By Catherine Hubbard, Jeff Carlson and Paula Cruickshank, CCH Washington Staff Writers

The House narrowly passed on October 24, 2001, the Economic Security and Recovery Act of 2001 (HR 3090), calling for nearly $100 billion in tax breaks next year. The vote was 216 to 214, mostly along party lines.

House Speaker J. Dennis Hastert (R-Ill.) said at a briefing that "Congress and the president must act again to help our economy." Hastert said that the tax rebates and tax savings in the bill would "help put more money in working people's pockets." The bill also would "encourage businesses to invest more in their companies and create more jobs," he said.

Specifically, the bill would:

• provide immediate 30 percent business expensing (temporary for the next 3 years) for the purchase of capital assets
• increase small business Code sec. 179 annual expensing from $24,000 to $35,000
• speed-up depreciation to 15 years for remodeling of leased property
• extend carry-back of net operating losses from 2 years to 5 years
• permanently repeal the corporate alternative minimum tax
• immediately allow corporations to cash in existing credits
• permanently extend Subpart F exceptions for finance and insurance

For individuals, the bill would provide payments to people who filed year 2000 income tax returns, but did not receive a full rebate or any rebate under the Economic Growth and Tax Relief Reconciliation Act of 2001. Those filers would receive the balance of the full rebate amount given to taxpayers earlier this year ($300 for single filers, $500 for heads of households, $600 for marrieds filing jointly).

In addition, the bill would speed-up the phase-in of the 28 percent marginal income tax rate reduction to 25 percent, which would now happen in 2002 instead of 2006.

The bill also would increase the capital losses deduction from $3,000 to $5,000 over the next 2 years and remove the 5-year holding rule for capital gains (as well as reducing the capital gains tax rate to 18 percent). Finally, the bill would extend expiring tax provisions for two years.

House Ways and Means Committee Chairman William M. Thomas (R-Calif.) said at the briefing with Hastert that about 40 cents of every dollar would go to individuals, both low-income and moderate-income, "to assist them in continuing the consumer-demand portion of our economy's engine." The rest would go "toward the creation of jobs through business stimulus." Of the nearly $160 billion cost over 10 years, nearly $100 billion would provide assistance in the first year. In a prepared floor statement, Thomas said that 37 million working families would receive $14 billion in immediate help by speeding up the reduction to a 25 percent marginal rate from this year's tax act.

House Majority Leader Richard K. Armey (R-Texas) said the bill would "spend a large share on individual tax incentives for work" and provide two-thirds of the tax relief in the first year. "Two out of every three dollars in this plan will boost investment and growth opportunities next year alone. This means that a family of four would see an average increase of $940 in 2002 due to higher wages and lower taxes," he said. He added: "This tax relief package will help jumpstart our lagging economy and give Americans much needed jobs."

But Democrats complained that the bill favors the wealthy. Ways and Means Committee ranking member Charles B. Rangel (D-N.Y.) also said that the bill would dig into the Social Security surplus.

House Minority Whip David E. Bonior (D-Mich.) said the GOP bill "is not an economic stimulus package, is not temporary and does not target relief to businesses hurt by the recession." He balked at the permanent repeal of the corporate alternative minimum tax, saying the tax "ensures that corporations don't use tax shelters and loopholes to avoid paying taxes." In addition, he said, companies that paid the alternative minimum tax in the past would get an immediate refund of those payments, costing more than $20 billion. He also commented that the bill permanently extends an expiring tax shelter for multi-national corporations that allows them to shift taxable profits to offshore accounts "so they can avoid paying taxes."

Defending the corporate alternative minimum tax repeal, Ways and Means Committee member Nancy L. Johnson (R-Conn.) said the tax "is truthfully the dumbest tax that was ever passed, because you pay taxes when you're not making a profit, and you get it back when you are making a profit." The bill would "repeal that stupid approach," and force businesses to "use all of your credits." The provision would have "the affect of dumping $25 billion in investment capital into the economy in the first year," she said.

Bonior added that HR 3090 calls for additional tax breaks for wealthy individuals, "but does little to help middle income workers whose extra spending is the quickest way to stimulate the economy." Most--72 percent--of the capital gains tax cut would go to the wealthiest 2 percent of taxpayers, Bonior said. "Cutting the capital gains rate rewards investors who sell their stock, which is precisely the wrong incentive in a falling stock market," he said.

House Minority Leader Richard A. Gephardt (D-Mo.) said in a floor statement that 75 percent of the population who pay income taxes would not benefit from the bill. He had urged the House to pass the Democratic substitute that "puts money in people's pockets." The substitute bill, sponsored by Rangel, failed to pass.

House Budget Committee ranking member John M. Spratt, Jr. (D-S.C.) warned that two-thirds of the tax cuts in the House bill go to corporate interests, and if the temporary corporate tax provisions are made permanent, the provision would increase the cost by $250 billion, when higher interest payments on the national debt are accounted for. Spratt said the corporate tax cuts in the bill were essentially remnants from the Economic Growth and Tax Relief Reconciliation Act of 2001, which were left on "the cutting room floor." Spratt also said that while the bill repeals the corporate alternative minimum tax, it leaves individuals to deal with the AMT. "This bill bends over backwards to help corporate taxpayers, but barely stoops to help the average American taxpayer," he said. The bill also "leaves no margin of error if the recession is worse then expected."

Meanwhile, the Blue Dog Coalition called for fiscal restraint. "The coalition believes that the contest between stimulus packages, either heavy on tax cuts or heavy with new spending programs, are out of step with today's reality," it said in a release. The Senate is expected to propose additional spending. Rep. Martin Frost (D-Texas) said the bill "violates all of the economic stimulus principles" that the House and Senate Budget Committees agreed on earlier this year.

White House Response

The Administration "strongly supports" House passage of HR 3090 and is "pleased that the House has started the process of acting on a stimulus package to help get the economy going again following the terrorist attacks of September 11th," according to a policy statement issued by the Office of Management and Budget (OMB).

The OMB Statement of Administration Policy noted that the House measure contains the "main elements" included in the president's proposed stimulus plan, namely: "tax relief for low-to-moderate income individuals and families; . . .an acceleration of scheduled tax rate cuts to spur consumer spending, improve economic growth incentives, and restore confidence; . . .increased business expensing; and repeal of the corporate alternative minimum tax to create jobs and encourage capital investment."

The administration statement also praised the proposal for focusing primarily on tax relief instead of additional spending, which the president believes has already been addressed adequately by the $60 billion in expenditures adopted by Congress since September 11. The $60 billion is "ample" for funding the direct impact of the terrorist attacks, noted OMB.

Concerning Democratic proposals that call for additional spending and less tax cuts, the administration said it "opposes alternative proposals that contain large spending and tax increases. Raising taxes on small businesses--which create most new jobs--as well as on families and individuals is ill-advised in any environment, but is particularly troubling in an already slow economy. Additional spending and tax increases will retard economic recovery rather than stimulate it," according to the OMB statement. The administration maintains that "prompt tax relief" is the best way to "restore consumer confidence, spur capital investment, and. . .create new jobs."

Senate Action To Come

Senate Majority Leader Thomas A. Daschle (D-S.D.) criticized House Republicans for taking the same approach to the economic stimulus bill that they "typically" pursue in tax bills--namely, "they address issues important to them." Daschle said the House bill failed to meet the three criteria for an economic stimulus bill established earlier in bipartisan meetings: that it has a stimulative impact, applies immediately, and is cost effective. "In my view this bill violates all three," said Daschle.

Daschle lauded Sen. Max Baucus (D-Mont.) and finance committee Democrats on the proposal they unveiled on October 23. "They have done a very good job of giving us a good starting point," he said. Daschle added that he would be working with Senate Appropriations Chairman Robert Byrd (D-W.V.) to determine how much spending a final stimulus package should contain.

Senate Budget Committee Chairman Kent Conrad (D-S.D.) called the bill a non-starter and reminded reporters that Treasury Secretary Paul H. O'Neill had earlier referred to the House proposal as strictly "show business." "It will never pass in the end," said Conrad.

Senate Health, Education, Labor and Pensions Committee Chairman Edward M. Kennedy (D-Mass.), who is proposing a $71 billion economic stimulus bill, said the long-term cost of the House measure was "much too high" and that more than half of the dollars would not reach the economy for more than a year. Kennedy's offering includes spending proposals advocated by Senate finance committee Democrats, but unlike the Baucus plan, Kennedy's proposal contains no tax cuts. Instead, Kennedy wants more "stimulus spending, including: $10 billion for public works, $2 billion for job training, $5 billion for communities, and $7 billion for state human services."

But Senate leaders want a bipartisan bill. An early afternoon meeting between Baucus, ranking member of the Senate Finance Committee Charles E. Grassley (R-Iowa) and Treasury Secretary Paul H. O'Neill raised hopes that a bipartisan deal could be struck. Grassley said the meeting consisted mostly of listening to Baucus explain his proposal, but those present hoped a deal could be struck before bringing a bill to the Senate floor. "There is more we agree on than disagree," said Grassley. "But where we disagree, we are very wide." The three expect to meet again on October 25.

Senate centrists met with O'Neill later in the day to go over their priorities for a stimulus package. While members said there was much agreement between centrist views and the Baucus proposal, Sen. John Breaux (D-La.) said the differences in approach to health care assistance for the unemployed was creating the widest gap. Breaux said a possible solution might lie in a refundable tax credit bill for COBRA coverage--The COBRA Plus Act of 2001, introduced in the Senate on October 4 and sponsored by a half-dozen core centrists. The measure allows for a tax credit refund of 50 percent of COBRA coverage up to 9 months and not exceeding a total of $110 per month for single coverage and $290 per month for family coverage. According to CBO estimates the measure would cost $9.4 billion over two years.

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