The nearly $2 trillion Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act in the United States was designed to help counter the economic shock of the COVID-19 pandemic, which drove an annualized GDP decline of 4.8 percent during the first quarter of 2020. Among the act’s many stimulus provisions, which will add a net $1.6 trillion to the 2020 federal deficit, were corporate tax breaks designed to provide businesses with immediate liquidity to prevent widespread bankruptcies and layoffs.

But Chicago Booth’s John Gallemore, Tilburg University’s Stephan Hollander, and Martin Jacob of the WHU–Otto Beisheim School of Management find these tax provisions were not material for most publicly traded US companies and did not benefit companies that needed liquidity during the pandemic. Instead, the primary beneficiaries appear to have been highly leveraged companies with losses that occurred prior to the onset of the pandemic, a finding that can help policy makers evaluate additional economic relief and stimulus.

The researchers focused on five major CARES business tax provisions: an option to defer payroll taxes until 2021 and 2022; a targeted refundable payroll-tax credit that encourages companies to keep employees on the payroll during the pandemic; the option to carry back certain net operating tax losses incurred during 2018 and 2019 and receive an immediate refund; enhancements to debt-interest tax deductions; and accelerated recovery of certain corporate alternative minimum tax credit refunds.

To study the impact of the CARES corporate tax provisions, the researchers analyzed all 10-Ks (annual reports), 10-Qs (quarterly reports), and 8-Ks (reports of a material event) filed with the Securities and Exchange Commission from March 27 to May 31. They searched these reports for mentions of the act under the expectation that SEC filings would only discuss CARES tax provisions that had a material impact on the company.

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The final sample contained 1,813 companies, representing more than 90 percent of total market capitalization for nonfinancial companies, of which 66 percent discussed CARES in at least one SEC filing. Financial companies were excluded from the analysis because their CARES disclosures were generally limited to their role as lenders distributing Paycheck Protection Program funds.

The researchers find that the net operating loss carryback provision was the most-discussed CARES tax break, mentioned by 25 percent of companies, suggesting that this provision was the most relevant one for publicly traded US companies. The immediate benefit of this tax break, however, was limited to the subset of companies with pre-pandemic losses.

The findings cast doubt on the idea that the CARES tax provisions encouraged employee retention or primarily benefited regions and sectors hurt most by the pandemic.

In theory, the payroll-tax deferral had the broadest applicability of any of the five provisions, and the employee-retention payroll-tax credit had the greatest potential for encouraging companies to keep employees on their payrolls. But those features of the act were only mentioned by, respectively, 14 percent and 9 percent of companies with an SEC filing during the sample period, an indication that most companies did not benefit materially from these provisions.

Overall, Gallemore, Hollander, and Jacob find that companies operating during the early months of the pandemic in states or sectors with greater increases in unemployment or with more COVID-19 cases per capita were not more likely to discuss the CARES tax provisions. A notable exception is that companies in these states and sectors were more likely to discuss the payroll-tax deferral and the employee-retention credit, suggesting that the tax breaks targeted at employment may have been more effective at providing liquidity to hard-hit companies and encouraging them to retain workers.

The researchers also find some evidence that companies with greater pre-pandemic shareholder payouts and more lobbying activity during the pandemic were less likely to discuss the interest-deduction provision, suggesting that businesses facing potential reputational or political costs from discussing CARES tax benefits may have strategically avoided doing so.

Overall, the findings cast doubt on the idea that the CARES tax provisions, and in particular the net-operating-loss carryback tax break, encouraged employee retention, or primarily benefited regions and sectors hurt most by the pandemic. Instead, companies that experienced lower stock returns during the COVID-19 outbreak were the primary beneficiaries.

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