On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.
House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.
The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.
The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.
Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor
As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.
The Senate's Senseless Six
But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.
1. One-year AMT "patch": included in conference agreement.
This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."
2. Homebuyer tax credit: dramatically scaled back in conference agreement.
The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.
3. Deduction for automobile purchases: dramatically scaled back in conference agreement.
This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.
4. Suspension of taxes on UI benefits: included in conference agreement.
The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.
5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.
This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.
6. Delayed recognition of certain cancellation of debt income: included in conference agreement.
Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.