Larry Jones
May 26, 2003

In a move that disappointed mayors and other local leaders across the nation, House and Senate conferees decided May 22 to drop language from the economic stimulus bill that earmarked $4 billion for local aid. The provision deleted was contained in a $20 billion state and local fiscal relief package. The measure was then sent back to both chambers for a final vote. Under the final bill, all fiscal relief funds will be provided to states with no requirement to share with local governments. The final $350 billion Jobs and Growth Tax Relief Reconciliation Act of 2003, H.R. 2, which calls for $318 billion in tax cuts, $20 billion in state aid and $12 billion in refundable child tax credits for low income families, passed the Senate on May 23 by a vote of 51-50 with the help of Vice President Dick Cheney. Two Democrats voted for the measure while 3 Republicans voted against it. In the House, the bill was approved by a vote of 231 to 200 with 7 Democrats voting in favor of the measure and 1 Republican voting against it.

Reacting to the news about Congress dropping local aid, Conference President Boston Mayor Thomas M. Menino said "The nation's mayors are extremely disappointed." He pointed out that "providing federal aid to states without any requirement that they, in turn, help cities is politically foolish." And he said "Mayors will continue to work for direct fiscal assistance and urge Congress to restore the earmarked funding for local governments."

From the beginning the leadership in both houses opposed adding state and local fiscal relief to the economic stimulus bill. But because of strong bipartisan support, the Senate leadership reluctantly added it after it became apparent they could not pass the proposal in committee or on the Senate floor without it. During Senate Finance Committee action and consideration on the Senate floor, Senator Snowe (ME) and a few other Senators successfully opposed efforts to drop local aid altogether from the stimulus [package. The Senate voted 95-3 in favor of a $20 billion state and local fiscal relief package on May 15, which earmarked $4 billion in general fiscal assistance for local governments. In the House, the leadership strongly opposed state and local aid and no funds were included in the their version of the bill.

When conferees were appointed by the leadership of both chambers to work out the differences between the two versions of the bill, it was apparent that most of them opposed state and local fiscal relief. Two of the three Senators who voted against state and local fiscal relief, Senators Don Nickles (OK) and Senator Trent Lott (MS), were named as conferees. Although the leadership was convinced that they could not pass the economic stimulus bill without state fiscal relief, some felt they could go after the local share. During conference deliberations, a staff source said several conferees remarked that the only thing they found more objectionable than state aid in the stimulus package was local aid. Because of strong opposition among conferees, the $4 billion earmarked for local governments was dropped. In the final package, funds earmarked for states were increased from $6 billion to $10 billion, with $5 billion in general fiscal assistance being made available this year and $5 billion made available for next year.

To get the economic stimulus package approved before Congress adjourned for the week-long Memorial Day recess, which began May 24, the President and the House Republican leadership were forced to make huge concessions. First the size of the final package was cut significantly after a number of Senators made it clear that they would not support an economic stimulus package larger than $350 billion, far less than the $726 billion requested by the President and the $550 billion package approved by the House. This forced conferees to significantly scale back the centerpiece of the President's proposal, the elimination of taxes on stock dividends. Rather than eliminate taxes on stock dividends, conferees agreed to cut the tax rate on dividends and capital gains to 15 percent for taxpayers in the high income brackets and to 5 percent for individuals in the lower income brackets. The top tax rate on dividends is currently 38.6 percent because dividends are taxed as ordinary income. The top rate for capital gains is 20 percent.

The final package also would accelerate to 2003 marginal tax rate reductions adopted in 2001 that are currently scheduled to take effect in 2004 and 2006; accelerate relief from the so called marriage penalty tax; accelerate an increase in the child tax credit from $600 to $1000; increase the amount that small businesses may write off in taxes for expenses from $25,000 to $100,000; and increase the bonus depreciation amount for businesses to 50 percent for property acquired after May 5, 2003 and before January 1, 2005.

Also, the final package did not include any tax increases although the Senate version called for a number of revenue and fee increases. House conferees were strongly opposed to any tax increases.