’s most recent baseline projections, which reflect current law and
incorporate information available through May 18, 2021, show larger-than-
anticipated receipts. Less use of this credit than was anticipated near the
time of enactment may be one of the factors supporting the recent strength
in revenues.
Differences in outcomes from earlier estimates for legislation are not
unusual, and those differences may be reflected in increases or decreases in
the estimated costs of various provisions. That type of change, like other
changes for economic and technical factors, is regularly reflected by CBO
as a baseline adjustment and is not attributed to legislation. CBO regularly
assesses the reasons actual collections differ from those previously
projected. 5




5. See Congressional Budget Office, The Accuracy of CBO’s Budget Projections for Fiscal Year
   2020 (December 2020), www.cbo.gov/publication/56885, and An Evaluation of CBO’s Past
   Revenue Projections (August 2020), www.cbo.gov/publication/56499.
Honorable Kyrsten Sinema
Page 4

I hope this information is useful. If you have any questions, please contact
me.
                                          Sincerely,



                                          Phillip L. Swagel
                                          Director

cc:    Honorable Ron Wyden
       Chairman, Committee on Finance

       Honorable Mike Crapo
       Ranking Member

       Honorable Bernie Sanders
       Chairman, Committee on the Budget

       Honorable Lindsey Graham
       Ranking Member

       Honorable Mark R. Warner


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