Negotiations between House Speaker Nancy Pelosi, Minority Leader John Boehner and Treasury Secretary Henry Paulson resulted yesterday in an agreement to spend about $146 billion to jumpstart the economy. About two thirds of that would go towards tax rebates for households, and a third would go towards tax breaks for businesses. The tax rebates would be targeted toward middle-income taxpayers, including working people who pay federal payroll taxes but who do not have enough income to owe federal income taxes. However, the rebates would provide no help for people who do not have earnings (including the unemployed and many Social Security and welfare recipients) even though these people are arguably the most likely to spend any money given to them, thereby pumping the money immediately into the economy.

Some Democrats in the Senate, like Finance Committee Chairman Max Baucus (D-MT) have expressed an interest in adding increased unemployment benefits or food stamps to any stimulus package to reach these people. It appears that Speaker Pelosi felt forced to give up demands for increasing these benefits in order to get the Bush administration to agree to making the tax rebates available for more lower-income people.

The Tax Measures

The rebates would be a maximum of $600 for singles and $1,200 for married couples. For people whose tax liability is below $600 (or $1,200 for couples), the rebate would be equal to tax liability, and a minimum benefit of $300 for singles and $600 for married couples would be available so long as they have at least $3,000 in earnings. Finally, an additional $300 for each child would be available to anyone with any earnings.

The rebates would begin to phase out for singles with incomes of $75,000 and married couples with incomes of $150,000. As a result, they would be more targeted towards the middle-class than any tax bill we've seen during the Bush years.

The tax rebates would be advances on a one-year reduction of the 10 percent income tax rate to 0 percent for the first $6,000 of income for singles or $12,000 of income for married couples for 2008.

The business tax breaks would consist of so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and doubling the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000.

The Spending Increases that Were Left Out

Several advocacy organizations have called attention to the fact that the whole point of an effective stimulus is to put money in the hands of people who are most likely to spend that money right away to increase demand and provide an immediate boost to the economy. The stimulus proposal announced yesterday, however, would give smaller tax rebates to those people who work and pay federal payroll taxes but have incomes too low to pay federal income taxes.

Another group who would likely spend any money given to them includes those with no or very little earnings, who could be helped with increased unemployment benefits or food stamps. An expert with Moody's Economy.com has studied the effects of different stimulus measures on the economy and finds that increased UI benefits and food stamps provide the greatest increase in demand for each dollar spent. Business tax breaks, on the other hand, produce relatively little demand for each dollar spent. Investment usually takes quite a while to plan and implement and most investment is made by businesses that would not have tax liability anyway.

These aspects of the plan are very troubling, but they are not sufficient reason for members of the House to oppose it. The plan does provide some help for low-income and middle-income people, and House passage could be followed by a much improved bill in the Senate. Hopefully, this could lead to a final bill that does more for the economy and for Americans who need help.

The Republican presidential candidates have all promised to make the Bush tax cuts permanent if elected. This would cost $5 trillion in the first decade alone and most of the benefits would flow to the top 5 percent (or 1 percent if the AMT is not fixed). Any attempt to put our fiscal house in order while extending these tax cuts would require a scaling back of public services that would be truly dramatic and unthinkable, as we've pointed out before. Nonetheless, the GOP candidates are trying to prove that they're even more anti-tax than President Bush. They have apparently decided that the Republican primary voters will not be mobilized and energized by a promise to extend the policies that appear to be in place today. The Republican base wants something more and something new.

Romney's "Stimulus"

Former Massachusetts governor Mitt Romney unveiled a new tax plan last weekend, calling his proposal an "economic stimulus plan" even though most of the provisions would be permanent rather than limited to any temporary, recessionary period. Romney would cut the lowest federal income tax rate (10 percent) down to 7.5 percent, and he would make this change retroactive to 2007 for those with incomes below $97,500. He would also eliminate payroll taxes for people over 65 who are still working and repeats his intention to make interest, capital gains and dividends tax-free for those with incomes below $200,000, even though most people below this level don't enjoy much in the way of investment income.

Who Can Cut Corporate Taxes the Most?

For business, Romney would allow 100 percent "expensing" of equipment for two years retroactive to 2007 and he would cut the corporate tax rate from the current 35 percent down to 20 percent over two years. Last week we reported that Senator John McCain and former New York mayor Rudy Giuliani both want to reduce the corporate tax rate to 25 percent. While some conservatives like to point out that our nominal corporate tax rate is high compared to that of certain other countries, the effective corporate tax rate is certainly quite low because of the loopholes businesses use to avoid taxes. Last year Citizens for Tax Justice found that, measured as a share of GDP, our corporate tax ranks among the lowest among industrialized countries. Both Giuliani's and McCain's plans would create a permanent research credit, and McCain would, like Romney, allow "expensing" of "equipment and technology investments."

Giuliani's Friends Introduce His "Simplification"

Meanwhile, Giuliani's friends in Congress have introduced a bill to implement the former mayor's tax proposal. Called the "Fair and Simple Tax" or FAST, it would lower the corporate rate to 25 percent, lower the capital gains rate to 10 percent, repeal the estate tax, and allow taxpayers the option of using a simplified tax that has three rates, 10 percent, 15 percent and 30 percent. This would be a huge tax break for the wealthy. The 30 percent rate begins at income of $150,000 and we've reported before that most of the current capital gains and dividends tax break goes to the richest 0.6 percent.

Citizens for Tax Justice has produced preliminary estimates showing that Giuliani's tax plan would cost, at least, an eye-popping $11 trillion over a decade.

Nine states currently have no broad-based income tax and, as a result, their tax systems are among the nation's most regressive. This week, legislation was introduced in the most regressive of them all, Washington State, to create a "Working Families Tax Credit." According to the Washington State Budget and Policy Center, the credit would reduce taxes for more than 350,000 Washingtonians by allowing workers to claim a refundable earned income tax credit (EITC) that would be equal to ten percent of the federal credit. While several state have implemented EITCs, Washington could be the first where lawmakers are figuring out that the EITC is an effective measure even in a state with no income tax. The Seattle-Post Intelligencer is right to say that the implementation of this credit would help to offset the regressivity of the nation's most regressive tax structure. For more on this ground breaking legislative priority, read the Budget and Policy Center's full report here.

Minnesota transportation and infrastructure needs have long been discussed and debated, especially in the wake of last year's tragic Minneapolis bridge collapse. As explained in a common sense editorial in the Hutchinson Leader, polling by theMinnesota Chamber of Commerce shows businesses know they need better infrastructure and that taxes are needed to pay for it. "Businesses rely on the transportation system to move freight efficiently and to get employees to work in a timely and safe manner. Growing congestion in the Twin Cities area as well as safety issues on Greater Minnesota roads (70 percent of highway deaths happen in rural areas) has created a significant problem for Minnesota businesses. The editorial also discusses the Chamber's plan for a tax increase to fund infrastructure . For too long business lobbyists have been the enemy of tax hikes, yet clearly some businesses in the North Star state understand the role that taxes play in their ability to meet the needs of their customers and employees.

This week Mississippi Governor Haley Barbour named 37 members of the state's newly formed Tax Study Commission. The business community is heavily represented on the Commission, which is hardly surprising given the Governor's experience as a K Street lobbyist in Washington. Barbour tries to be reassuring by pointing out that the members of the new group "share a common bond in that they are all Mississippi taxpayers." The group's recommendations are due August 31. This comes shortly after Barbour announced in his State of the State address that he would like to complete an overhaul of the state's tax system by the end of his term in office. Let's hope this close look into Mississippi's tax structure takes into account the state's outdated income tax and overall regressive tax structure.

Several Presidential candidates have proposed allowing the Bush tax cuts to expire for wealthy Americans. For Senators Hillary Clinton and Barack Obama, "wealthy" means those with income above $250,000, while for former Senator John Edwards, this means those who make more than $200,000. John Edwards thinks people with incomes higher than $200,000 should pay more in Social Security payroll taxes, while Mitt Romney thinks that people with incomes below $200,000 need a new tax break for investments.

There seems to be a perception that people with incomes below $200,000 or $250,000, depending on who you talk to, are "middle-class" people who deserve every tax break they have ever received.

A new paper from Citizens for Tax Justice finds that in 2008, only 3.2 percent of taxpayers nationwide will have adjusted gross income (AGI) greater than $200,000 and only 2.1 percent will have AGI over $250,000. The paper also shows how many taxpayers have incomes higher than these levels in each state.

It further explores how people are often even more confused when the discussion revolves around the "richest one percent," partly because about a fifth of the public seems to believe they're in the top one percent.

Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.

The White House has indicated that the President will announce today the broad principles of a stimulus plan, which will likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them could not possibly do anything to counteract a recession taking place today. What's more, the resulting increase in the budget deficit would actually hurt the economy overall.

Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted." Democratic House Speaker Nancy Pelosi, Ways and Means Chairman Charles Rangel and several other Democratic leaders have echoed these three principles.

The Democratic and Republican House leadership met on Wednesday to discuss the possibility of a bipartisan effort to enact a stimulus package. No deal was reached, but both sides have suggested they could work together to pass legislation quickly. Some House Republicans have indicated that they might offer amendments that would extend the Bush tax cuts but that they will not make their support for a stimulus package conditional on passing such an amendment. Meanwhile, Rangel has said that he is open to including some business tax breaks, even though he may not agree with them, in order to get a bill passed.

However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.

Meanwhile, the top three Democratic presidential candidates all have their own stimulus plans, although it's not entirely clear how influential they will be on the issue.

Former New York mayor Rudy Giuliani proposed new tax cuts last week that go beyond making permanent the Bush tax cuts (which in itself would cost $5 trillion over ten years). Giuliani proposes to also cut the capital gains rate from its current level of 15 percent down to 10 percent, and to cut the corporate tax rate from 35 percent to 25 percent.

CTJ published a paper this past summer showing that the current tax subsidy for capital gains and dividends cost $92 billion in 2005 alone, and nearly three quarters of that went to the richest 0.6 percent of taxpayers. This regressive tax break would become more costly under Giuliani's proposal.

Senator John McCain of Arizona released his tax plan on Thursday. McCain would also lower the corporate tax rate to 25 percent.

Another CTJ paper from last year found that U.S. corporate taxes as a percentage of GDP are already among the lowest in the developed world, meaning American corporations are not unduly burdened, or made less competitive than those in other countries, by our corporate tax.

McCain would create a permanent credit for research and development. CTJ has criticized the current research credit which, we've noted, has a peculiar following among lawmakers who usually argue that the free market works without government interference. McCain also proposes first-year deduction or "expensing" of "equipment and technology investments." Accelerated depreciation and expensing have in the past been a cause of tax sheltering and distortions in the economy. They can result in certain investments becoming more profitable after-tax than before-tax.

News of the shaky fiscal situation in the states is making headlines. Legislators across the country are contending with slower than expected revenue growth and a weakening economy. In fact, the Center on Budget and Policy Priorities published a report Tuesday showing that at least twenty-one states are facing budget shortfalls. These bleak and uncertain economic times mean that some state officials are toning down the tax cut rhetoric and fiscal belts are tightening. How are governors responding? Here's a quick roundup of State of the State speeches given recently:

New Jersey

New Jersey Governor Jon Corzine has put forward an ambitious proposal of his own to help reduce the state's debt burden and to make needed public infrastructure investments. He has called for a 50 percent increase in tolls on the Garden State Parkway and other major roads every four years. Corzine also wants to create a new entity that would manage those roads and that would have the authority to issue as much as $38 billion in bonds backed by the revenue generated by such toll increases. While higher tolls may be a necessary component of any long term budget plan in the Garden State, New Jersey Policy Perspective's Jon Shure points out that they ought to be considered with an eye towards improving the overall fairness of state fiscal policy.

Idaho Governor Butch Otter's State of the State included one good tax policy idea, but failed to provide additional information on one terrible idea that the Governor has championed in the past. In his January 7 speech, the Governor once again proposed improvements to the state's innovative "grocery tax" credit, which seeks to offset some of the impact of the sales tax on food purchases, but suffers from a serious flaw: the poorest taxpayers in the state are unable to receive it. He neglected, however, to discuss his proposal to follow the disastrous lead of Florida and other states and limit the growth of a house's value for property tax purposes until it is sold. Such limitations allegedly help state residents afford to the pay the property taxes on their homes, but, as the experience in Florida has shown, they end up leading to enormous inequities within the property tax, not to mention constraining the revenue needed to provide public services.

Georgia

Georgia Governor Sonny Purdue is singing the same old tired song in this year's S tate of the State address. In this year's rendition he proposed eliminating the state portion of property taxes levied and removing the tax on retirement and investment income for seniors. Georgia already has a large exemption for retirement income on the books and the state portion of property taxes levied is so small that Georgians would likely see an average tax cut of $30. On a positive note, the Governor didn't endorse House Speaker Richardson's plan to eliminate the portion of property taxes levied to fund schools -- a step in a dangerous direction that Richardson says will eventually lead to the elimination of all property taxes.

California In his State of the State address earlier this month, California Governor Arnold Schwarzenegger outlined his plans for closing the state's $14.5 billion budget gap. As the California Budget Project's summary shows, his plans consist principally of slashing spending on a wide array of public services. Indeed, the Governor maintains that his budget plans would address the shortfall without raising taxes, an approach that has rightly been criticized by numerous observers, including the state's independent Legislative Analyst, Elizabeth Hill.