The $789 billion stimulus bill moving toward final passage by Congress will not quickly solve the historic problems besetting the economy, but it could reduce the damage, while providing relief for the unemployed and the uninsured.
Nariman Behravesh, chief economist at IHS Global Insight, predicts the biggest effects will occur in 2010 from the bill’s spending for aid to state and local governments and on infrastructure such as roads, bridges, transit and other areas.
Moody’s Economy.com chief economist Mark Zandi says the bill could help end the economic slide. He warns, however, that the stimulus spending will likely be too small, given the size of the economic decline, and suggests Congress may have to revisit the issue.
The non-partisan Congressional Budget Office says the bill could increase employment in a range of 800,000 to 2.3 million jobs by the fourth quarter of 2009 and 1.2 million to 3.6 million by the fourth quarter of 2010.
HOUSING/CARS: Buyers could get a modest break
If you’re in the market for a new car or your first house, the compromise stimulus bill offers modest tax breaks for both kinds of purchases.
First-time home buyers would receive an $8,000 tax credit, and they wouldn’t have to repay the government later as is required for the current $7,500 credit. An earlier Senate proposal would have provided all home buyers with a $15,000 credit.
“The home buyer tax credit is a plus for the housing market, but only a small plus,” says Mark Zandi of Moody’s Economy.com. “The credit … covers only a part of the down payment needed to make a purchase. The housing market will take any help it can get, but it needs more.”
Other economists point out that the tax credit will still provide a mild jolt to the market by encouraging home purchases, which in turn should help curb the rapid rate of home price declines.
“While scaled back somewhat, it is still a good idea,” says Brian Bethune at IHS Global Insight. “It should induce more home sales in 2009, and this will be an important support for the housing market and the housing industry. It should also buffer the rate of decline of home prices.”
The bill also would allow new car buyers to deduct the purchase’s sales tax from taxable income.
“We’re happy to see the sales tax help, but credit is really the big issue,” Chrysler President Jim Press said Thursday in Chicago.
“Ever-increasing credit score requirements by lenders,” and slipping consumer credit ratings take many potential buyers out of the pool, Press said.
“A positive development, but we don’t think it would have an immediate impact on the market,” said Chris Hosford, vice president at Hyundai’s U.S. operations.
The average new car purchase price the first 11 months of last year was $28,280, and the average used car trade-in value was $15,203, according to data from the National Automobile Dealers Association. Paul Taylor, NADA chief economist, says states typically tax the difference — $13,077 in this case.
A 5% rate, as in Massachusetts, would be $654, Taylor says, meaning the deduction would reduce taxable income that much.
By Stephanie Armour, Sharon Silke Carty and Chris Woodyard
TAXES: A $400 to $800 credit for many taxpayers
A key element of the stimulus bill would provide most Americans with a tax credit of $400, or $800 for married couples. The tax credit would phase out for single taxpayers with adjusted gross incomes of $75,000 to $90,000 and married couples with AGI of $150,000 to $190,000.
The tax credit would increase the average taxpayer’s paycheck by about $8 a week, prompting some to question whether it will do much to stimulate consumer spending. But for a single worker, the credit is the equivalent of a $500 salary increase, after taxes, says Clint Stretch, managing principal for tax policy at Deloitte Tax. “In this economy, if you walked into your boss’ office and demanded a $500 raise, you’d probably get laughed at,” he says.
Retirees who receive Social Security benefits and individuals on disability would receive a $250 tax credit, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. Because these individuals typically don’t have withholding, they’ll likely receive a check, he says.
Other tax provisions in the stimulus package:
•An expanded earned income tax credit and child tax credit for low-income families.
•A higher education tax credit. Parents of college students would be eligible to claim a tax credit of up to $2,500. The credit is more generous than the existing Hope Scholarship Tax Credit, which maxes out at $1,800 and is available only for the first two years of college, says Amy McAnarney, executive director of H&R Block’s Tax Institute. The tax credit, which would be available in 2009 and 2010, phases out for single taxpayers with AGI of $80,000 to $90,000 and married taxpayers with AGI of $160,000 to $180,000.
•A stopgap measure designed to prevent the alternative minimum tax from hitting more than 24 million households in 2009. The AMT was designed to prevent extremely wealthy taxpayers from using loopholes and deductions to avoid taxes. But because it was never indexed to inflation, it has expanded to encompass more upper-middle and some middle-class taxpayers. About 4 million owed the AMT last year.
By Sandra Block
ENERGY: Weatherizing homes will save money
The agreed-upon stimulus plan provides about $50 billion aimed at ushering in a clean-energy future and includes money or tax credits for Americans to weatherize their homes and buy hybrid cars.
It also commits dollars to upgrading the electricity grid and underwriting renewable energy projects.
“This is going to be an extraordinary boost to our challenge of preparing for global warming legislation and re-energizing the American economy,” says Tom “Smitty” Smith, director of Public Citizen’s Texas office.
While many analysts cheered provisions to weatherize homes as both an instant way to create jobs and put money in consumers’ pockets, some say other initiatives are insufficient and won’t deliver a quick economic boost.
The bill sets aside $5 billion to weatherize more than 1 million modest-income homes, saving families an average $350 a year. It devotes $6.3 billion to improve federally backed and public housing projects with new insulation, windows and furnaces. Higher-income households can make similar improvements and get expanded tax credits.
For every dollar spent, such programs produce about $3 in electricity savings, Smith says.
Spending $11 billion to upgrade the nationwide transmission grid to get renewable energy from rural areas to cities and digitize the electric grid to prevent outages is more controversial.
“It’s just too little,” says Joel Kurtzman, senior fellow at the Milken Institute, an economic think tank. He says it will cost about $100 billion.
Kenneth Medlock, energy fellow at Rice University’s Baker Institute, says grid improvements will take years and won’t spawn jobs immediately.
Providing a tax credit of up to $7,500 for families that buy plug-in hybrids to spur a new generation of cars “will help the environment and help Detroit,” Kurtzman says.
But automakers won’t have plug-in hybrids and battery-power electrics in showrooms until next year at the earliest.
“To roll that into a stimulus is almost misleading,” Medlock says.
By Paul Davidson
THE SAFETY NET: Jobless get a little extra help
Many of those who are unemployed will get a boost from the stimulus bill, including a $25 increase in weekly benefit checks through 2009 that should help not only those who are out of work but the broad economy as that money gets spent.
Currently, the nationwide average weekly check to those receiving unemployment benefits is $295.05, ranging from $179.08 in Mississippi to $408.28 in Hawaii, according to the National Employment Law Project.
Increasing payments is a good way to stimulate the economy, because, “You can get money into the hands of people right away,” says Michael Hicks, director of the Center for Business and Economic Research at Ball State University. And people who are unemployed are likely to spend it.
More than 4.8 million people were collecting unemployment benefits at the end of January, up 78% from a year earlier and the highest since records began in 1967, the Labor Department said Thursday.
The bill includes other measures to help those who have lost their jobs. They:
•Lengthen the period in which people can be eligible for extended unemployment benefits. The program, which provides up to 33 weeks of extra jobless benefits after workers exhaust the regular 26 weeks received in most states, was passed last year and was set to expire at the end of March. Under the stimulus bill, the extended benefits would be available through the end of 2009. The NELP estimates this will help about 3 million people.
•Provide money to states that agree to make benefits available to more workers. That would help at least 500,000 people, including some low-wage and part-time workers, who wouldn’t otherwise receive unemployment benefits, the NELP says.
•Suspend the taxation of unemployment benefits up to $2,400.
The measure also helps the unemployed and others by increasing the maximum monthly food-stamp benefit by 13%, which lawmakers estimate will help 31 million Americans, half of them children. And the bill provides a subsidy to cover 65% of a worker’s COBRA health insurance premiums for up to nine months. COBRA lets workers continue their former employer’s coverage for at least 18 months.
By Barbara Hagenbaugh
BROADBAND: Help for rural areas
The stimulus bill includes $7 billion for broadband deployment in rural markets across the USA.
That high-speed Internet access is counted as “infrastructure” is illuminating in itself, says Gene Kimmelman of Consumers Union.
Under the Bush administration, broadband service was treated as a luxury, he says. The Obama-backed stimulus package, in contrast, “treats Internet communications as an essential service, just like our highways,” Kimmelman says.
With that baseline established, Kimmelman says, he expects major public policy shifts to follow, with the goal of making broadband available and affordable to all Americans. Though final language is still being worked out, the $7 billion plan offers “grants,” or funding, to companies willing to deploy broadband — wireless or wired — in “underserved” or “unserved” markets.
But there are regulatory strings attached, notes Paul Glenchur of Stanford Group in Washington, D.C.
Companies must offer broadband services in a “non-discriminatory” fashion. That’s code for “open access,” a politically charged notion that says carriers must treat all Internet services the same.
Likewise, trying to define “underserved” or “unserved” markets could prove challenging, he says.
Why: Satellite-based Internet services already are available in most rural markets. Phone and cable TV companies have also spent billions deploying broadband in hundreds of markets, including rural areas.
The government’s plan to essentially subsidize competition in these areas through a grant program “raises a basic question of fairness,” Glenchur says.
Kimmelman disagrees. Satellite-based broadband costs around $90 a month, he says, putting it out of reach of many consumers.