House Dems detail recovery plan

House Democrats released new details about their economic recovery plan late Friday, showing substantially smaller business tax breaks than Barack Obama proposed and a greater emphasis on credits to spur renewable energy production and help state and local governments float bonds in today’s difficult financial market.

A breakdown provided by the House Ways and Means Committee shows that the total Democratic tax package will cost about $275.5 billion over 10 years, of which about $189.2 billion is attributed to tax breaks for individuals.


Tax staff estimate that business would benefit from an estimated $36.5 billion in tax breaks, including some of the incentives for energy production. But the big—and less well-defined— new player is about $49.5 billion that will most benefit state and local governments.

These 10-year estimates, to some degree, understate the immediate benefits for companies since new depreciation and expensing provisions will be more valuable to them in the short term.

But the Obama tax package — worth about $300 billion — boasted that it would devote $100 billion, or a third of its tax breaks, to business. And the president-elect’s aides were careful to leak details in advance to financial newspapers in hopes of attracting Republican support.

The Democrats’ desire to do more for state and local governments reflects a larger theme in the development of the entire House economic recovery plan, which is expected to cost in the range of $825 billion in total. Nearly 60%, or more than $300 billion, of the new spending over the next two years, for example, would be channeled to state and local governments, chiefly through education and health care programs.

When it comes to tax breaks for individuals, the House plan is more faithful to the Obama proposals, and $145.3 billion is dedicated to his signature “Making Work Pay” tax credit, worth up to $500 for individuals –and $1000 for working families—to help defray the burden of payroll taxes.

The plan would temporarily increase the earned-income tax credit for families with three or more children at a cost of $4.66 billion. But the far bigger change is a major increase in the eligibility for the refundable child tax credit that will cost $18.27 billion.

The chief business tax breaks focus on bonus depreciation and enhanced small business expensing, worth about $5.1 billion. And at a cost of $17.18 billion, Obama would get his expanded “carryback” provision allowing a company to reach back further to claim net operating losses.

But the House bill would bar major banks and investment houses, which have benefited from recent Treasury bailout funds, from taking advantage of this Obama tax break, which effectively allows a carryback period of five years, compared with two years today.

Among the state and local provisions, the most expensive involve the use of tax credit bonds. At a cost of almost $9 billion, the bill creates a new category of tax credit bonds for the construction and repair of school facilities. At the same time a second provision promises a new option to make such bonds more attractive by offering a direct federal payment as a subsidy.

Tax credit bonds are a debt instrument that allows their purchasers to receive a nonrefundable credit against their federal income tax liability instead of the cash interest that is typically paid on the borrowing that bonds represent. With tax-credit bonds, the federal government bears virtually all of the cost of borrowing — in the form of forgone revenues — even if the bonds are issued by a nonfederal entity such as a state or city.

But in today’s economy, the market for such tax credits is less, and the new bill would instead give states and cities the option of receiving a direct payment from Washington equivalent to the subsidy that would otherwise come from the tax credit.

Like most all of the tax provisions, this also is temporary, applying to just bonds issued in 2009 and 2010. But the 10-year-cost is as much as $18.27 billion.