CBPP Discounts Features of New Stimulus Proposal

The new plan includes several multiyear tax cuts for corporations and high-income individuals that would be either inefficient in stimulating the economy or more effective if limited to one year. Also, Greenstein argues that the multiyear or permanent tax provisions will widen budget deficits in the years following the end of the recession.

Greenstein also writes that the new plan retains features of the original House bill that are "highly deleterious" to states. "The plan would cause states -- which already face budget deficits this year of $35 billion to $50 billion -- to lose an additional $5 billion in state revenue each year for the next three years," he says. Furthermore, the plan continues to exclude those measures extending unemployment insurance benefits to low-wage workers who would qualify if the wages they earned in recent months were counted. The plan also fails to extend unemployment insurance to those who meet all criteria for unemployment benefits, but are disqualified because they are available for part-time work rather than full-time work, Greenstein says.

Finally, the report indicates that the health insurance proposals in the new plan are unlikely to provide "adequate assistance" to many low- and moderate-income workers who lose their jobs. As a result, those individuals and their families would have to rely on Medicaid. However, Greenstein warns, with the new plan's increased pressure on states to cut budgets, Medicaid is a "prime candidate" for budget cuts.

"The plan includes several permanent tax cuts, which would further exacerbate the nation's long-term budget difficulties," Greenstein concludes.

[2] The plan includes numerous multi-year (and, in some cases, permanent) tax cuts for corporations and higher-income individuals that would either be inefficient in stimulating the economy or much more effective as stimulus if limited to one year. These multi-year or permanent provisions will widen budget deficits in years after the recession is over. While estimates from the Joint Tax Committee and the Congressional Budget Office are not yet available, the plan appears to cost well over $50 billion in the nine years after 2002 -- that is, in years where the economy is expected to be in recovery and stimulus is no longer needed. (This estimate is based on estimates provided by the Joint Tax Committee and CBO in recent weeks for identical or similar provisions in earlier stimulus packages.)

[3] Moreover, the multi-year nature of these provisions, under which they would remain in effect long after the downturn ends, makes sense only if one of the goals of the legislation is to heighten the chances that these corporate tax cuts will be extended when they are scheduled to expire and thus will become ongoing fixtures of the tax code, a course that would cost several hundred billion dollars over the coming decade. While the plan drops some tax provisions included in the original House bill -- such as a capital gains tax cut and large, retroactive corporate tax refunds -- the principal tax provisions of the House stimulus bill remain intact in whole or in large part, and the plan adds several new special interest tax provisions, such as changes in pension rules that would enable firms to reduce pension contributions and changes in the individual Alternative Minimum Tax that would principally benefit high-income taxpayers.

[4] Furthermore, the new plan retains features of the House bill that are highly deleterious to states. The plan would cause states -- which already face budget deficits this year of $35 billion to $50 billion -- to lose an additional $5 billion in state revenue each year for the next three years. Since states must balance their budgets even in recessions, this would force states to institute still-larger budget cuts or tax increases this year, steps that would dampen the economy and undercut federal stimulus effects.

[5] In addition, the plan continues to exclude measures to extend unemployment insurance benefits for the coming year, at federal cost, to low-wage workers who would qualify if the wages they earned in recent months were counted and to workers who meet all other criteria for unemployment benefits but are disqualified because they are available for part-time rather than full-time work. Because many unemployed low-wage workers would still fail to qualify for unemployment benefits but could lose other assistance as a result of the larger state budget cuts that the plan would engender, some of the low-income unemployed could be made worse off by the plan. Finally, while larding costly tax breaks on corporations that would endure long after the downturn ends, the plan excludes even a modest, short-term increase in unemployment benefit levels.

The Plan's Tax Provisions

The plan's tax provisions include the following:

o Depreciation: The plan contains a generous depreciation

Unemployment Insurance

[6] The new plan would provide an additional 13 weeks of unemployment benefits for workers in all states who lost their jobs after March 15 and have exhausted their regular benefits. This represents a marked improvement over the earlier House bill, which contained no comparable provision.

[7] However, the plan rejects all other temporary improvements in unemployment benefits contained in the Finance Committee stimulus plan. Those provisions would make more part-time and recently employed workers eligible for benefits when they are laid off and provide for a modest increase in unemployment benefits.

[8] The new plan retains a provision of the House bill that would speed up the transfer of $9.2 billion already slated to be shifted from the federal unemployment insurance trust funds to state unemployment accounts.³ While this transfer can help states whose unemployment accounts are running low on funds, it would neither offer much assistance to the unemployed nor do much to stimulate the economy. This is because most of the funds it would transfer to state unemployment accounts would not be spent. Most states would use a large share of these funds to strengthen the reserves in their state unemployment trust funds, rather than to expand or extend unemployment benefits. States have no way of knowing how long or deep the recession will be, and they understandably are concerned that their reserves be adequate to weather the recession.

[9] A new survey of states conducted by the National Association of State Workforce Agencies confirms that most states would not use any of these funds to expand or extend unemployment benefits.⁴ The survey findings, which have been known for a number of weeks, also demonstrate that statements about this provision made in documents circulated late Monday by Rep. Bill Thomas are misleading. The Thomas documents declare that states would have the option of using these transferred funds to extend unemployment insurance coverage to laid-off part-time workers and to workers who would be eligible if the wages they earned in recent months were counted. This may suggest that Rep. Thomas has moderated his position on these matters. In fact, the new proposal represents no progress on these issues. States have long had the option to count more recent wages and to cover part-time workers; most states have declined to do so because of the potential impact on state unemployment insurance tax rates. That is why the Senate Finance Committee bill would cover part-time workers and count more recent wages for a one-year period at 100 percent federal cost. Moreover, the recent survey by the National Association of State Workforce Agencies, in which states were specifically asked what uses they would make of the $9.2 billion in transferred funds if the House proposal became law, shows most states would not spend any of the transferred funds either to extend coverage to these workers or to improve unemployment benefits in other ways. The survey found that "most responding states said they would not expand or extend benefits if they received the $9.3 billion in transferred funds." Most of the 38 states that responded specifically said they would not use these funds to count more recent wages, to extend coverage to part-time workers, or to increase the weekly benefit amount.

[10] These survey findings also are supported by Congressional Budget Office estimates. CBO estimates indicate that if the $9.2 billion in funds are transferred now, only a very small fraction of these funds (probably less than $1 billion) will actually be used in fiscal year 2002 to maintain or expand benefits.

[11] Temporarily expanding unemployment insurance benefits would be highly effective as economic stimulus. In a recent analysis, Nobel Prize winning economist Joseph Stiglitz and Brookings Institution senior fellow Peter Orszag noted that "in a recession, the primary problem is that the nation's firms face a reduction in demand for their products -- not that they lack available workers, equipment, or anything else needed to produce goods and services."⁵ Increasing unemployment benefits addresses this critical demand problem by boosting consumer spending and thereby helping other workers keep their jobs. ⁶ Stiglitz, Orszag, and other economists also have noted by increasing aggregate demand, improvements in unemployment benefits would be more effective in providing economic stimulus and reducing lay-offs than most of the tax cuts included in the new package.

Health Insurance for the Unemployed

[12] The health insurance provisions of the package also are problematic. The principal such provision would provide a tax credit for 60 percent of health insurance premiums that laid-off workers pay. A second proposal would increase funding for a small Labor Department blockgrant program known as the National Emergency Grants program and make the provision of health insurance one of the allowable uses of the block-grant funds. Both of these proposals are poorly designed and likely to prove of limited effectiveness.

o The tax credit could be used either to purchase employer-based

[14] Overall, the plan would increase pressures on states to cut their budgets. In many states, Medicaid is a prime candidate for budget cuts. Cuts in Medicaid may further limit the options available to some low-and moderate-income families that are seeking health care coverage during the recession.

Conclusion

[15] The new offer package consists primarily of multi-year tax cuts for businesses and upper-income individuals that would be of limited effectiveness as stimulus, while offering relatively modest assistance for the unemployed and no fiscal relief to states. With the Administration projecting unified budget deficits at least in 2003 and 2004, there is little rationale for enacting proposals that would produce substantial revenue losses in these years but constitute inefficient and ineffective ways of stimulating the economy now. Furthermore, by fashioning key business tax cuts in the package as multi-year cuts that extend beyond the period for which the recession is forecast, the plan would virtually ensure there will be significant pressure to make these tax breaks permanent, creating yet another danger for the budget. In addition, the plan includes several permanent tax cuts, which would further exacerbate the nation's long-term budget difficulties.

The proposal would delete depreciation tax breaks from those added to a firm's income in calculating the firm's AMT liabilities. An examination of IRs corporate tax return data for 1998, the most recent such data available, shows that the depreciation adjustment in the AMT accounted for more than 100 percent of the adjustments and preferences added to income for the calculation of corporate AMT payments. (Depreciation can be more than 100 percent because there are some items that are subtracted.) Thus, removing depreciation from the calculation would largely gut the AMT.

These changes also would enable corporations to secure billions of dollars of tax credits, as would have been the case under the House stimulus bill. It was these credits that would have resulted in huge checks being written to a number of corporations under the House bill. Corporations have build up credits from prior payments of the AMT. They may use these credits to reduce their regular corporate income tax liability if -- and only if -- the credits do not reduce their tax liability below the level at which they would have an AMT liability. If the corporate AMT is eviscerated to the point that few corporations have a significant AMT liability. then corporaitons will be able to use these credits to reduce their regular tax liability. This is what would happen under the corporate AMT provision in the new plan. Many corporations would be able to receive billions of dollars of tax credits, although the credits would be spread over a number of years rather than paid in full now.

² Funding requirements for defined benefit pension plans depend on an interest rate: The higher the interest rate, the lower the pension contribution a firm is required to make, since a higher interest rate means that smaller contributions to a pension fund are needed to provide workers a given level of pension benefits in future years. Accordingly, firms are allowed to make lower pension contributions when interest rates are high but must make larger contributions when interest rates are low. As interest rates have fallen in recent months, the required contributions into defined benefit plans have risen, balancing the lower contributions that many firms made when interest rates were high. The new stimulus package would artificially raise the assumed interest rate used to determine the required level of pension contributions for the next two years, thereby reducing the contributions that firms are required to make. Some adjustment to the assumed interest rate may be justified because the 30-year bond is disappearing, but it appears that the adjustment included in the new package will exceed what can be justified on this basis.

³ Under current law, $5 billion will be transferred to states under the Reed Act in 2002. The proposal also would make $4 billion that would not have been transferred until 2003 available in 2002, making a total of $9.2 billion available in 2002, and would provide these funds quickly after enactment.

⁴ The survey, "How Would Your State Use An Accelerated Reed Act Distribution? A Summary of A State Survey by the National Association of State Workforce Agencies" is available on the NASWA website (www.naswa.org).

⁵ Peter Orszag and Joseph Stiglitz, "Tax Cuts Are Not Automatically the Best Stimulus: A Response to Glenn Hubbard," Center on Budget and Policy Priorities, November 27, 2001.

⁶ Peter Orszag, "Strengthening Unemployment Benefits Would Be Much More Effective in Saving Jobs than Most Corporate Tax Cuts," Center on Budget and Policy Priorities, November 14, 2001.

⁷ Another problem is that only unemployed workers eligible for unemployment insurance could receive the tax credit. A substantial number of low-income unemployed workers do not receive unemployment insurance. Indeed, because the plan does not include the proposals in the Senate Finance Committee stimulus bill that would expand access to unemployment insurance to part-time workers and low- wage workers who would be eligible if wages they earned in recent months were counted, a substantial number of lower-income unemployed workers would be excluded from eligibility for the health tax credit.

⁸ Sandra Clark, "Do Proposals to Increase Funding for National Emergency Grants Provide an Effective Way to Meet the Health Insurance and Other Needs of Laid-off Workers?," Center on Budget and Policy Priorities, revised November 27, 2001.