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The Un-stimulating Stimulus Package

The Un-stimulating Stimulus Package

Ancient Chinese Proverb: “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”

On February 17th in Denver, Colorado President Obama is expected to sign into law his $789.5 billion economic stimulus package. It’s the result of a good deal of compromise and curtailing of pork projects.

The Bill received no Republican support in the House. In the Senate three GOP defectors crossed the aisle to vote for the Bill. While this may be partisan politics it speaks volumes about the obviousness of the weaknesses within the legislation. Most of the money is designated to tax breaks and infrastructure projects. That’s good. Unfortunately the Bill’s provisions offer little to no chance of any real or meaningful economic stimulus. That’s bad.

The stopgap measures offer nominal one-time benefits while offering nothing in the way of long-term investment and impact. What’s more the Executive and Legislative branches of our government will finance the package by incurring additional debt. In essence the economic package amounts to a selling of Treasury bonds with distribution of proceeds to the populace.

Let’s take a look at some of the key provisions.

Single taxpayers will be eligible for a “make work pay” credit of up to $400 ($800 for married couples filing jointly). The benefit is completely phased out at $95,000 of income ($190,000 for married couples filing jointly).

Will an extra $7/week influence spending habits? Unlikely.

A combination of infrastructure spending, business tax cuts and direct aid to states is slated as a savior/creator of up to 3.5 million jobs. Specifics include $45.6 billion for school renovations/staffing, $8 billion for fire/police jobs and indeterminate sums for highway/bridge construction, mass transit, public housing and water-treatment. Projections by The Congressional Budget Office offer little hope claiming many of the new jobs won’t materialize until 2014. What’s more many are temporary or seasonal in nature. There’s nothing in the way of long-term jobs in research, engineering, higher education, manufacturing, entrepreneurial, etc.

This isn’t so much a new item as it’s more of a clean up and extension of a credit passed by the last Congress.

Previously a first-time home buyer received a tax credit of 10% of the purchase price (with a max credit of $7,500) as long as the transaction took place between 4/9/08 and 6/30/09. It was an upfront credit to be paid back over 15 years. President Obama’s package provides a twofold amendment to the credit. First the transaction period is extended through the end of August. Second the credit is now permanent so there’s no payback requirement. (There’s also a slight chance the max credit will move up from $7,500 to $8,000 but it’s not yet finalized.) The twofold credit amendment brings a twofold problem. First those who used the credit in 2008 are stuck having to pay it back. The new legislation did nothing to address their plight. Second and more importantly it’s going to take a lot more than a nominal credit to spur home buying. People simply don’t want to undertake a large purchase when there’s uncertainty about employment. They don’t want to buy a home for $400,000 if they expect to see it worth $350,000 in 6 months. They don’t want a 5.5% mortgage if the government continues hinting they’ll fix rates at 4.5%.

It’s time to clear the lots to help Detroit. Under the legislation purchasers of new vehicles may deduct sales and, if applicable, excise taxes on purchases up to $49,500. Purchasers of vehicles over $49,500 still qualify for the incentive but only the first $49,500 of the purchase price is used in the calculation. Taxpayers with AGI of $125,000 will begin to phase out of the deduction with complete phase out at $135,000 of AGI – the figures are doubled for married taxpayers filing jointly. An interesting aside is the loss of an interest deduction on car loans. This was to be included in the legislation but fell victim to compromise. The last time personal loan interest was deductible was prior to TRA of 1986 – Ronald Reagan’s sweeping tax reform package that ushered in the economic prosperity of the 1990s (it wasn’t your doing Bill Clinton!).

As far as stimulus goes this will likely have some impact but expect it to be minor. As with the first-time homebuyer credit a tax perk is nice but employment concerns and other issues are more likely to drive demand (or the lack thereof).

Lots of goodies here – 33 weeks of unemployment compensation, an increase of $25/week and an exemption from taxation for the first $2,400. There’s also a 60% subsidy for up to 9 months of premiums for laid-off workers purchasing health insurance through COBRA.

Helping the unemployed cope is laudable but finding stimulus in doing so is analogous to asking about a train leaving Boston traveling west at 80 mph while simultaneously a train leaves Chicago traveling east at 120 mph. It’s a headache waiting to happen!

Unlike the federal government states are required (at least most are due to state constitutional amendments) to annually balance their budgets. The current economic situation mandates program cuts and/or tax hikes to close the gap caused by declining tax revenues.

Medicaid – the state-administered federal health insurance program for the poor – faces cutbacks like any other program. President Obama’s legislation provides up to $87 billion over the next 24 months to solidify this vital health coverage. While the funding will help maintain existing Medicaid program benefits it does nothing to stimulate the economy. What’s more it will only stem the tide as state budgets will remain under strain due to job losses, declining home values and depressed corporate profits.

The Hope Scholarship Credit (max of $1,800 for college tuition and expenses incurred in the first two years of college) will be replaced by the American Opportunity Education Credit (max of $2,500 in 2009 and 2010 for college tuition and expenses incurred in the first four years of college).

In addition the Pell grant increases by $500 to max out at $5,350 and $5,550 in 2009 and 2010 respectively.

Offsetting the ever-increasing cost of higher education is a noble effort but to suggest it somehow stimulates the economy is misguided. That said it does offer what economists call positive externalities (e.g. society benefits when cancer is cured by a kid who went to college via government subsidies) which ironically is one of the few long-term ‘teach a man to fish’ provisions in the stimulus package.

Not to be outdone by the individual there’s a plethora of stuff for business to like. The §179 expense deduction (up to $250,000) and 50% bonus depreciation for capital expenditures are extended into 2009. There’s also an expansion of the net operating loss carry back provision from two to five years. Unfortunately these are superficial perks since the benefits are extended to corporations with gross receipts of $15 million or less. This covers about 98% of corporations that combined generate only 5% of taxable income. In essence most corporations are covered but not the ones that account for 95% of corporate tax activity.

In 2009 there’s no waiting until year-end for the annual ‘fix.’ The stimulus package includes an increased exemption designed to keep more taxpayers out of AMT.

This refundable credit (max of $1,000/child) kicks in beginning at income of $3,000 thanks to the new legislation. Currently the credit is available only after $8,500 of income is earned.

The current maximum pre-tax amount that can be put aside to cover bus/train commuting costs is $120/mo. The new legislation increases the figure to $230/mo bringing it inline with the amount employers may pay to subsidize parking costs.

We have a tough time getting excited about President Obama’s first major foray into policy. The benefits are superficial and nominal at best. At worst they’re nonexistent. Had the legislation provided incentive for investment that would yield long-term sustainable benefits then we would have been happier. Policies that will achieve this goal are things that repair the financial system, bolster shattered consumer confidence and stabilize home prices. We’re hard pressed to see how these things will be accomplished with this new legislation.

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