The Employee Retention Tax Credit gives waste and fraud a bad name
Cutting waste, fraud and abuse is the perennial recommendation of politicians who want to seem tough on debt and deficits but don’t want to take on their true, structural causes. Still, there is such a thing as real waste, fraud and abuse; rooting it out is necessary to putting the government’s finances on a sounder footing.
Case in point: the Employee Retention Tax Credit, a pandemic-era policy enacted to save jobs from the lockdown-induced recession. It has been co-opted by bad actors and morphed into a scam that has cost taxpayers more than quadruple what Congress anticipated.
The initial purpose of the program was sound enough: to compensate businesses for keeping workers on their payrolls as long as they could, even as the pandemic hurt their revenue. The credit as initially designed covered about half of their wages from March 13, 2020, through Dec. 31 of that year. Then Congress extended the credit through December 2021, increased maximum payouts and made eligibility criteria more flexible. Expected to cost $55 billion when it was first enacted, the ERTC has so far cost $230 billion, according to the Congressional Budget Office.
People quickly figured out how to game the system. New claims flooded in during 2023 — and the Treasury started to hemorrhage cash. At times, Mr. Werfel said, new applications arrived at a rate of 70,000 per week, an extraordinary amount for supposed costs incurred during 2020 and 2021. Much of this surge was stimulated by companies running unscrupulous ads touting the program as an easy way to get rich. The companies offer to file claims on behalf of employers (in return for a cut of the IRS payout).
Congress needs to end the Employee Retention Tax Credit immediately. Ideally, this would happen through Senate passage of a bipartisan tax bill that the House passed at the end of January by a vote of 357 to 70. It included a provision that would have made Jan. 31 the final day to apply for the ERTC instead of April 15, 2025, as current law stipulates. It would also stiffen the penalties on abusive promoters of the credit. The savings is an estimated $78 billion over the next five years.
The bipartisan tax bill redirects that money to more legitimate uses. The main one is helping low-income families with children by expanding the child tax credit. Senate Republicans’ policy objection — that the bill lacks strict enough work requirements to qualify for the child tax credit — is hyperbolic. An eligible parent or guardian would have to have worked at some point in the two years before getting the credit.
If Senate Republicans simply refuse to stop blocking the bipartisan tax bill, Congress’s best alternative for eliminating the Employee Retention Tax Credit would be during the budget process in March. Lawmakers would be well advised to take advantage of it. The notion that the federal government has borrowed a penny to fund such an obvious taxpayer rip-off is unconscionable.