House Ways and Means OKs Stimulus Bill

The approved bill goes further than the $60 billion President Bush has indicated he favors ? but gives too many benefits to corporations and wealthy individuals for the comfort of House Democrats.

About 70% of the almost $100 billion in tax benefits that would flow in fiscal 2002 go to businesses. Over the next decade, the bill passed by Ways and Means would cost the federal government nearly $160 billion in lost revenues.

Employment Related Impacts

Along with tax breaks, the GOP stimulus package would provide about $12 billion in federal funds to states to allow them to offer more income and health care support payments to jobless workers. Democrats tried to offer amendments that would have boosted that total but lost on largely party-line votes.

The bill also includes a provision that would allow individuals to withdraw funds without penalty from individual retirement accounts (IRAs) and other retirement plans such as 401(k)s to help pay for health insurance premiums.

Investment Incentives

To encourage business investment, the House bill includes a package of mainly temporary (three-year) tax breaks that would encourage companies to invest in new plant and equipment by allowing them to recoup the cost of such spending more quickly. Companies would be allowed to claim an extra 30% first year depreciation for investments in new plant and equipment during the three years beginning Oct. 12, 2001.

Additionally, companies that qualify for expensing – generally smaller firms – would be allowed to immediately write off up to $35,000 of new investments during the next three years, compared with the current $24,000 a year.

For the next three years businesses would be permitted to carry net operating losses back five years (versus two years under current law) to offset past profits. This would allow previously profitable firms to convert current losses into a cash refund from the Internal Revenue Service.

The bill would also repeal the corporate version of the Alternative Minimum Tax retroactive to 1986, when the current version was enacted. That would allow firms to convert unused AMT credits into immediate cash ? generating an estimated $25 billion in refunds from the IRS.

Individual Impetus

For individuals, the bill includes:

• a one-time federal payment to low-income taxpayers who weren?t eligible for the earlier tax pre-bates (these would have to be made by the end of the year)
• a temporary benefit for those who experience losses on investments
• a cut in the 27% tax rate to 25% effective next year, rather than the scaled implementation in current law
• an increase in the threshold where the alternative minimum tax (AMT) kicks in
• a cut in the top rate on individual capital gains, to 18% from 20% at present, by repealing a five-year holding period. The 10% rate on capital gains paid by low-income taxpayers would be cut to 8%

Next Steps

The measure next goes to the full House of Representatives for further consideration, perhaps as early as next week.

The Democrat-controlled Senate is expected to differ “substantially” from the House version, according to Senate Majority Leader Tom Daschle (D-South Dakota).