By Larry Jones
January 13, 2003

During a January 7 meeting in Chicago with a group of economists, President George W. Bush unveiled a $674 billion proposal to spur economic growth mostly by providing a new round of tax cuts to individuals and small businesses over the next ten years. The proposal also calls for extending jobless benefits and creating a new program to assist unemployed workers in finding new jobs. To the surprise of many, the proposal did not include any direct financial assistance to help state and local governments, many of which are experiencing huge budget shortfalls resulting from the downturn in the economy and increased spending on securing the homeland in the aftermath of the 2001 terrorists attacks.

In a prepared January 7 statement on the prospects of an economic stimulus package, Conference of Mayors President Boston Mayor Thomas M. Menino pointed out that cities are struggling to fund homeland defense efforts and stated: "As the President and Congress begin the year we again emphasize the need now for direct funding to our cities for homeland security." He also urged support for tax incentives that will spur investment in local infrastructure projects while creating jobs such as the President's homeownership tax credit, brownfields cleanup tax credits and a temporary elimination of the tax exempt bond caps.

President's Economic Growth and Job Creation Package

The President said his proposal has three main goals — to encourage consumer spending, promote investments that will lead to job creation, and to provide critical help to unemployed workers. Most of the funds in the President's proposal would be used to provide tax cuts and only a small portion, $102 billion (about 15 percent) of the total, would be spent this year to provide an immediate boost to the economy. The bulk of the funds, $572 billion, would be spent over the next 9 years to ensure long term growth and job creation. According to projections by the White House, 92 million taxpayers will receive, on average, a tax cut of $1083 in 2003, and the plan will help create 2.1 million jobs over the next three years.

Under the President's proposal:

• Taxes on corporate dividends paid to individuals would be eliminated.
• Income tax rate cuts currently scheduled to take effect in 2004 and 2006 would be accelerated to take effect this year and made retroactive to January 1. The rate structure would become:10%,15%, 28%, 33%, and 35% ; and employers would apply the rates immediately so employees can receive bigger paychecks.
• Marriage penalty relief would be accelerated to 2003 to provide married couples a standard deduction twice the amount available to single filers; and the amount of income in the 15% bracket for married couples would be twice the amount for single filers.
• Child care tax credits would be increased from $600 to $1,000 starting 2003 instead of being phased in by 2010. The Treasury Department would send out checks ($400 per child) to working families.
• The amount of expenses small business owners can write off for purchasing equipment would be increased from $25,000 to $75,000 and the amount would be phased out for small businesses with investments exceeding $325,000. The phase out would be on a dollar for dollar basis up to $400,000.
• The 10% income bracket would be expanded by increasing the bottom of the 15% income bracket from $6,000 to $7,000 for single filers and from $12,000 to $14,000 in 2003.
• The individual alternative minimum tax would increase by $4,000 for single and $8,000 for joint filers through 2005 to hold people harmless from the AMT effects of the above changes.
• A new personal re-employment program would be established to help unemployed workers who exhaust their unemployment benefits with expenses related to find a job.

Senator Charles Grassley (IA), chair of the Senate Finance Committee, said it is likely that the committee will consider the President's proposal in the Spring. He is looking at the possibility of completing action on the proposal in late March or early April. However, he has said unless the President can assure the support of all 51 Republicans in the Senate, the White House will need to give him the latitude to work with Democrats to craft a bipartisan compromise that can make it through the Senate.

Senate Democratic Leader Tom Daschle (S.D.) voiced strong opposition to the bill, calling it "obscene" and critizing it for directing most of the benefits to the wealthiest taxpayers and for not providing an immediate stimulus to the economy. He said Senate Democrats will offer an alternative proposal soon that shares many of the same goals as the $160 billion, one year proposal introduced last year by Senator Max Baucus (MT).

House Democrats Offer Alternative Stimulus Proposal

In anticipation of the President unveiling his economic growth plan on January 7, House Democratic Leader Nancy Pelosi (CA) and other key Democrats unveiled their own $136 billion one-year alternative stimulus proposal on the day before. Pelosi and other Democrats wasted no time to criticize the President's proposal, calling it fiscally irresponsible because of its huge price tag which they believe will drive up the federal deficit into the foreseeable future. They also believe it would direct most of the benefits to the wealthy instead of working Americans. According to Citizens for Tax Justice, three-fifths of the tax cuts under the President's proposal would go to the wealthiest 10 percent of all taxpayers in 2003.

In contrast to the President's 10-year plan, the House Democrat's plan is a short-term stimulus proposal that would provide $18 billion in jobless benefits to laid off workers, $55 billion in tax relief to working families, $32 billion in tax relief to small businesses, and $31 billion in targeted assistance to states and localities. State assistance would be provided in the form of an increase in the federal share of Medicaid payments, homeland security grants, aid for highways, and extra aid to help states with high unemployment assist laid off workers who exhaust their regular benefits.

Under the House Democrat's proposal, an additional 26 weeks of unemployment benefits would be provided to laid off workers, including those whose benefits expired on December 28. It also calls for:

Targeted Assistance to States and Localities

• Homeland Security—a one-time $10 billion federal grant would be provided to states for urgent unmet needs in homeland defense. Grants would be available to equip first responders and strengthen security at airports, seaports, rail tunnels, transportation facilities and other targets vulnerable to terrorists.
• Highways and Transportation - an additional $5 billion will be provided in highway aid and states would be allowed to postpone their matching share of project costs for up to two years.
• Medicaid Cost Sharing - a one-time $10 billion increase in the federal share of Medicaid payments would be provided to states.
• Special Support for Critical Needs - an additional $6 billion would be available to states with high levels of unemployment to assist laid off workers with 7 additional weeks of benefits.

Tax Cuts for Working Americans and Businesses

• All workers would receive an income tax rebate of up to $300 per person or $600 per working couple.
• The amount of expenses that small businesses can write off for tax purposes would be increased from $25,000 to $50,000 for the cost of new investments made in 2003.
• The bonus depreciation provision would be restructured so that all businesses can write off a 50 percent bonus in 2003 and it would decline to 10 percent in 2004.

Senator Max Baucus Economic Stimulus Alternative

Senator Max Baucus (MT), who was chair of the Senate Finance Committee last year and now serves as the ranking Democrat on the Senate Finance Committee, introduced a stimulus proposal last December. Sen. Baucus was one of 12 moderate Democrats who worked with the White House to pass a $1.35 trillion compromise tax bill sponsored by the President in 2001. But he and a other moderate Democrats have been very critical of the President's stimulus proposal because they believe it is too expensive and will not provide enough short-term stimulus. The support of moderate Democrats may eventually prove to be crucial in passing a stimulus proposal in the Senate which is almost evenly divided with 49 Democrats and 51 Republicans. Very often, tax bills requirSimilar in some ways to the House Democrats proposal, Senator Baucus' stimulus bill would provide $160 billion in fiscal year 2003 to jump start the economy by extending unemployment benefits, providing various tax cuts to individuals and businesses, and by providing general financial assistance to states.

Similar in some ways to the House Democrats proposal, Senator Baucus' stimulus bill would provide $160 billion in fiscal year 2003 to jump start the economy by extending unemployment benefits, providing various tax cuts to individuals and businesses, and by providing general financial assistance to states.

Under Senator Baucus proposal:

• A new general revenue sharing would be established to provide $75 billion to the states and territories on a one-time basis, without restrictions on how the funds would be used.
• The Treasury Department would be directed to sell $4 billion in tax credit bonds immediately and the proceeds will be deposited in the Highway Trust Fund and sent out to states in 2003.
• Unemployment benefits would be extended through June 30, 2003 to assist laid off workers.
• Taxes would be eliminated on the first $3,000 of wages earned in 2003 and most taxpayers would receive larger paychecks due to decreased withholdings.
• Bonus depreciation provisions for businesses investment in new equipment and facilities would be increased from 30 percent to 40 percent of investment.
• Tax write offs for business purposes would be increased from $25,000 to $75,000 for expenses related to new investments made in 2003; and
• A new tax credit would be established to cover up to 50 percent of the cost of health of health insurance for businesses with 50 or fewer employees.

President Signs Law Extending Unemployment Benefits

In his proposal, President Bush agreed with Congressional leaders who urged that helping unemployed workers be made the first order of business on the congressional calender this year. Both houses wasted no time in moving quickly to adopt legislation extending unemployment benefits to laid off workers. On January 7, the opening day of the 108th Congress, the Senate passed a proposal by voice vote that will provide an additional 13 weeks of benefits to laid off workers. The House adopted the measure on January 9 by a overwhelming vote of 416 to 4 and at a signing ceremony on the same day the President signed the bill into law.

During the ceremony President Bush said "It is my honor to sign this piece of legislation, which should bring some comfort to those of our fellow citizens who need extra help during the time in which they try to find a job." The benefits will apply retroactively to more than 750,000 laid off workers who exhausted their benefits on December 28. And an additional 1.6 million who exhaust their state benefits will be eligible to receive federal aid until June 1.

(See also Joan Crigger's story on Unemployment Insurance)