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              Research Service






Employment Tax Incentives to Promote

Recovery from the COVID-19 Recession:

Policy Options



June  25, 2020
Some Members  of Congress and the Trump Administration have shown interest in additional tax benefits
to encourage employee retention or hiring as a response to the Coronavirus Disease 2019 (COVID-19)
recession. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into
law on March 27, 2020, created an employee retention tax credit equal to 50% of qualified wages paid by
eligible employers to qualifying employees between March 12, 2020, and December 31, 2020. This
refundable payroll tax credit can be claimed for up to $ 10,000 in wages, making the maximum credit per
employee $5,000. The Health and Economic Recovery Omnibus Emergency Solutions (1-EROES) Act
(H.R. 6800), as passed in the House on May 15, 2020, would increase the amount of the credit.
Employer tax relief is one option for supporting employment and promoting economic recovery from the
COVID- 19 recession. This Insight highlights some considerations that may inform the policy debate
regarding this approach, and examines the federal government's past experience with hiring tax
incentives.


Promoting Employment Using Tax Policy:

Considerations

If employers have laid off employees due to lack of consumer demand, employers may be slow to hire,
even with employment subsidies. Economic theory tends to indicate that demand-side stimulus, rather
than supply-side (like employer tax relief), is the most effective tool for boosting employment during
periods of economic weakness. While the pandemic decreased consumer demand for some goods and
services (e.g., in-person dining at restaurants and shopping in retail stores), demand in other industries has
increased (e.g., the information technology sector).
As patterns of demand shift, labor markets can be expected to reallocate the distribution of workers
among industries over time. Some have suggested that policies to facilitate a worker reallocation might be
more effective in promoting a return to work than those that try to keep workem in sectors with declining

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