The House and Senate, by votes of 417-3 and 85-9 respectively, have finalized “economic stimulus” legislation, and it is now on its way to the President, who is expected to sign the bill. The bill’s title -- “Economic Recovery and Assistance for American Workers Act of 2001” -- is misleading given that it is overloaded with huge tax breaks that will do little to stimulate the economy and the provision for unemployed workers and their families is limited to a 13-week extension of unemployment benefits to those whose 26-week benefit limit has expired.

The House and Senate, by votes of 417-3 and 85-9 respectively, have finalized “economic stimulus” legislation, and it is now on its way to the President, who is expected to sign the bill. The bill’s title -- “Economic Recovery and Assistance for American Workers Act of 2001” -- is misleading given that it is overloaded with huge tax breaks that will do little to stimulate the economy and the provision for unemployed workers and their families is limited to a 13-week extension of unemployment benefits to those whose 26-week benefit limit has expired.

The economic stimulus bill has gone through fits and starts since October. Republicans made no bones about this being a good opportunity to provide even more tax cuts, including the repeal of the corporate alternative minimum tax, a reduction in capital gains taxes, and an acceleration of some of the provisions of the $1.3 trillion tax cut passed this summer. Democrats primarily wanted to focus on assisting those who were unemployed as a result of the economic slowdown and the September 11 attacks -- through such measures as extending and expanding unemployment insurance and coverage for health care -- and giving assistance to the fiscally strapped states. Finally, after months of wrangling, and the expiration of many people’s unemployment benefits, it was a question of who would back down the first, since both sides supported extended unemployment benefits.

Eventually, the Republicans agreed to forego some of the tax breaks and Democrats -- apparently driven by the need to get some sort of unemployment benefit passed before Monday’s 6-month mark of the September 11th attacks -- jumped on board, even though the bill offers only the most basic elements of their original plan to assist the unemployed -- a 13-week extension of unemployment benefits. This extension of unemployment benefits was achieved at a high cost -- more tax cuts, the most expensive of which is clearly not focused on economic stimulus. Since the cost of the business depreciation tax cut alone is 7 times the cost of the extension of unemployment benefits, it is difficult to see how the passage of this bill represents a compromise. (For more, see this Center on Budget and Policy Priorities analysis.)

The House passed the bill 417-3 and in the Senate the vote was 85-9.

Key elements of the new bill (which President Bush is expected to sign into law) include:

• $14.4 billion for an extension of unemployment and TANF benefits over the next three years. This includes up to 13 weeks in additional unemployment benefits, although some recipients would receive less if their state programs run for a shorter period. States where the unemployment rate remains over 4% could be eligible for extended benefits after the 13 weeks. The bill does not provide for any increases in benefit amounts or extension of eligibility to part-time workers or others who have not worked long enough to qualify under existing law.
  
  
• Three years of tax breaks for businesses for investments in new computer hardware, software, and other equipment that will cost $96.9 billion over the next three years and $35.3 billion in FY 02 alone. During the year of purchase, a company can depreciate 30% of the investment, with the remaining years at the current 20% level.
  
  
• Tax incentives for investment in New York City to compensate for the September 11 terrorist attacks.
  
  
• Extension of several expiring tax breaks, such as one allowing financial services companies to defer tax payments on overseas profits.

The bill provides no resources to help ailing states cope with budget crunches, such as assistance with burgeoning Medicaid costs or increased block grants so that states can avoid cutting back on services. There is no provision to help the unemployed with health care. The corporate tax break to depreciate 30% of new investment made in the first year will actually further deplete state revenues by as much as $14.6 billion over the next three years because most states tie the corporate income tax to the federal tax. (For more on the impact of the legislation on state budgets, see this Center on Budget and Policy Priorities analysis.)

Perhaps most startling is that the tax write-off on investments is for three years, clearly outside any window of immediate economic stimulus. Previously Sen. Kent Conrad (D-ND) and other Democrats were only willing to accept a one-year tax break, but, again, it seems, momentum to complete the economic stimulus legislation in time for the six-month mark of the terrorist attacks prevailed.

Some predict that since the write-off on business investment is two parts tax cut and only one part economic stimulus, when the tax break expires in three years it will be treated like most other tax breaks and renewed, even after the economy presumably will have moved well on its way through recovery. This, of course, would add yet more cost to the Treasury. (Read more about the huge costs to the federal government of the depreciation bonus for businesses in this Citizens for Tax Justice analysis.)

While OMB Watch sees no problem with running a reasonably sized deficit, the mood in Congress, especially among Democrats, is for a balanced budget. As a result, the huge tax cuts of last summer, combined with the addition of new tax cuts and spending increases for defense and homeland security, can only mean one thing – cuts in domestic spending. As national poll after national poll shows, this is not what the public wants. They want Congress to support domestic investments – education, prescription drugs, environmental clean-up – even if it means delaying or canceling tax cuts. It is unfortunate that many Democrats in Congress, while calling for fiscal responsibility, passed a bill that will cause huge losses of federal and state revenue -- not for important domestic investments, but for corporate tax cuts.

A new Democracy Corps poll shows that 49% of those asked would favor delaying or canceling last year’s $1.35 trillion tax cuts. When asked a similar question, only 29% felt that there was a “great deal” of truth to the statement that, “If we restrain federal government spending, we can cut taxes while continuing to meet our other commitments. Tax cuts are key to economic growth in our country.” In contrast, 51% “strongly favored” a proposal for “a major investment that would create jobs [including] safer airports, more secure borders, community police, better transportation, improvement to public health systems, safeguards for nuclear facilities, and energy conservation that reduces dependence on oil companies.” Similarly, a Zogby poll conducted February 2, 2002, found that 63% favor rolling back the tax cuts if it means more money would be available for environmental protection. This figure grows to 69 percent for increased education funding and 71% for a prescription drug program for seniors. These results echo polls taken by the Los Angeles Times, CNN/USA Today/Gallup, and an Ipsos-Reid poll done for the Committee for Education Funding.

Though the passage of 13 additional weeks of unemployment benefits is certainly welcomed after so many failed attempts to provide assistance to individuals and the economy, it is regrettable that so many in Congress allowed it to come only at the expense of such costly business tax breaks, most of which will provide no economic stimulus and, in any event, are several months behind the need for such a stimulus.