As Congress scrambles for offsets to blunt the deficit impact of extending key provisions of the 2017 Tax Cuts and Jobs Act (TCJA), it should zero in on an obvious target: the Employee Retention Credit (ERC). A pandemic-era program now thoroughly hijacked by fraud, the ERC is bloated, outdated, and relatively simple to eliminate. Doing so could save taxpayers more than $70 billion.
Passed in March 2020 and expanded in 2021, the ERC was designed to help businesses retain employees during COVID-19 shutdowns. At the time, the logic was sound. Businesses that could prove they kept workers on payroll during government-ordered closures qualified for generous tax relief. But the emergency is long over, and the credit has mutated into a massive liability.
Despite the federal government officially declaring the pandemic over in May 2023, the law still allows businesses to retroactively claim the credit as late as this year’s tax filing deadline. As a result, thousands of businesses that did not need the credit have nonetheless filed claims years after the worst effects of the pandemic.
What was once a targeted support program is now largely a windfall for firms that no longer need it. After all, any ability that tax policy had to prevent businesses from failing due to COVID has long since faded away. Even worse, the credit has become a magnet for outright fraud. Instead of costing $55 billion as initially projected, updated estimates from budget analyst Donald Schneider suggest the final bill could exceed $550 billion absent congressional action.
The mechanics of the scam were straightforward. A swarm of pop-up tax shops aggressively solicited small businesses via cold calls, emails, and online ads, promising easy ERC money in exchange for a cut, often without regard to actual eligibility. These firms filed questionable claims, pocketed their fees, and vanished before the IRS could initiate audits. By the time enforcement began to kick in, the damage was done, and the fraudsters were long gone.
The IRS was quickly overwhelmed. In September 2023, the agency halted processing new ERC claims due to mounting concerns over improper filings. In August 2024, the agency announced that it was denying fraudulent claims worth $5 billion and noted that it had opened criminal investigations into a further $7 billion in claims. In other words, each day without action to fix this program puts more taxpayer dollars at risk.
It’s time for Congress to act. At a minimum, lawmakers should formalize the IRS’s January 31, 2024, moratorium as the official cut-off date for the program. This would bar claims filed well after the end of the pandemic while still honoring legitimate earlier claims from truly struggling businesses.
Some in the business community may protest, but it’s difficult to justify pandemic-era benefits extending into 2025. The ERC no longer serves its original purpose, and continuing it only subsidizes bad actors and aggressive middlemen at taxpayer expense.
Congressional leaders say they want to extend TCJA provisions without exploding the deficit. Repealing the ERC is the lowest of low-hanging fruit. It’s not just a pay-for; it’s a policy correction. If lawmakers are serious about fiscal responsibility, this is where they should start.
More broadly, if initiatives like the Department of Government Efficiency and congressional efforts to trim back waste are to be successful, they must be paired with real policy decisions. Sunsetting a fraud-riddled program like the ERC would send a credible signal that Washington is capable of actually tightening the reins, not just talking about it.
The national debt now exceeds $34 trillion. The best time to end the ERC would have been in 2022, when the acute public health crisis had mostly passed. The next best time is today.
