WikiLeaks Document Release http://wikileaks.org/wiki/CRS-RS22850 February 2, 2009 Congressional Research Service Report RS22850 Tax Provisions of the Economic Stimulus Package Jane G. Gravelle, Government and Finance Division March 27, 2008 Abstract. The economic stimulus package, P. L. 110-185, contained two major components: individual tax rebates costing an estimated $117 billion in FY2008 and FY2009, and depreciation provisions (bonus depreciation and small business expensing costing an estimated $46.3 billion. This report describes the stimulus package's major components and their likely impacts as an economic stimulus. ¡ ¢ http://wikileaks.org/wiki/CRS-RS22850 Prepared for Members and Committees of Congress ¡ ¢ The economic stimulus package, P.L. 110-185, contained two major components: individual tax rebates costing an estimated $117 billion in FY2008 and FY2009, and depreciation provisions (bonus depreciation and small business expensing costing an estimated $46.3 billion. This report describes the stimulus package's major components and their likely impacts as an economic stimulus. http://wikileaks.org/wiki/CRS-RS22850 ¡ I n February 2008, the Congress passed H.R. 5140, the economic stimulus package, which was signed into law as P.L. 110-185. The most important part of the proposal was the individual income tax rebate, which accounted for around $117 billion of the packages's estimated cost in FY2008-FY2009. The proposal also included two provisions for businesses that allowed a speed-up in depreciation, which is expected to cost $51 billion in the first two fiscal years. Because these business provisions shifted deductions into the present from the future, they eventually result in revenue gains and a much smaller overall cost in the 10-year budget horizon. These costs are shown in Table 1. ¡ The centerpiece of the stimulus package is the tax rebate for individuals. Unlike the 2001 rebate, the rebates have elements of refundability: families with no tax liability may also be eligible for a rebate. Table 2 lists the specifics of the provision. The rebate is technically a credit for 2008, but http://wikileaks.org/wiki/CRS-RS22850 payments would be mailed in 2008 based on 2007 returns. If taxpayers qualify for a higher credit based on their 2008 circumstances, they could claim the excess on their 2008 returns. Essentially, the rebate allows the larger of those based on either 2007 or 2008 circumstances. 581-011 .L.P fo tsoC yrategduB detamitsE .1 elbaT ) s r al l o d f o s n o i l l i b ( noisivorP 8002YF 9002YF 8102-8002YF slaudividnI rof setabeR 7.601- 0.01- 7.611- setabeR tuO yrraC ot snoitairporppA 2.0- 1.0- 3.0- 8002 rof stnuomA tuoesahP dna gnisnepxE 971 .ceS esaercnI 9.0- 6.0- 1.0- noitaicerpeD sunoB %05 9.34- 6.5- 4.7- latoT 7.151- 3.61- 5.421- .8002 ,8 yraurbeF ,80-71-XCJ ,noitaxaT no eettimmoC tnioJ :ecruoS ¡ etabeR eht fo snoisivorP .2 elbaT noisivorP sliateD etabeR lareneG ;ytilibail xat fo tnetxe ot ,)selpuoc rof 000,21$( emocni elbaxat fo 000,6$ tsrif eht fo %01 lasoporP .006$/003$ muminim ,002,1$/006$ mumixam ytilibadnufeR sulp emocni denrae fi ytilibail xat tuohtiw esoht rof elbaliava )selpuoc rof 006$( etaber 003$ snoisivorP tsael ta era stnemyap ytilibasid s'naretev dna ,tnemeriter daorliar 1 reit ,stifeneb ytiruceS laicoS *.000,3$ emocnI-hgiH tnemyaP .selpuoc rof 000,051$ ,slaudividni elgnis rof 000,57$ revo emocni fo %5 ta tuo desahP tuoesahP .slaudividni rof 000,471$ dna selgnis rof 000,78$ ta tuo desahp ylluf snoisivorP dlihC eht rof sa emas eht era airetirc ytilibigilE .etaber rehto yna rof elbigile fi dlihc gniyfilauq rep 003$ .tiderc dlihc serutaeF rehtO .rebmun ytiruces laicos a gniriuqer yb stnargimmi lagelli ot etaber eht swollasiD .ecivreS hcraeseR lanoissergnoC :ecruoS gnidulcni( snoisnep yratilim dna tnemnrevog gnidulcni snoisnep ro ISS edulcni ton seod emocni elbigilE :etoN* http://wikileaks.org/wiki/CRS-RS22850 dlo( stnemyap ytiruceS laicoS ot detimil si tI .sARI morf slawardhtiw gnidulcni emocni denraenu yna ro ,)ytilibasid dna 31 ,11 seltit rednu stnemyap ytilibasid snaretev dna ,tnemeriter daorliar 1 reit ,)ytilibasid dna srovivrus ,ega .edoC .S.U eht fo 83 retpahC fo 51 There are five elements of the rebate proposals that are outlined in Table 2. The first is the basic nature of the rebate, which is 10% of income up to a maximum, with a minimum payment. The second element is the refundability feature, which extends benefits to lower income households without tax liability. The third element is the treatment of high-income taxpayers whose payments are phased out. The fourth element is the child rebate, which in all plans is set at $300 per qualifying child and allowed if a basic or refundable rebate is received. The fifth element limits the scope of the rebates by denying them to illegal immigrants through requiring the taxpayer identification number to be a social security number. Compared to the experience with a rebate in 2001, the proposed rebates are more favorable to lower income individuals because of their refundability provisions. While the administration originally proposed a package with no refundability, the House allowed a minimum payment for low-income earners with at least $3,000 of income. The Senate extended the rebate to lower income retirees (social security, railroad retirement, and veteran's disability) and this extension was adopted. Both changes expanded the number of taxpayers affected. Without any refundability provisions, 37% of 151 million returns, or 56 million would have been excluded because of low incomes or lack of tax liability. Adding low-income earners as in the House bill excluded only 30 million because of low incomes, that is, made an additional 26 million eligible. Adding retirees meant only 10 million were excluded. Thus the refundability feature added 46 million taxpayers: 26 million due to the earnings rule and 20 million due to the retirees rule. (The stimulus also excludes about 9 million because of high incomes.) 1 The original House bill was more progressive (i.e., relatively more favorable to lower income households) than a non-refundable rebate. The final law is more progressive than the House bill. 1 For a more detailed analysis of the refundability provisions, see CRS Report RL34341, Tax Rebate Refundability: Effects and Issues, by Jane G. Gravelle. ¡ Although some rebates in the past appeared to be relatively ineffective in increasing spending, there is some evidence that the 2001 rebate was spent.2 In general, economic analysis suggests that benefits that go more heavily to low-income individuals are likely to be more effective at stimulating the economy in the short term, per dollar of payment, than those with smaller benefits because lower income households are more likely to spend the rebate, and spending is necessary to produce a stimulus. The extension of rebates to those with Social Security payments could be quite complex administratively, since it would require filing and processing up to an additional 18 million tax returns.3 (The IRS has announced a simplified tax return filing for these households, using the 1040A tax form.) ¡ The bill includes two business provisions aimed at stimulating investment. The first was bonus depreciation, allowing 50% of investment with a life of less than 20 years (which applies mostly to equipment) to be deducted when purchased. The second addressed a provision that allowed small businesses to deduct all equipment investment when purchased, by increasing the ceiling on http://wikileaks.org/wiki/CRS-RS22850 eligible equipment and phasing out the benefit more slowly. These provisions are shown in Table 3. snoisivorP xa ssenisuB .3 elba T T noisivorP sliateD sunoB nehw detcuded eb ot )tnempiuqe yllareneg( tnemtsevni elbigile fo %05 swolla ,8002 roF noitaicerpeD .derrucni ssenisuB llamS morf gnisnepxe )tnempiuqe yllareneg( tnemtsevni elbigile fo tnuoma eht sesaercni ,8002 roF gnisnepxE ta detelpmoc tuoesahP .000,015$ fo daetsni 000,008$ ta tuoesahp nigeb ;000,052$ ot 000,821$ .000,050,1$ .ecivreS hcraeseR lanoissergnoC :ecruoS The bonus depreciation provisions are the most costly of the business provisions, amounting to an estimated $43.9 billion in FY2008 and $5.6 billion in FY2009. As with all of the provisions, which largely involve timing, revenue is gained in future years as regular depreciation deductions fall. Over 10 years, the cost is $7.4 billion, as shown in Table 1. The small business expensing provision costs an estimated $0.9 billion in FY2008 and $0.6 billion in FY2009, with the 10-year cost $0.1 billion. Because these benefits arise from timing, neither the initial cost nor the 10-year cost provide a good reflection of the value to the firm. For the benefit of bonus depreciation to the firm, the discounted values (using an 8% nominal interest rate) would be about $18 billion. Based on empirical evidence, it is unlikely that these provisions would provide significant short- term stimulus. Investment incentives are attractive, if they work, because increasing investment 2 See CRS Report RS22790, Tax Cuts for Short-Run Economic Stimulus: Recent Experiences, by Jane G. Gravelle. 3 According to the Tax Policy Center, 18 million households over the age of 65 would receive no rebate under the House bill. See Tax Policy Center, Table T08-0030, at http://www.taxpolicycenter.org/numbers/ displayatab.cfm?Docid=1742&DocTypeID=4. ¡ does not trade off short-term stimulus benefits for a reduction in capital formation, as do provisions stimulating consumption. Nevertheless, most evidence does not suggest these provisions work very well to induce short-term spending.4 This lack of effectiveness may occur because of planning lags or because stimulus is generally provided during economic slowdowns when excess capacity may already exist. Of business tax provisions, investment subsidies are more effective than rate cuts at providing a short-term stimulus, but there is little evidence to support much stimulus effect. Temporary bonus depreciation is likely to be most effective in stimulating investment, more effective than a much costlier permanent investment incentive because it encourages the speed-up of investment. Although there is some dispute, most evidence on bonus depreciation enacted in 2002 nevertheless suggests that it had little effect in stimulating investment and that even if the effects were pronounced, the benefit was too small to have an appreciable effect on the economy. Based on theoretical considerations, the likelihood of the expensing provision having much of an incentive effect is even smaller. Firms may, for example, benefit from the small business expensing, but it actually discourages investment in the (expanded) phase out range. http://wikileaks.org/wiki/CRS-RS22850 Jane G. Gravelle Senior Specialist in Economic Policy jgravelle@crs.loc.gov, 7-7829 4 See CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle, and CRS Report RS22790, Tax Cuts for Short-Run Economic Stimulus: Recent Experiences, by Jane G. Gravelle.