As Congress began its formal work in early October 2001 on constructing an economic stimulus package, there was agreement on only a few items, foremost of which is that the bipartisan spirit of the last month has all but disappeared over the course of this debate. With each side accusing the other of being responsible for the demise of bipartisanship, it seemed that the primary cause was a mutual loss of focus on many of the economic stimulus principles the Administration and party leaders from both houses had agreed on less than two weeks ago, namely:

• The economic stimulus package should consist of temporary measures only and should not threaten the long-term budget outlook or raise long-term interest rates;
• It should be made up of both tax cuts and spending measures; and
• It should immediately address the economic effects of the events of September 11 including the further slow-down of the economy and the thousands of workers who have been laid off since September 11.

It was against this backdrop that the House Ways and Means Committee met on Friday, October 12 to begin to markup the "Economic Security and Recovery Act of 2001" (H.R. 3090) -- Ways and Means Chairman Bill Thomas's (R-CA) version of the President's proposal. The bill, which includes numerous tax breaks both for corporations and individuals, totaling $99.5 billion in FY 2002, was approved in the committee in a straight party line vote, 23-14. Among the tax reductions for corporations are:

• An increase in the amount a company is allowed to deduct in the first year of a purchase of property used in generating the company's income (property must have been purchased after September 10, 2001);
• Acceleration of the timeline companies use in calculating the depreciation in value of their equipment; and
• Repeal of the corporate Alternative Minimum Tax (AMT), which ensures that corporations with annual incomes over a certain amount are not able to use various available exemptions to avoid paying income taxes altogether.

The Joint Committee on Taxation (JCT) estimated that the total cost of these corporate tax cuts, from 2002-2006, would be $112 billion. The elimination of the corporate AMT comprises 20% of the 5-year cost of the corporate tax breaks. We agree that temporary changes in depreciation scheduling and the "depreciation bonus" would give businesses an incentive to purchase new equipment and, thus, would be an effective economic stimulus. Repeal of the corporate AMT, on the other hand, is unlikely to do any immediate good for the economy, and permanent repeal will weaken our long-term budget picture. The total 5-year cost of those provisions aimed at individual taxpayers is $80 billion. The key proposed tax cuts for individuals are:

• A rebate (up to $300 for an individual) for those 35 million people who did not receive the rebate from the earlier tax cut bill because their incomes were low enough not to require an income tax payment in 2000;
• Acceleration to January 1, 2002, of the June tax cut package's drop of the 28% marginal tax rate to 25%, which was scheduled to take place in 2004;
• Reduction of the capital gains tax rates from 10% to 8% and 20% to 18%; and
• An increase in the individual AMT exemption

Among these, the acceleration of the drop of the 28% marginal tax rate is the most expensive. At a 5-year cost of $53.7 billion, it comprises 28% of the total $195 billion cost of the proposal, and while the reduction sounds like a "middle-class" tax cut, it actually benefits those who make more money, since it is people with higher incomes who will realize the full benefit of that tax bracket rate reduction. In addition to these provisions, there were some that addressed the needs of those workers who have already been, or will be, laid off, following the September 11 terrorist attacks. One of these is the President's proposal for $3 billion in grants to states to help extend health insurance benefits and job training to the unemployed who qualify. This is likely to reach far fewer unemployed workers than it needs to, as only workers in states that qualify will benefit. (See this Center on Budget and Policy Priorities analysis for more details.) The package also provides for a 13-week extension of unemployment benefits, again only to workers in certain states that experience a 30% increase in their unemployment rates. Finally, the remaining proposal put forth by the President -- permission to states to use their remaining $11 billion in Federal SCHIP money to pay for services for the unemployed -- does not get factored in to the cost analysis of such a bill, as it does not create an additional draw on federal funds. However, in light of tight state budgets, it is a huge draw on state funds. In response to what they described as being "frozen out" of the discussion, House Democrats will be issuing a substitute stimulus package later this week. According to a report in BNA, key elements of their proposal include:

• A rebate for the 35 million people who did not receive tax rebates earlier this fall (this component is the same as that put forth in H.R. 3090);
• A two-year -- instead of the Republicans' permanent -- waiver of the corporate AMT;
• $15 billion in expansion of unemployment benefits: would extend benefits to those who, under current law, do not qualify because they are temporary or part-time workers; expand the benefit period by 13 weeks; and supplement the weekly benefit payment by 15% or $25, whichever is greater; and
• $17 billion to continue health care insurance for the unemployed: would pay 75% of the COBRA premium for eligible individuals for up to 12 months; provide a temporary expansion of Medicaid to cover those who are not eligible for COBRA and pay the remaining 25% of the COBRA premium for low-income individuals unable to afford it.

House Democrats are said to be offsetting the cost of their stimulus package by freezing the next reduction in the top marginal rate, scheduled to occur in 2004. Democrats estimate that holding the top rate at its current level of 38.6% will impact 0.7% of all households and would raise $91 billion. It is not clear when the Senate will begin its work on the stimulus package, although Majority Leader Tom Daschle (D-SD) has noted that when it does the focus will be on the type of proposals to be included in the House Democrats' proposal. In addition, Daschle is looking to provide more money for national security projects, including strengthening the nation's response system to biological terrorism and its rail infrastructure. The House bill could be ready for floor debate this week. There are a number of measures we believe would be most successful at giving the economy a jumpstart while taking care of those who have already been hit by the effects of the slow-down: tax rebates for low-income families, who are most likely to spend them right away; expensing and depreciation tax breaks for companies that will use them to facilitate the purchase of new equipment; spending that will address the needs of unemployed workers in this very new new-economy, as well as on the improvement of existing and creation of new schools, rail infrastructure, and our public health system, which will help create jobs while it works to provide complete and long-lasting domestic security. Ultimately, however, without a commitment from all sides of the debate to crafting an economic stimulus package that will actually stimulate the economy, we will be left only with an expensive but ineffective tax cut package -- again. Read more on the OMB Watch response to the Bush economic stimulus proposal.