Last Thursday, January 22, the House Ways & Means Committee on a party-line 24-13 vote approved the $275 billion tax portion of the economic stimulus package (HR 598). 

Ways & Means Package: Revenue Effects

Ways & Means Package: Description of Provisions 

Last Friday, January 23, the Senate Finance Committee released its own package, which will be considered by the Committee today (Jan. 27).  Compared with the House Ways & Means package, the Senate bill would provide more energy tax incentives and less for school construction bonds.  The Senate bill also would temporarily suspend income taxes on unemployment benefits.

Senate Finance Committee: Revenue Effects

Senate Finance Committee Release

Senate Finance Committee Package: Description of Provisions 

The largest component of the House and Senate tax packages is a $1000 tax credit ($500 for individuals) distributed in the form of reductions in payroll tax withholding spread over the course of the year. (The tax credit would phase out for upper income taxpayers.)  

Highlights of the Ways & Means portion of the stimulus bill (in billions of $): 

• "Making Work Pay" Credit: Middle class payroll tax relief in the form of a $1000 tax cut ($500 for individuals) -- phasing out at $150,000 for couples. ($145 billion)
• Tax Relief for Families w/ Children by increasing the EITC and the Child Tax Credit ($23 billion)
• Education Assistance:  Partially refundable tax credit for college tuition and other expenses ($14 billion)
• Housing Stimulus: Remove repayment requirement on $7500 first-time home buyer credit until 6/30/09  ($2.6 billion)
• Tax Incentives for Business:  Bonus depreciation for property acquired in 2009; Extend temporary increase in small business expensing; and 5-year Carryback of NOLs allowing companies to apply net operating losses to the last 5 years -- generating instant refunds ($20 billion).
• Relief to State and Local Governments: Expand bonding authority to stimulate State and local bonds, private activity bonds, school construction bond, and bonds for "recovery zones"  ($34 billion)
• Renewable energy tax incentives including a 3-yr extension of the energy production tax credit for renewable energy ($20 billion)

No AMT Patch: Neither the Ways & Means nor the Senate Finance tax packages include an AMT (Alternative Minimum Tax) patch for tax year 2009.  In the absence of a patch, more than 25 million taxpayers could face an increase in taxes under the AMT (because it has never been indexed for inflation).

A key question being raised about the evolving stimulus bill is whether it is sufficiently focused on short-term stimulus (which should be deficit-financed) vs. long-term investment (which should be carefully crafted and paid for over time).  

Former CBO and OMB Director Alice Rivlin, addressed this last week at a January 21, 2009 hearing of the Senate Budget Committee: 

"The first priority is an 'anti-recession package' that can be both enacted and spent quickly, will create and preserve jobs in the near-term, and not add significantly to long run deficits. It should include temporary aid to states in the form of an increased Medicaid match and block grants for education and other purposes....The package should also include temporary funding for state and local governments to enable them to move ahead quickly with genuinely 'shovel ready' infrastructure projects....Another important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly.....

"The anti-recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy....We have neglected our public infrastructure for far too long and invested too little in the skills of the future workforce....Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package...

"Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue...."  (emphasis added)

Former CBO Directors Robert Reischauer and Rudolph Penner addressed similar issues at the hearing: 

Full text of Rivlin Testimony

Full text of Penner Testimony

Full text of Reischauer Testimony

A CBO analysis of the evolving stimulus package estimates that while many provisions will generate significant government spending in the short-term, others will generate most of their spending after FY 2010, as summarized below.

Examples of stimulus provisions that will generate most of their outlays in 2009 or 2010:

• Medicaid: $33 billion in 2009, $44 billion in 2010, and $12 billion after 2010
• Unemployment benefits: $16.8 billion in 2009, $19.7 billion, and $1.6 billion after 2010
• Food Stamps: $4.8 billion in 2009, $6.1 billion in 2010, and $9.1 billion after 2010. 
• Corps of Engineers Programs: $1.1 billion in 2009, $1.7 billion in 2010, and $1.7 billion after 2010.
• HHS Education Programs: $3.1 billion in 2009, $9 billion in 2010, and $8.1 billion after 2010.
• Student Financial Assistance: $700 million 2009, $14 billion in 2010, and $2.3 billion after 2010.
• Health Insurance Assistance: $4.9 billion in 2009, $7.1 billion in 2010, and $1.4 billion after 2010.

Examples of stimulus provisions that will generate most of their outlays after 2010:

• Highway Construction: $3 billion in 2009, $7.5 billion in 2010, and $19.5 billion after 2010.
• Energy Efficiency and Renewable Energy: $450 million in 2009, $2.2 billion in 2010, and $15.9 billion after 2010.
• Wireless and Broadband investment: $10 million in 2009, $240 million in 2010, and $2.6 billion after 2010
• Federal Buildings Fund: $400 million in 2009, $900 million in 2010, and $6.2 billion after 2010.
• Health Information Technology:$383 million in 2009, $138 million in 2010, and $19.7 billion after 2010

In response to Republican concerns about the marginal impact of provisions with a slow spendout rate, OMB Director Peter Orszag on January 22 sent a letter to Congress stating that "our analysis indicates that at least 75 percent of the overall package (including its tax component...) will be spent over the next year and a half...."   Based on CBO's estimates released yesterday (Jan 26), about two-thirds of the overall package will provide stimulus during the balance of 2009 and 2010.

CBO Estimates of House Stimulus Package (released Jan. 26)

 

On January 23, a cross-section of fiscal policy experts called on President Obama to address both America's short-term and long-term economic needs.

The memorandum was developed by fiscal policy experts at the Brookings Institution, Committee for a Responsible Federal Budget, Concord Coalition, Peter G. Peterson Foundation, Progressive Policy Institute, and Urban Institute. 

Key points of the memorandum:

• The Obama budget should "strike a judicious balance between America's short-term and long-term economic needs."
• This means simultaneously "stabilizing America's financial markets....reducing the severity and duration of the current recession....controlling the growth of health costs and putting Social Security on a financially sustainable path....(and) reforming America's tax system...to raise adequate revenue while maintaining economic growth."
• The stimulus package "should not worsen the long-term fiscal outlook."
• Medicare, Medicaid, and Social Security are "growing faster than tax revenues because of soaring health costs and the aging of the population."
• Launch an "intensive public education campaign" to set the stage for tough choices.
• PAYGO rules should be reestablished to enforce a long-term agreement on entitlements and taxes.
• Long-term targets should be established for entitlement spending and tax expenditures, enforced through automatic triggers.

Full Text of the Memorandum

 

Recent developments:  The House on January 21 passed HR 384, a bill that would place restrictions on the Treasury Department's use of the remaining $350 billion in the TARP (Troubled Assets Relief Program).  A key provision of the bill would require Treasury to allocate a minimum of $40 billion to foreclosure mitigation (although Obama Administration officials have already announced their intention to dedicate at least $50 billion for that purpose).

• Under the bill, the mitigation plan would be required to have five components: a guarantee for qualifying loan modifications; a program to pay down second mortgages; payments to mortgage servicers to implement the modifications; purchase of loans for the purpose of modification or refinancing them; and addressing the costs of the Hope for Homeowners program.

• Congressional Quarterly reports it is unlikely the Senate will take up the measure. 

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