Over the past several weeks, Democratic leaders in the House and Senate have pursued a strategy of enacting several small pieces of legislation to address joblessness. While lawmakers might find this strategy easier than passing one great big bill, it does make it a bit difficult for those of us who are trying to keep track of which tax provisions Congress has passed and which provisions are still being debated. A new report from CTJ simplifies this task by summarizing recent activity on jobs bills and describing each bill and the tax provisions included.

Read the report.

The Senate approved a bill Wednesday that includes an extension of unemployment benefits and COBRA health benefits for unemployed workers through the end of the year, and a short-term extension of Medicaid funding for states and a Medicare "doc fix" (maintaining payments to doctors under Medicare).

The cost of this spending was not offset since it is considered emergency spending to stimulate the economy. But the costs of other provisions in the bill — extensions for $30 billion worth of business tax breaks often called the "tax extenders" — were offset. The biggest revenue-raiser used to offset this costs is a provision to close the "black liquor" loophole. This loophole allows paper-making companies using a carbon-rich by-product as fuel to use a tax credit that is supposed to encourage the use of environmentally-friendly alternative fuels.

But the "black liquor" provision may be used instead in the final health care reform bill. The health care reform bill approved by the House on November 7 of last year (H.R. 3962) included this revenue provision, and the President's recent proposal to bridge the differences between the House and Senate health bills also includes it.

There is another perfectly good revenue-raising provision that the Senate can use to offset most of the cost of the "tax extenders." The version of the tax extenders bill approved by the House on December 9 was supported by CTJ and several other progressive organizations because it included several good provisions, including one to close the infamous "carried interest" loophole. U.S. PIRG and CTJ issued a joint press release yesterday stating their disappointment that the Senate has not done the same.

The carried interest loophole allows billionaires managing hedge funds and buyout funds to pay taxes at a lower rate than middle-income workers. The House has passed legislation three separate times to close the carried interest loophole (including the recent House-passed extenders bill), and both of President Obama’s budget plans have proposed to close it. Senator Chuck Schumer (D-NY) was quoted in Congress Daily recently saying that closing the carried interest loophole is "on the table."

Until this loophole is closed, the compensation of these fund managers will continue to be taxed at a rate of 15 percent, the preferential rate for capital gains that is supposed to benefit people who invest their own money, not the people who manage it.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

On Tuesday, President Obama put forth ideas, some good and some not as good, to create jobs. The more misguided proposals involve using the tax code to reward businesses, while the best ideas involve direct spending.

For example, he proposed the elimination of capital gains taxes for small business investment and an extension of the break that lets small businesses immediately deduct (expense) a larger amount of their capital investments.

The capital gains break is particularly problematic. If this provision works as existing similar capital gains breaks work, it would mean that anyone who buys an interest in a company that qualifies as a "small business" within a certain time period can hold onto that interest for as long as they like -- say, 20 years or longer -- and then sell it without paying any tax on the gain.

Of course, no investor knows whether or not a small company will grow and last that long. The company could go out of business in a couple years. Or the company could be Microsoft.

But, more to the point, it's not obvious that this would help a small business today to create jobs. Investors don't want to put their money in a venture unless they think there is some demand for the goods or services that would be produced. So, what's needed now to create jobs is a boost in demand for goods and services. Investors would respond by creating or expanding business, meaning they would hire more people to work more hours. Business owners only expand like this if they can profit, and that resulting profit is what causes stocks to become more valuable, which is what causes shareholders to have capital gains.  

The President's capital gains proposal gets this all backwards by aiming a tax cut at the very end of that process, at the capital gains, and assuming that demand will materialize on its own as long as a tax cut encourages an increase in the supply of capital. At risk of drawing an alarming comparison, the proposal is, well, supply-side in its logic.

The President also says he wants to work with Congress to "create a tax incentive to encourage small businesses to add and keep employees."  This could be a mediocre idea or a bad idea, depending on exactly what he's thinking.

If he's thinking of a payroll tax holiday, this could, in theory, produce some increase in demand if it means that workers who pay less in payroll taxes will spend the increase in their take-home pay. But to the extent that they save the extra money, it doesn't produce the boost in demand that is needed right now.

If the "tax incentive" the President is thinking about is a tax credit that goes to businesses for creating jobs, that could be even more problematic. There has been a lot of talk about giving businesses a credit for the amount by which they expand their payroll, and even making the credit refundable so that companies that are not currently profitable can benefit from it. Like the capital gains tax break, this proposal would do little to boost demand. But that's only the beginning of the problems.

Another problem is that it raises the question of how to treat new companies. Would they get the credit, and how would it be calculated since all their jobs are new? If they get the credit, what's to stop someone from liquidating their existing company and starting a new company that is different in name only?  Perhaps more alarming is the fact that a lot of companies will create more jobs anyway, so a lot of the revenue would be a reward to firms for doing something they would have done even without the tax break.

A proposal that has been recently promoted by the Economic Policy Institute argues that even if one takes these problems into account, a well-designed tax credit can create jobs in a cost-effective way. Even if only a fraction of the jobs created are the result of the credit, the authors figure that five million jobs could be created over two years, at a total cost of about $5,400 per full-time job (or full-time job equivalent) created as a result of the credit.

Given the many questionable assumptions needed to come to this conclusion, we think a much surer bet for job creation would be plain old government spending. Thankfully, direct spending by the government was also included in the proposals the President discussed.

For example, he mentioned extending aid to unemployed and low-income people as well aid to states. This type of government spending would result in increased consumption (and therefore increased demand for goods and services) almost immediately.

As a recent report from the Center on Budget and Policy Priorities explains, aid to states is particularly important right now, because state governments are already planning their budgets for fiscal year 2011, when most of the aid they received in the recovery act is supposed to end. There's usually a lag between an economic recovery and state governments' recovery of their revenue streams, so a lot of states will be cutting services and staff even if the economy is expected to improve in 2011.

Federal aid to state and local governments that allows them to save jobs that they are about the eliminate provides an immediate and clear benefit. It maintains the income that the otherwise eliminated state and local government employees will spend, which boosts demand for goods and services above where it would be if the federal government did not provide this aid.

The President is right that Congress cannot improve our economy by focusing single-mindedly on the budget deficit. The federal government needs to provide the conditions for job creation. Let's hope that this effort doesn't get diverted into a tax-cutting spree that makes good sound bites without addressing our underlying economic problems.

The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.

The Battles Over the "Carried Interest" Loophole

Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.

The Homebuyer's Credit

In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.  

The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.

Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy. 

Ted Gayer at the Brookings Institution has written that:

"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."

Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.

Health Care

Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.

In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.

Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.

NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.

Do the Realtors Oppose the Bush Tax Cuts?

But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.

As the current recession pulls revenues down in states across the country, legislatures find themselves between a rock and a hard place, or at least that's how the situation is often presented. Sometimes budget crises are portrayed as a choice between several horrific alternatives. (Cut healthcare for low income children or programs for the elderly?)

So you would think that every state facing such cuts would use federal stimulus funds to avoid them, right? Wrong. Federal stimulus aid to states is explicitly intended to protect essential services such as health care and education, but a recent article in Business Week explains that some states are using this money to indirectly finance tax incentives for businesses. In some cases it has been suggested that tax cuts for corporations may actually threaten states' eligibility for these funds!

In an interview for the article, Greg LeRoy of Good Jobs First notes that, "When a cash-strapped state is giving out an enormous tax package and also getting federal money, the left hand, in this case the incentives, is connected to the right."

Economic research has shown that if tax incentives to businesses are financed by cuts in spending on essential services and infrastructure, the costs may far outweigh the benefits. Corporate tax breaks (like this one in North Carolina, worth almost $70 million) don't produce anywhere near enough economic benefits to offset their costs. Even worse, most are simply handouts to companies who would have invested anyway.

These giveaways are expensive and clearly contribute to declining revenues. On the other hand, research suggests that the benefits of public services are likely more important than tax costs as determinants of business location. Instead of lining the pockets of large corporations, states should be engaging in pro-growth policies that ensure low- and middle-income families don't bear the full brunt of the current economic storm.

For more on costly corporate subsidies, check out Good Jobs First.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Congress seems set to approve, before their Presidents' Day recess, a final economic stimulus bill that marks a victory for progressives and economists who argue that federal government spending and aid for working class families can kickstart the economy far more effectively than tax cuts for businesses or the investor class.

The agreement hammered out this week by a House-Senate conference, which is presumably the final bill, will cost about $787 billion. Around 40 percent of that will go to tax cuts, most of which will be in effect for two years. Almost half of these tax cuts are progressive breaks for families, including the refundable Making Work Pay Credit, an important expansion of the refundable part of the Child Tax Credit for low-income families, a modest expansion of the EITC, and a new partially refundable education credit (the American Opportunity Tax Credit).

According to the official cost projections from the Congressional Joint Committee on Taxation (JCT), the tax provisions categorized as "business" tax cuts (which does not count several provisions that do benefit businesses, like energy incentives and provisions relating to tax-exempt bonds) will only make up 1 percent of the total cost of the bill. Even if we define business tax cuts as including the energy incentives and other provisions that do benefit businesses, these only make up around 7 percent of the total cost of the stimulus bill.

Some lawmakers felt a political need to keep the total cost of the bill below $800 billion. It is unfortunate that some of that was filled up with a $70 billion reduction in the Alternative Minimum Tax (AMT), which is not likely to stimulate the economy (as explained in the following article).

But overall, the bill marks a bold and effective step by the federal government without funneling very much of the benefits towards corporate tax breaks. While the bill is not perfect, it's hard to complain about it.

For more on the stimulus package, see the following Tax Justice Digest articles:

Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back

Stimulative Tax Cuts: Included in Final Package (But Scaled Back Slightly)

Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"

Impact of Selected Tax Cuts in Final Economic Stimulus Bill, State-by-State

On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.

House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.

The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.

The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.

Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor

As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.

The Senate's Senseless Six

But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.

1. One-year AMT "patch": included in conference agreement.

This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."

2. Homebuyer tax credit: dramatically scaled back in conference agreement.

The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.

3. Deduction for automobile purchases: dramatically scaled back in conference agreement.

This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.

4. Suspension of taxes on UI benefits: included in conference agreement.

The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.

5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.

This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.

6. Delayed recognition of certain cancellation of debt income: included in conference agreement.

Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.

CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.

1. Making Work Pay Credit (MWPC)

This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.

2. Expansion in the Earned Income Tax Credit (EITC)

Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.

3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families

Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.

Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.

Congress has, perhaps with good reason, temporarily set aside concerns about balancing the federal budget. Stimulating the economy and stopping the downward spiral of reduced demand and layoffs has become a higher priority than raising enough tax revenue to pay for public services. But one provision in the stimulus bill would raise revenue (albeit a mere $7 billion, officially). This provision would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary.

In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.

An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams.

A provision rescinding the ruling was included in both the House-passed bill and the Senate-passed bill and is included in the conference agreement.

The economic stimulus bill that the Senate approved today includes several tax cuts that are not in the stimulus bill approved by the House of Representatives two weeks ago and which should be excluded from the final bill that goes to the President.

The bill approved by the House of Representatives two weeks ago has a total cost of about $819 billion, while the cost of the Senate bill had grown last week to about $940 billion. A group of self-styled centrist Senators then put forth a compromise that took exactly the wrong approach to cutting down the costs: They mostly removed government spending that economists believe will stimulate the economy -- like aid to state governments, school construction, food stamps -- while they left in most of the regressive tax cuts that Senators have added to the bill.

A new report from Citizens for Tax Justice lists the six most regressive and ineffective tax cuts included in the Senate stimulus bill that are not in the House bill (or, in some cases, are much more limited in the House bill).

Legislation to kickstart the economy is badly needed. Lawmakers who are sincere in their desire to stimulate the economy in the most cost-effective manner should seek to exclude from the final bill these tax cuts, which economists believe will do little to boost consumer demand. They add $124 billion (according to official projections) to the cost of the Senate's stimulus bill compared to the House stimulus bill. The real cost of these provisions is considerably more.

Here are CTJ's worst six tax cuts in the Senate stimulus bill:

1. One-year AMT "patch"
2. Home buyers' tax credit
3. Deduction for automobile purchases
4. Suspension of taxes on UI benefits
5. Five-year carryback of net operating losses (NOLs)
6. Delayed recognition of certain cancellation of debt income

Read the CTJ Report: http://www.ctj.org/pdf/sixworsttaxcuts.pdf
Read the Summary: http://www.ctj.org/pdf/sixworsttaxcutssummary.pdf

The report also explains that some tax cuts could actually be effective in stimuluating the economy -- if they are extremely targeted to poor and working class families. The Making Work Pay Credit and the EITC expansion that appear in both the House and Senate bills accomplish this. So do the provisions in each bill to make the Child Tax Credit more available to poor families, but the report explains that the House provision does a much better job of this than the Senate provision.

A House-Senate conference will now attempt to work out the differences between the House and Senate bills and settle on a final bill, which President Obama wants to sign by the end of this week.