TaxVox Tax Stimulus: It Could Have Been Worse
Howard Gleckman
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House-Senate conferees have just about wrapped up a compromise $789 billion stimulus plan that should land on President Obama’s desk by the weekend.

While we do not yet have bill language or revenue estimates, published reports suggest that about one-third of the compromise measure is made up of tax cuts. For the most part, the final version of those tax breaks is worse than the initial House proposal. Most troublesome, this measure waters down two important proposals that would have gotten money into the economy rather quickly and instead adds a $70 billion Alternative Minimum Tax patch that will do little to boost spending—the goal of any good stimulus.

To get the cost of the overall bill below $800 billion--a key goal of a group of Senate moderates-- and to make room for the AMT patch, the conferees scaled back both direct aid to states and Obama’s Make Work Pay tax credit. The slimmed-down credit will give individuals $400 rather than $500 in cash payments, while couples will get $800 instead of $1000. These proposals would have delivered among the biggest bangs for the buck in the bill. Now that big bang is sounding more like a pop. 

This choice has no redeeming economic value. Most people who were in the AMT bullseye did not know it. Protecting them from a tax they never expected to pay will do nothing to encourage them to spend. Worse, most of the benefit will go to higher income taxpayers who are less likely to consume than those lower-income workers who will get less Make Work Pay money. Politics is what it is, but this was a bad economic decision.    

The good news is that two dreadful tax proposals that made their way out of the Senate have been largely—though sadly not entirely—scrapped. A $10.5 billion tax deduction that would have helped high-earners buy fancy cars was scaled way back to a $3 billion federal deduction for sales tax paid on auto purchases. A tax credit that in the Senate version would have been a huge give-away to wealthy homebuyers was pretty much ditched as well. Instead, the conferees reportedly agreed to the preserve the current $7,500 credit and eliminate the requirement that homebuyers repay the subsidy over 15 years.

The compromise also makes it easier for families to qualify for the child credit by reducing the income threshold to $3000. However, it also eliminated a proposal that would have allowed large, once-profitable companies to turn 2009 and 2010 losses into much-needed cash. Instead, it limited the use of those Net Operating Losses to small businesses only.  

I am certain that over the next days we will discover some lovely boondoggles that found their way into the final bill. They should keep us amused well into the weekend.      

Overall, this stimulus won’t fix our economic mess, but it should keep it from getting worse. In truth, while it could have turned out a lot better than it did, it also might have been much worse. TPC will post its report card for the final bill soon. But my grade for the tax cuts: a C.

Primary topic Federal Budget and Economy
Research Area Federal Budget and Economy Individual Taxes Campaigns, Proposals, and Reforms