Partisan Tax Relief For The Rich And Powerful
Congress' Stimulus Package Passes Over the Poor and Unemployed
The Center on Budget and Policy Priorities
The House Ways and Means Committee's economic stimulus package approved on October 12 -- costing $103 billion in fiscal year 2002 and $162 billion over ten years -- consists overwhelmingly of tax cuts. More than 95 percent of its cost in 2002 and over the next 10 years are tax reductions, and between eight and nine of every ten dollars in the package over the next decade are cuts for corporations and businesses, or cuts that disproportionately benefit upper-income families.
While the legislation showers tax-cut benefits on corporations and high-income individuals, it provides scant assistance to unemployed workers. Only a small fraction of unemployed workers would receive added unemployment insurance benefits when their regular benefits run out, or secure any help in maintaining their health insurance. Indeed, most unemployed workers would get no assistance under the legislation.
The legislation also is inconsistent with bipartisan principles for a sound and fiscally responsible stimulus package that the Ways and Means Committee chairs and the ranking members of the House and Senate Budget Committees issued just two weeks ago. Those principles call for stimulus measures to be temporary and to have a quick effect on the economy. However, many of the tax cuts in the Ways and Means package are permanent and would do little to stimulate the economy now.
Essentially, the Ways and Means Committee has used the stimulus legislation as a vehicle to attach a number of tax cuts that have little to do with boosting the economy now or assisting unemployed workers. Instead they are tax cuts that have long been sought by powerful interest groups and that some in Congress have long favored for ideological reasons. Even Treasury Secretary Paul O'Neill criticized some of the elements of the Ways and Means package as "show business" designed to accommodate constituents.
Some of these tax provisions provide major benefits to selected corporations. Changes in the corporate Alternative Minimum Tax included in the Ways and Means package would provide $25 billion in 2002 to corporations subject to the AMT. According to an analysis by Citizens for Tax Justice, more than a dozen major corporations -- including IBM, General Motors, and several energy companies -- would each receive tax breaks of over $100 million as a result of these changes. Companies would receive most of these AMT benefits as tax refund checks. The total amount of such checks that would be written to these corporations would exceed the total in "rebate" checks that would be sent to over 40 million low- and moderate-income taxpayers under the bill.
Moreover, if the proposal's provision to allow partial expensing of business investments were approved, it would cause states to lose an estimated $5 billion a year in revenues for the next three years. This comes against a backdrop of already falling state revenues and discussions in many state capitals of new budget cuts or the need for state tax increases to make up the shortfalls.
Certain other key provisions in the Ways and Means legislation heavily favor high-income taxpayers, the group that is most likely to have the resources to weather an economic downturn and least likely to spend additional after-tax income. According to a separate analysis by Citizens for Tax Justice, the tax cuts in the Ways and Means legislation are as skewed to people at the top of the income spectrum as the tax cuts enacted in June. In addition, several of the tax measures in the Ways and Means package would make the nation's already worrisome medium-and long-term budget outlook more problematic.
In fact, the threat the package poses to long-term fiscal discipline is more serious than an initial glance at the legislation might indicate. The official cost estimate that the Joint Tax Committee has issued for the legislation rests on the assumption that the biggest immediate tax cut in the package -- the partial expensing of investments that corporations make -- actually will expire at the end of three years, as the legislation calls for, rather than being extended at that time. But the record in Congress suggests that 'temporary' measures often are extended or become permanent. If that occurs -- and there is no question there will be powerful corporate lobbying efforts to ensure partial expensing is extended when its scheduled expiration approaches -- the cost of this package will grow by about $250 billion over 10 years. If partial expensing remains in effect, the package's total cost will exceed $400 billion over the decade.
The Ways and Means legislation raises the following issues:
While including generous tax breaks for corporations and upper-income individuals, the Ways and Means legislation provides extremely limited assistance to unemployed workers. The package speeds up the transfer of $9 billion already slated to be shifted from the federal unemployment insurance trust funds to state unemployment accounts. It also provides states with $3 billion through the Social Services Block Grant to provide health coverage for unemployed workers.
These provisions are unlikely to offer much assistance to the unemployed or to provide much stimulus to the economy. The $9 billion in transferred unemployment insurance funds would simply go into state unemployment trust fund reserves. States would not be required to use these funds to pay unemployment benefits or to make any payments in the months ahead. Indeed, many states would be likely to "bank" these funds so they have a larger reserve in their unemployment accounts.
The Ways and Means package includes a number of permanent tax cuts, thereby departing from bipartisan principles that all provisions of a stimulus package be temporary. The legislation includes four permanent tax cuts: a reduction in the capital gains tax rate, the repeal of the corporate Alternative Minimum Tax, a conversion into permanent law of what is now a temporary provision that allows deferral of taxation on certain income that businesses (primarily multinational corporations involved in banking, finance, and insurance) earn overseas, and changes to allow the cost of improvements to leased property to be depreciated over a shorter period.
These permanent tax cuts violate the principles the chairs and ranking minority members of the House and Senate Budget Committees issued on October 4, which call for stimulus measures to be temporary, to last no more than 12 months to the extent that is practicable, and not to worsen the long-term budget outlook. Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin have warned that if a stimulus package contains items that worsen the longer-term fiscal outlook, the package will risk pushing up long-term interest rates and thereby undercutting some of the stimulative effect the package otherwise might have.
The majority of the temporary provisions in the package would be in effect for two or three years, distorting the definition of "temporary" and increasing the likelihood that these provisions may be permanently extended. The chairs and ranking members of the House and Senate Budget Committees called for stimulus proposals to have a large part of their impact on the economy in the next six months and to sunset within one year, to the extent practicable. Only one major tax provision in the Ways and Means package meets this test -- the rebate for low-income workers. The spending provisions to aid the unemployed also would be temporary and end relatively quickly.
In contrast, all of the corporate tax cuts that are temporary would expire in either 24 months or 36 months, and thus would extend beyond the period when the economy is expected to be in need of stimulus. The largest individual income tax cut -- accelerating the implementation of the 25 percent tax rate -- would entail costs over five years, of which only one-quarter would occur in 2002.
The provision to accelerate certain tax-rate reductions scheduled for 2004 and 2006 would reduce the ability of policymakers to ensure fiscal discipline over the long run, a matter of particular concern given that most or all of the total budget surplus over the next ten years has apparently disappeared. New estimates issued by the chairs and ranking members of the House and Senate Budget Committees show that even without a stimulus package, virtually the entire non-Social Security surplus over the next ten years has disappeared. Their estimates show that only $53 billion of the non-Social Security surplus would remain over the next 10 years.
Other tax measures in the package -- such as the repeal of the corporate AMT -- also could lead to large out-year costs. The corporate AMT was enacted to prevent excessive use of tax avoidance schemes by corporations; its repeal would signal corporations that they can use existing tax breaks more aggressively. Moreover, repeal would be likely to spur corporations to push more vigorously for enactment of additional tax preferences that would further reduce future corporate income tax revenues, since new preferences would become more valuable in the absence of the AMT.
The capital gains tax cut, included against the advice of Fed Chairman Greenspan and former Treasury Secretary Rubin, would be especially ineffective as a stimulus mechanism and constitutes another permanent tax cut whose benefits would overwhelmingly accrue to the wealthiest Americans. In congressional briefings following the September 11 attacks, Greenspan and Rubin laid out principles that Congress should adhere to in developing an economic stimulus package. Although Greenspan and Rubin generally avoided specific policy recommendations, they singled out the capital gains tax rate as being inappropriate for economic stimulus legislation. Similarly, in a recent report the Congressional Research Service found that "a capital gains tax cut appears the least likely of any permanent tax cut to stimulate the economy."
The package includes corporate tax cuts that create little incentive for firms to undertake new investments. As noted, the package proposes a permanent repeal of the corporate Alternative Minimum Tax. This tax was modified as part of the 1986 Tax Reform Act to prevent corporations from pyramiding so many tax breaks on top of each other that some corporations could largely or entirely escape income tax even while pulling down large profits. Although the corporate AMT may have to be adjusted temporarily to avoid unwanted interactions with other temporary provisions in the package, permanent repeal of the corporate AMT cannot be justified as an effective stimulus mechanism. Indeed, corporate AMT repeal would be ineffective as a stimulus, since it would not induce corporations to undertake new investment. Eliminating the corporate AMT would simply reduce the taxes that corporations subject to the AMT must pay on their current income, the majority of which represents income earned on investments made in previous years.
Provisions in the Ways and Means package also would worsen the fiscal situation in the states, where budgets are already under severe strain as a result of the economic slowdown. Some 44 states use federal depreciation rules for their own corporate income taxes and would therefore be adversely affected by the Ways and Means proposal to provide more generous depreciation deductions by allowing partial expensing of business investment. States would likely lose about $5 billion a year in state revenues from 2002 through 2004 as a result of this provision. This reduction in state revenues would come at a time when many states are falling into fiscal crisis and, because of balanced budget requirements, are being forced to cut programs and/or raise taxes amidst the downturn.
Taken as a whole, the Ways and Means legislation reflects a sharp departure from the bipartisan principles for economic stimulus that have emerged over the past few weeks in discussions among congressional leaders, the administration, and respected economic advisers such as Alan Greenspan and Robert Rubin. One principle that has been stressed repeatedly is the importance of avoiding fiscal policies that will worsen the medium- and long-term budget outlook, since such policies have the potential both to exert further upward pressure on long-term interest rates and to worsen the nation's fiscal problems down the road. High long-term interest rates can dampen economic activity today, discouraging business and housing investment, and prevent the Federal Reserve's rate-reduction policy from being as successful as it otherwise would be in stimulating the economy.
Despite what appeared to be bipartisan acceptance of this principle, nearly $60 billion -- or almost 40 percent -- of the $162 billion ten-year cost of the package would occur after 2002, when the economy is likely to have recovered. Further, those figures understate the full extent of the fiscal problems the Ways and Means proposal may cause. The "out-year" cost will be much greater than $60 billion if some of the temporary corporate tax cuts are extended when they are about to expire. As noted, a large push to extend these tax breaks is a virtual certainty when they are about to end.
The Center on Budget and Policy Priorities is a nonpartisan research organization that analyses government policies and programs, especially those affecting low- and moderate-income people.