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Washington mulls how to stimulate economy

Unemployment benefits extension on the table

By Brooks Jackson
CNN Washington Bureau

Unemployment benefits extension on the table

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WASHINGTON (CNN) -- With 8.5 million Americans out of work -- and rising -- political leaders are mulling ideas to stimulate the U.S. economy.

President Bush is expected to propose a package of tax cuts, and Democrats promise their own package. The Republican-controlled Congress could be debating the competing proposals as early as January, when the new legislative session convenes.

Bush's recent shakeup of his economic team underscored the political importance of focusing on the economy. For example, Rep. Bill Thomas, chairman of the House Ways and Means Committee, said he wants the new team to be in place in the new year, so Congress can "get to work on generating economic growth and job creation."

Here's a look at five different ideas for stimulating the economy:

• Speed up tax cuts. The idea is to move up to 2003 some of the federal income tax cuts already on the books, possibly the across-the-board rate cut now set for 2004 and some sweetened tax breaks for parents and married couples now scheduled for 2008. That could pump nearly $50 billion into family budgets next year and could eventually add 300,000 jobs according to David Wyss, chief economist for Standard & Poor's, the credit-rating agency.

But it would benefit upper-income taxpayers most. Taxpayers making $1 million a year would get an average reduction of $19,557, according to an analysis for CNN by the Tax Policy Center, a joint enterprise of the Brookings Institution and the Urban Institute. But taxpayers making between $30,000 and $40,000 a year would get only $146. Nearly one-third of the benefits would go to the highest-earning 10 percent of all taxpayers. The idea is popular with many Republicans, but the Bush administration is reported to be having second thoughts about proposing this option.

• Cut taxes on dividends. Economists have always been bothered by the double bite that the federal income tax takes out of corporate profits. Corporations pay a tax directly on their profits, and stockholders pay again when they receive their share of what's left. "We sort of feel that's not consistent with good capital markets, with efficient capital markets," said Wyss.

Making corporate dividends tax-free to individuals would pump billions into the economy, and also make it easier for corporations to raise funds to invest and create jobs in the future, experts say. But, according to the analysis by the Tax Policy Center, the immediate benefits would be even more lopsided than speeding up existing income-tax cuts. Taxpayers making $1 million or more would get $27,097, while those making $30,000 to $40,000 would get $42.

This option of eliminating the tax on dividends also carries with it the potential for corporate mischief. "Let's face it, if corporations are given this loophole they're going to jam everything they can find into it," Wyss said. Another option, under active consideration by the Bush administration, is to allow taxpayers to exclude only half the value of stock dividends from their taxable income, rather than 100 percent.

• Extend unemployment insurance benefits. At the end of December, the struggling economy suffered another setback when almost 800,000 people lost the extended unemployment insurance benefits that Congress had provided as a counter-recession measure.

Renewing those benefits would be -- dollar for dollar -- an even more effective stimulus measure than tax cuts, according to many economists. The reason is that jobless workers tend to spend every dollar of their benefits. "Therefore, stimulus would be provided to the economy in a timely fashion," said Sen. Max Baucus, the ranking Democrat on the Senate Finance Committee.

On the other hand, upper-income taxpayers tend to save much of what they gain from tax cuts. That can help future economic growth but does little to get the economy over what Federal Reserve Chairman Alan Greenspan has characterized as a 'soft spot.'

States typically provide 26 weeks of benefits. Congress added 13 weeks when the recession hit, but adjourned without renewing them. Bush has called for some new extension of benefits. Congress is likely to haggle over who is eligible, but it's likely that some form of extended jobless benefits will be part of any economic stimulus package.

• Payroll tax cut. As an alternative to speeding up cuts for upper-income taxpayers, some have proposed a cut in payroll taxes, which are paid by every worker starting on the first dollar earned. A temporary payroll tax cut could provide a big economic stimulus: just exempting workers from payroll taxes on the first $10,000 of income for one year could pump $100 billion into the economy.

The Tax Policy Center calculates that such a payroll cut would be far more egalitarian than income tax cuts. For taxpayers making $1 million it would produce a cut of $1,137, while for those making between $30,000 and $40,000 a year it would bring a cut of $788.

But a big political problem is that payroll taxes fund the politically sacrosanct Social Security and Medicare programs. Congress could easily structure a cut to ensure that the revenue lost to these programs is made up from general revenues. But the idea has yet to attract much support and chances for passage are doubtful.

• Fiscal aid to states. A fiscal crisis at the state level is threatening to drag the economy down. California recently announced it faces a staggering $34.8 billion budget shortfall. Economists estimate the combined budget gap of all the states as high as $70 billion. The National Governors Association calls it the worst fiscal crunch since World War II.

Some states are laying off workers, adding to unemployment. Some are raising taxes, partially offsetting the economic benefit of cuts in federal taxes.

"One one of the most powerful stimuli that they could do would be to make some money available to states, because states are going to be forced to cut spending and/or raise taxes," said Ray Scheppach, executive director of the National Governors' Association. Such aid could ease cuts states are expected to make in health programs for the poor, and in public education, spreading the benefit of federal fiscal aid fairly evenly.

The states are in trouble primarily because the sagging economy has taken a huge bite out of their tax revenues, but Washington has also saddled states with requirements to spend added billions for health care, education and homeland defense.

So far, Washington's political leaders have shown little interest in giving states additional aid. The NGA's Scheppach puts chances of passage at 50-50, and concedes that's an optimistic assessment.



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