Tax Incentives in the Aftermath of Hurricane Katrina

Tax subsidies may play a role in rebuilding the Gulf area and may be justified on several grounds. Although evidence from state experience with empowerment zones in chronically depressed areas does not support significant effects, this evidence may not be relevant for rebuilding after a disaster. One of the significant challenges with tax policy, however, particularly in an economically devastated area, is that many of the businesses may have insufficient tax liability to benefit from the provisions. This problem might be overcome by extending the loss carryback period or by allowing refundable credits or offsetting payroll taxes, but these strategies may raise concern about setting precedents. Allowing indirect subsidies, such as private activity bonds, may circumvent this problem but may involve significant administrative costs and windfall benefits to investors.