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Lawmakers and Financial Experts Question Obama's Tax Cuts

By Shailagh Murray
Washington Post Staff Writer
Thursday, January 8, 2009

At least two tax cuts that are part of Barack Obama's stimulus package have been criticized by lawmakers, tax experts and economists for being potentially too expensive and ineffective, signaling that they are likely to face resistance on Capitol Hill as congressional leaders begin direct negotiations with the president-elect's team.

Both Democrats and Republicans have questioned a provision that would provide a $3,000 tax credit to companies for every job created and, possibly, for every job spared. They contend that the idea would be ripe for abuse and difficult to administer.

Lawmakers are also skeptical about a measure that would allow companies to deduct large portions of recent losses. The proposal would benefit companies that have been hit hardest by the recession, including in the banking and real estate sectors, but experts worry that costs could soar because so many would be eligible.

Despite the concerns, as well as growing unease from Republicans about the size of the package after the Congressional Budget Office's latest projection of a $1.2 trillion deficit for the current fiscal year, congressional leaders said they are moving swiftly to produce a big, bold bill. Senate Majority Leader Harry M. Reid (D-Nev.) vowed that a stimulus package would be passed by Congress before it takes a 10-day break on Feb. 13, or "there won't be a recess."

Obama is scheduled to speak this morning at George Mason University to promote his plan, while former Treasury secretary Lawrence H. Summers, who will be Obama's most senior White House economic adviser, is scheduled to brief Senate Democrats in the afternoon on its outlines. Today the Senate Finance Committee will hold its first meeting on the emerging stimulus package.

In the House, Democrats on the Ways and Means Committee have scheduled three sessions -- today, Friday and Tuesday -- with Obama economic aides to begin drafting the tax portions of the bill.

Democratic congressional leaders said they welcome Obama's input but made clear that they will have their own priorities. "Senators are senators," Senate Finance Committee Chairman Max Baucus (Mont.) told reporters after a Democratic caucus meeting yesterday. "They've got ideas, too."

Baucus's preference is to invest a bigger share of the roughly $775 billion package in domestic energy programs. But, he added, Senate Democrats and the president-elect are "in general agreement" on what should be in the bill.

House Ways and Means Committee Chairman Charles B. Rangel (N.Y.) was less committal, describing the five tax proposals Obama outlined this week as guidelines aimed at reaching general goals, such as job creation and relief for middle-class workers. House tax writers "may have a little more experience technically" on what incentives might best achieve those objectives, Rangel cautioned. "Don't get tied up in how we do it."

Obama promoted the corporate tax credit on the campaign trail as a way to keep workers in their jobs, but many experts dismissed it when it resurfaced this week as one of his five tax priorities.

"It is tough to see how a company that is seeing its sales slaughtered in today's recession is going to hire just because it gets a few thousand dollars per new worker from the government," Howard Gleckman wrote on the TaxVox blog for the Tax Policy Center, a nonpartisan think tank. "Profitable firms would merely take the credit for bringing on workers they were already planning on hiring."

Mark Zandi, chief economist and co-founder of Moody's Economy.com, said the credit "sounds good" but added, "It's going to be hard to design something" that proves effective and resistant to abuse.

Rep. Richard E. Neal (D-Mass.), chairman of the Ways and Means subcommittee on select revenue measures, said the scenario that worries him is that of the employer who lays off thousands of people and then is subsidized for hiring back a few hundred. "My game plan is to be helpful to the administration," Neal said but added that he hopes questionable proposals will be "filtered out through the committee process."

The credit is similar to the New Jobs Tax Credit, a two-year provision that offered subsidies to 1.1 million businesses for hiring 2.1 million workers, according to a report by Timothy J. Bartik, senior economist for the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

The estimated annual cost for the 1977-78 credit was less than $4 billion, Bartik found, or about $13 billion in today's dollars. Obama's version could add about 1.3 million jobs per year, Bartik estimated. But he noted that the proposed credit is significantly smaller than the 1977 version, and, as a result, Bartik wrote, "a smaller wage subsidy would probably lower both budgetary costs and job creation impacts."

Tax experts also warned that allowing companies to deduct recent losses could come at an enormous cost. One senior GOP congressional aide said the number of businesses that could cash in on the break "is potentially frightening."

Zandi said the provision "could have the biggest impact" of any of the business tax measures Obama has proposed "but could also be very costly."

Other potential disagreements include a Democratic effort to provide states with money to relieve Medicaid costs and the strain of providing other services. Republicans are resisting the proposal, saying it would encourage states to expand benefits beyond what they can afford to provide.

Many lawmakers are also eager to add provisions to ease the housing crisis through the stimulus. House Budget Committee Chairman John M. Spratt Jr. (S.C.) and Senate Budget Committee Chairman Kent Conrad (N.D.) are backing a tax credit for first-time home buyers, along with a government subsidy that would lower mortgage rates to 4.5 percent, an idea that has been discussed by Treasury Secretary Henry M. Paulson Jr.

In an interview with CNBC, Obama said he would act soon after taking office to address the housing problem. "Dealing with this foreclosure crisis is something that we've got to do," said Obama, adding that he would announce a mitigation plan "sometime in the next month or two."

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