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Tuskegee University is an independent and state-related institution of higher education.  Its programs serve a student body that is coeducational as well as racially, ethnically and religiously diverse.

 


Tax Policies for Hurricane Victims

By: N. Baharanyi, R. Zabawa, A. Paris and P. Kanyi, Tuskegee University

            Nearly one month after Katrina made landfall, Congress approved the first legislation to assist victims of Katrina: the Katrina Emergency Tax Relief Act of 2005 (KETRA)[1]. This tax relief was later extended to other Gulf Coast regions through the Gulf Opportunity Zone Act of 2005 (GOZA)[2] with the creation of special tax Gulf Opportunity ‘GO' Zones. KETRA and GOZA resemble two packages of tax relief created in response to an earlier disaster: the Victims of Terrorism Tax Relief Act of 2001 (VTTRA)[3] and the Job Creation and Worker Assistance Act of 2002 (JCWAA)[4], both enacted following the events of 9/11. The tax package for the Gulf Coast was explicitly borrowed from that designed for New York.

            Under the U.S. federal income tax, individuals and businesses determine their tax liability by multiplying their applicable tax rates by their taxable income, which can simply be put as receipts minus the cost of producing those receipts[5]. Thus, relief from tax liability for the hurricane victims therefore came in four basic forms: reduction in the rate at which income is taxed, excluding or exemption of certain kinds of income, deduction of certain expenditures from income, and application for credits against tax owed. Some provisions of these policies also provided relief by deferring the time when accrued income was taxed, accelerating deductions, or postponing payment of taxes. To use an exclusion, exemption, or deduction, a victim must have had gross income. To fully use a deduction, his or her gross income must have been greater than or equal to the deduction. Hurricane victims who had no or had very low gross income typically could not take advantage of such tax relief provisions. Because the U.S. tax system is progressive[6], a deduction gave the higher-bracket victims a greater benefit than lower-bracket victims. With minimal deductions provisions available to victims, itemized deductions could only be taken instead of the standard deduction. If victim total itemized deductions were less than the standard deduction, they were of no benefit.  The table below summarizes the tax changes and how it affected the poor and the non poor in the GO zone areas.

Non Poor Poor
Tax-favored early distributions from retirement accounts. Had no retirement accounts, hence could not take advantage.
Retirement plans Loans delays and adjustments. Most of them had no retirement accounts, hence could take advantage.
Any distribution from a 401(k) plan or 403(b) annuity or a qualified first-time homebuyer distribution from an IRA before hurricanes to be Re-contributed to a retirement plan. Most of them had no 401(k) plan or 403(b) annuity to take a distribution but for the few who had a first-time homebuyer distribution from an IRA before hurricanes could take advantage and re-contributed the money into a retirement plans.
Had high advantages in legislation changes on elimination of limitations on claiming losses. The entire amount of unreimbursed losses was deductible from their already high Taxed income. Little advantage in policy changes on elimination of limitations on claiming losses. They already had less taxed income hence deductible of entire amount of losses in many cases may have superseded

 their already low income and IRS would not refunded deductible that is over zero taxes.
Permitted certain refundable child tax credit recipients to choose either tax year 2005 or 2004 to determine their earned income and use the more beneficial result. Permitted certain earned income tax credit (EITC) and refundable child tax credit recipients to choose either tax year 2005 or 2004 to determine their earned income and use the more beneficial result.
Educational assistance by expanding the Hope and Lifetime Learning credits for students enrolled and paying tuition at eligible educational institutions in the GO Zone for tax years 2005 or 2006 hence reducing the amount of tax they had to pay Most of the poor were an unable to enroll hence could not take advantage of the  Educational assistance by expanding the Hope and Lifetime Learning credits Further more, the poor usually get almost all, if not all of their tax return thus having zero taxes. These educational assistance which are tax credits were non- refundable in cases of zero taxes, thus becoming unbeneficial to the poor as IRS would not  refund any excess credits
A non-business debt that is canceled was unconsidered in income provided that the debt was not secured by property outside the Hurricane Katrina Disaster Area. A non-business debt that is canceled was unconsidered in income provided that the debt was not secured by property outside the Hurricane Katrina Disaster Area.


In conclusion, tax relief tends to skew benefits toward non poor and away from the poor, and this phenomenon is even more significant in the context of a disaster such as the Gulf coast hurricane disaster which affected poor citizens in large numbers. The poor suffered disproportionately greater economic harm; they were slower to return to pre-disaster income levels; and they had little wealth to provide an economic cushion during hard times. The very poor victims in these disaster areas did not benefit from tax relief policies in general, and the effects of the disaster made them even less likely to benefit. The most obvious examples were families with no income at all, or income so low that they did not owe taxes. Provisions of KETRA and GOZA that permitted the victims of hurricanes to exclude or deduct income were useless to such poor victims[7]. For instance, a victim who had no taxable income could not use the casualty loss deduction, even as expanded by GOZA[8]. Moreover, poor victims could not participate in a qualified retirement plan (a form of wealth) and borrow funds from the plan because most of them did not have retirement plan prior to the disaster. GOZA expanded the advantage of participation in such plans thus permitting non poor beneficiaries who had such plans to withdraw or borrow funds without the usual penalties. Tax credits were similarly unhelpful with the exception of the provisions modified in the Earned Income Tax Credit (EITC)[9] and refundable Child Tax Credit (CTC) [10]. EITC was refundable to the extent that a victim would not have the equivalent liability, and the CTC was partially refundable. Both credits were available, however, only to victims with income. Eligibility for the EITC required earned income and phased out at a relatively low ceiling. Eligibility for the CTC required income (not necessarily earned income), but eligibility for the refundable portion of the CTC required earned income. In 2006, a family that earned less than $11,300 for instance, a family with one full-time minimum wage worker was ineligible for the CTC[11]. Thus, tax relief rarely, if ever, provided benefits to the poorest citizens, since citizens with no o low income could not take advantage.

Since KETRA and GOZA were based on existing tax relief packages that were designed to help the New York economy recover from the 9/11 attacks, some lawmakers and commentators questioned whether a package designed for one disaster could be suitably retrofitted for another[12]. Among other distinctions, the income levels of the affected populations were quite different.  This difference is significant given the two acknowledged effects of tax expenditures that is; producing upside-down benefits and offering few benefits to lower-income taxpayers.  Additionally, doubts about the efficacy of both the policies timing framework and geographic targeting, in the context of disaster relief, remained after the 9/11 legislation. In recommendation, Congress should ensure that grants and other direct financial aid have clear information, accessible and directed to the poor population. Several existing programs, including code provisions, employ means testing; such tests should be used to determine which victims qualify for direct aid. Alternately, Congress should restructure tax relief to correct for upside-down benefits. Wealth provides an economic "safety net" when earned income is interrupted with examples from the non poor participants of qualified retirement plans that benefited from KETRA expansion that permitted them to withdraw or borrow funds from such plans without the usual penalties. Congress could assist poorer victims by applying the same principle to other forms of debt cancellation. For example, forgiveness of the financing on a car that could have been damaged or destroyed as a result of a hurricane can also be exempted from income.


[1] The Katrina Emergency Tax Relief Act of 2005 (KETRA). Pub. L. No. 109-73, 119 Stat. 2016 (codified at I.R.C. §§ 170, 7508. 2006.

[2] Gulf Opportunity Zone Act (GOZA) of 2005, Pub. L. No. 109-135, 119 Stat. 2577. Codified at Internal Revenue Code (I.R.C.) §§ 38, 54, 1400N. 2006.

[3] Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, 115 Stat. 2427.

Codified in scattered sections of I.R.C. and other titles). 2002.

[4]  Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21.

Codified in scattered sections of I.R.C. and other titles. 2002.

[5] Staudt C. N. Taxation Without Representation. 55 TAX L. REV. 555, 589. 2002.

[6] I.R.C. § 1(a)-(f), (i). (West Supp. 2006) Setting Marginal Income Tax Rates. The marginal rate at which income is taxed rises as income increases.

[7] Lipman J. F.  Anatomy of a Disaster Under the I.R.C, 6 FLA. TAX REV, 953. 2005.

[8] KETRA § 402, 119 Stat. at 2027. This section of KETRA was later replaced with

similar language that applied more broadly to victims of Hurricanes Katrina, Wilma, and

Rita. GOZA § 201, 119 Stat. at 2605. Codified at I.R.C. § 1400S(b). 2006.

[9] I.R.C. § 32(a) (2000 & Supp. III 2003). Providing for full refundability of Earned

Income Tax Credit by not limiting credit to amount of Income Tax liability.

[10] I.R.C. § 24(d) (West Supp. 2006). Allowing for partial refundability of Child Tax Credit.

[11] DeParle J.  Giving 2006 Earned Income Floor for Child Tax Credit. A study by the Tax Policy Center. N.Y. TIMES, Oct. 2, 2005.

[12] Hurricane Katrina: Community Rebuilding Needs and Effectiveness of Past Proposals: Hearing Before the S. Comm. on Finance, 109th Cong. 2005. (statement of George K. Yin, Chief of Staff, J. Comm. on Taxation), available at http://finance.senate.gov/hearings/testimony/2005test/092805gytest.pdf.