The Coronavirus Aid, Relief and Economic Security (CARES) Act was supposed to provide emergency relief from damage wrought by the COVID-19 pandemic.
But buried inside the hastily crafted, $2 trillion rescue package is a gold mine of tax benefits that allow companies and wealthy business owners to use earlier losses unrelated to the pandemic to claim large rebate checks.
Companies in Minnesota, including Insignia Systems, SurModics and Marathon Petroleum, are among those getting the tax refunds.
Supporters argue the emergency refunds provide critical cash for employers fighting a destroyed marketplace. Allowing businesses to carry back losses from before the pandemic makes sense, according to Pete Sepp, president of the right-leaning National Taxpayers Union Foundation, because it speeds up the relief: Companies don't have to wait to file their 2020 taxes to get the refund.
Other taxation watchdogs call it a windfall, and one that disproportionately benefits large companies with volatile earnings, not the neighborhood auto shop or hair salon whose business vanished in the wake of COVID-19. Plus, unlike the Paycheck Protection Program, which has limits on how the loans can be used in order for the loan to be forgiven, the tax refunds come with no strings.
"It's ridiculous for lawmakers to provide this giveaway for corporations and businesses and pretend that it is a response to the COVID 19 crisis," said Steve Wamhoff, director of federal tax policy at the left-leaning Institute on Taxation and Economic Policy.
Environmental groups, meanwhile, are galled at how major polluters such as oil and gas companies are cashing in. Lukas Ross, senior policy analyst at Friends of the Earth, said the bailout rewards them "for losing money long before the coronavirus disrupted the economy."
Specifically, the CARES Act allows corporations and noncorporate businesses owners who pass through their business taxes via their personal income taxes to carry-back business losses not only since the pandemic, but also from 2019 and 2018, and apply them to tax payments going back five years for a rebate. It's further juiced because they can deduct the older losses at the older, higher corporate income tax rate.
This handout alone is expected to cost about $26 billion over 10 years, according to Congress' Joint Committee On Taxation.
It has attracted less attention than a different CARES Act business tax break dubbed the Millionaires Giveaway. That one loosens the rules for wealthy "pass-through" noncorporate business owners to carry-back excess business losses to offset taxes owed on nonbusiness income, such as money from rent or gains on investments.
The act removes the cap on how much nonbusiness income can be offset, and targets speeding tax refunds to individual taxpayers with more than $1 million in income. This break alone will cost an estimated $135 billion over 10 years, according to the Joint Committee On Taxation.
Hedge fund investors and real estate professionals are expected to reap the most, said Steven Rosenthal, senior Fellow at the left-leaning Urban-Brookings Tax Policy Center.
Rosenthal called the CARES Act tax relief "very sloppy." Tax refunds aren't a great tool for emergency relief, he said, because the trickle-down effect does too little to help ordinary families. Plus, tax breaks are too difficult to regulate and monitor.
"The IRS doesn't follow you and watch how you spend it," Rosenthal said.
The $3 trillion HEROES Act relief and stimulus package that the Democrat-controlled U.S. House passed May 15 would scale back the largesse. But it's unlikely to survive the Republican-controlled Senate, and the White House has signaled its opposition.
Ross, at Friends of the Earth, said the generous corporate carry-back provisions have only become visible as public companies reported first-quarter earnings to the Securities and Exchange Commission. Filings by a dozen gas and oil companies, for example, show they expect to claim $1.5 billion from the business loss carry-back as well as changes to the alternative minimum tax in the CARES Act, according to Ross. In a recent analysis, Ross noted that Marathon Petroleum Co. is at the top of this list, reporting $411 million in income tax benefits from the business loss carryback provision.
Marathon, headquartered in Findlay, Ohio, bought the St. Paul Park refinery in Minnesota in 2018 along with the SuperAmerica chain of gas stations and convenience stores, since rebranded as Speedway.
The carry-back tax rebates can be spent on anything, including executive pay or stock buybacks, something Ross called "astounding and infuriating."
"This all just looks like giveaways to me to an industry that's driving the climate crisis," he said. "Nobody is paying attention to the way stimulus funds are being scrutinized." In a written response, Marathon said it's just following the law Congress passed, and provided a list of its environmental accomplishments that include working to advance production of cleaner biofuels. Its refineries have won more ENERGY STAR awards from the federal government than all other refineries in the U.S. combined, said Marathon spokesman Jamal Kheiry.
"MPC did not lobby for any CARES Act provisions to specifically favor our company or our industry," Kheiry said. "We did ask that if there were any broader tax relief provisions that were afforded to other manufacturers or industries, that our industry not be excluded. Although we did not request any benefit, we are obligated to follow the tax laws as passed by Congress, which apply to corporate manufacturers nationwide."
Kheiry said he couldn't say how Marathon plans to spend the emergency tax refund.
Koch Industries' Flint Hills Resources owns the Pine Bend Refinery in Rosemount, but Koch is privately held and doesn't disclose income tax information.
First-quarter financial documents show other public companies in Minnesota are claiming CARES Act tax benefits. SurModics Inc., for example, reported profits of $1.4 million in the first quarter and claimed a $1.8 million rebate by carrying back losses it suffered before 2020.
Brooklyn Park marketing company Insignia Systems Inc., which lost money all through 2019 as well as the first three months of 2020, claimed an emergency relief rebate of $232,000. Chief financial officer Jeff Jagerson said Insignia employs 52 people, and has been fighting tough competition from larger players.
He thinks the tax break is fair because the relief package was aimed at helping companies now, and Insignia has been "significantly impacted" by the pandemic.
He said he doesn't know when the rebate check will arrive, but most of it will go to payroll.
"It's not even close to covering the impact of COVID," Jagerson said.
Jennifer Bjorhus • 612-673-4683 • jennifer.bjorhus@startribune.com
Patrick Kennedy • 612-673-7926 • patrick.kennedy@startribune.com
