Fraternal Advantage - February 2008

NFCA Legislative Update

Tax Update - The Post-Stimulus Bill Agenda

While President Bush's signature on the economic stimulus bill brings an end to this first legislative effort to address the Nation's economic concerns, the debate over using tax incentives to stimulate the economy has just begun.  Also still on the floor is the potentially contentious debate over a number of other items on the tax legislative agenda for this year that were not addressed in the stimulus bill and that will be the subject of much discussion in the coming months.
 
Intense public pressure to act quickly resulted in Congress adopting a stimulus bill that was limited to three items:  individual tax rebates, accelerated small business expensing and bonus depreciation (items negotiated by Speaker Nancy Pelosi [D-CA] and Treasury Secretary Henry M. Paulson, Jr.).  That left out a number of other proposals, ranging from an extended period for net operating loss carrybacks (five years) to an extension of unemployment insurance payments.  The stimulus bill that was adopted by the Senate Finance Committee contained these and some other additional items but they were dropped under pressure to act quickly from Senate Republicans and the President.  However, in the final hours of Senate debate Finance Committee Chairman Max Baucus (D-MT) indicated that while the Senate was abandoning its proposal at that juncture, he remains interested in considering other economic stimulus ideas.
 
Nonetheless, it is unlikely that without a sudden and unexpected new downturn in the economy, Congress will act quickly on another stimulus bill.  The political conditions that resulted in the prompt enactment of the first one are unlikely to be replicated.  As a result, the Senate and House tax writing committees are likely to take their time to consider new proposals, and may even have the opportunity to hold hearings on them, something that did not happen in the case of the recently adopted stimulus bill.

Despite hearing arguments from some economists that removing the uncertainty over the fate of the three dozen or so popular tax provisions that expired at the end of 2007 would also help to stimulate the economy, these were not included, nor was a "patch" to remove millions of middle-class taxpayers from the alternative minimum tax for the current tax year.  Also not addressed were a package of tax incentives in the energy area that will expire at the end of 2008.
 
Some advocates of the expired tax provisions had been hoping they would be included, in large part because there was a consensus that the stimulus bill should not be offset by tax increases on the theory that tax reductions, not increases, were needed in a declining economy.  The cost of extending the AMT patch for 2008 is estimated at around $60 billion, while the cost of extending the expiring provisions for one year is upwards of $25 billion and will need to be offset unless Congress decides once again to waive the paygo rules as it did in the case of the stimulus bill.
 
In all likelihood, Congress will discuss possible additional stimulus proposals in the coming weeks, but will not act on them until there is additional data on the performance of the economy.  If the data indicate a clear need for an additional infusion of funds into the economy, there may be a second stimulus bill.  If economic conditions appear to be improving (or at least more stable), there may not be much urgency to act.
 
In any event, it seems unlikely that fiscal conservatives on the Hill will accept a second tax bill that is not paid for.  The just-enacted stimulus bill contains no offsets and adds around $160 billion to the deficit and follows the adoption in December of 2007 of an AMT patch that added $55 billion to the deficit. 
 
In the event that the economy has stabilized by the summer, Congress' focus may be less on a second stimulus or economic recovery bill, and more on a proposal to extend the expired tax provisions and the AMT.  In that event, the debate will likely shift to the issue of what tax increases should be used to pay for these extensions as was the case during debate on the extenders and the AMT patch last year.
 
Perhaps more importantly from the longer term perspective, the rush to adopt a stimulus bill only temporarily diverted the tax writing committees from their plans to hold hearings (and many internal discussions) on tax reform measures that might be taken up in the context of a new administration in 2009.  But now that the stimulus bill is out of the way and Congress is under less immediate pressure to act again, the debate over how the tax system should be reformed starting in 2009 is likely to get underway.



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