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The Long And Short Of Stimulus
by Teri Rucker
Many of the elements the high-tech industry supports for an economic stimulus package received poor grades for their ability to boost the economy in the short term, according to a recent Congressional Budget Office (CBO) report. Yet the report's results are mixed when the long-term effects are factored into the analysis, giving lobbyists ammunition to argue for a bill that contains both short-term and long-term measures.
The CBO report found that accelerating the rate at which a company could write the expense an asset off its taxes would have a moderate "bang for the buck" and that eliminating the corporate alternative minimum tax (AMT) would have a negligible economic impact in the short term.
"Any fair read would give a flunking grade to House-passed legislation" in the short term, Brookings Institution senior fellow Peter Orszag said during a Wednesday conference call analyzing the CBO report. The House passed two separate bills designed to boost the economy, H.R. 3090 and H.R. 3529, but both stalled in the Senate.
Now! Now! Now!
Key lawmakers repeatedly have said that any proposal in a stimulus bill must have an immediate effect on the economy, and the report's analysis is limited to such short-term effectiveness.
By that criteria, the CBO report sees measures that would put money in the hands of people most likely to spend it and, therefore, increase demand as the most effective means to boost a lagging economy. A payroll tax holiday for employees would be one good way to infuse capital into the economy, the report said, because individuals, particularly low-income earners, are more likely to spend the additional money in their paychecks.
"A tax cut that provides short-term fiscal stimulus by increasing consumption or investment demand can have more impact than its initial size might suggest," the CBO report said.
Yet the study noted that there is a great deal of uncertainty about whether individuals would spend the money or save it, and the economic benefits would be dependent upon the money being spent. The incentives to get a business to invest are entirely different, the report said.
"For businesses, increasing after-tax income does not create an incentive to produce more or spend more on labor," said Orszag. "Indiscriminately injecting cash into a corporation doesn't do any good. You need to change the incentives to get them to invest" while boosting the demand for products, he said.
The high-tech industry has worked hard to persuade lawmakers to include a provision for accelerated depreciation in a stimulus bill. Both House-passed bills would increase depreciation over two years, but Senate Majority Leader Thomas Daschle, D-S.D., recently announced a one-year depreciation proposal that would allow 40 percent of an asset to be written off if purchased in the first six months and 20 percent in the latter half of the year.
The CBO report found that a depreciation measure that lasts only one year would have a far greater influence on investment decisions than if companies have multiple years to take advantage of accelerated depreciation. If the economic outlook is uncertain and a firm has three years to invest, they likely will postpone investment, "delaying the stimulative effect," the report said.
"Of all the business incentives, accelerated depreciation came out the best," noted Ralph Hellmann, senior vice president of government affairs at the Information Technology Industry Council. "This is clearly the consensus business piece."
Maybe Later, Then
The House-passed bills also would repeal the corporate AMT and eliminate the five-year holding period for reduced capital-gains taxes, among other things.
The CBO report found that repealing corporate AMT "would primarily favor old capital, not new investment," and for some firms, it may make new investment more costly. "Consequently, eliminating the corporate AMT does not have the bang for the buck of a tax reduction focused solely on new investment."
Capital-gains tax cuts also found little support from the CBO. The report said they "would provide little fiscal stimulus."
However, the CBO report noted that repealing corporate AMT "may be useful in the long run as a permanent reform or as a way to ensure the economy derives the fullest effects from other corporate tax cuts."
That admission is good news to the tech industry. "Immediate, short-term stimulus is the yardstick they used, and not everyone thinks everything has to be short term," Hellmann said. When the definition is broadened to include longer-term measures "AMT and accelerated depreciation both do pretty well," he said.
Robert Cresanti, vice president of public policy at the Business Software Alliance, agreed. "Recognition that repealing corporate AMT may have long-term economic benefits is not useless to us," he said.
It is easy to argue for these longer-term measures because any proposal that would provide a cash infusion for a company would create an investment incentive, Cresanti said. If money is returned to a corporation, it does not save the money, he noted, adding that "investors get very rancorous when a company is not deploying capital and assets to their best and most efficient use."
A Political Paper Weight
Just what effect the CBO report will have on the stimulus debate is unclear. While the agency is widely respected, those who see the report as supporting their position will give more weight to its results, sources say.
"If you have a CBO study that opposes the thing you oppose, then you send your boss into battle waving the CBO study," said Cresanti. But if the CBO does not endorse a particular idea, the lawmaker who favors it will highlight the first couple of pages that note the analysis is full of assumptions and exceptions, he said.
Indeed, a Senate staff member praised the CBO's findings, saying the report shows that the House-passed stimulus bills are "intellectually incoherent." "We have been making these points all along, and they [Republicans] have gotten a pass on the substance of the issue," the source said.
But Greg Crist, a spokesman for House Majority Leader Dick Armey, R-Texas, said he is not sure whether lawmakers, particularly those in the Republican Party, would give the CBO report any more credence over other reports with opposite findings.
"Companies and individuals make decisions on long-term returns," Crist said, noting that "continued, sustained tax relief" produces positive economic results by encouraging firms to create jobs. He criticized Daschle and other Democrats for calling for a delay in the implementation of marginal income-tax cuts.
Whether the report will influence lawmakers and they can compromise depends on how entrenched their positions are. So far, the Bush administration has ignored the report, and "the bottom line is how locked in is the administration," said Robert Greenstein, executive director of the Center on Budget and Policy Priorities.
The proposal the Bush administration supports "scored quite low in the CBO report," and the State of the Union address next week will show just how wedded President Bush is to the proposal he has been touting, Greenstein said.
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