Last week, President Bush released the outlines of the White House plan to stimulate the nation’s flagging economy. The Administration’s two-part proposal, billed as a $75 billion stimulus, consists of (1) limited spending to help some workers losing their jobs after the September 11th attacks and (2) new tax cuts and tax breaks that are of little benefit to working families and are four times greater than the benefits for workers.
The President’s plan is unlikely to stimulate the economy and put America back to work. The modest worker relief package is even less than it appears. It provides too little for too few workers, confers weaker protections than workers enjoyed in past recessions and robs Peter to pay Paul. It will do little to help needy workers or to boost a weak economy. Coming on the heels of the $15 billion airline industry bail-out that provided nothing for airline employees—many of whom lost their jobs overnight and, despite years of service, have few or no severance benefits—this meager package signals an intention to serve workers last and least at the table of economic recovery.
The heftier part of the package—$60 billion in tax breaks—will likewise be of little help for the economy or for working families. Most of the proposed tax breaks will benefit wealthy individuals, who already benefited the most from this year’s trillion-dollar tax cut, and corporations, which were promised in the spring that their tax cut day would come soon. Even before the September 11th tragedy, the earlier tax cut had all but eliminated the budget surplus and prevented long term interest rates from falling, reflecting concerns about the economy once all the tax cuts were phased in. Further tax cuts now will only compound an already dire economic situation, without providing any guarantees that new tax breaks will actually encourage new spending, produce jobs or spur economic growth.
Instead of the plan proposed by the Administration, the American economy and America’s working families need a serious economic stimulus package that will work for all of us—not just some of us. The first step in economic stimulus must be meaningful and significant federal support for working families that have been and will be hurt the most during this time of crisis. Such a program would include better unemployment benefits covering more unemployed workers, federal financial assistance to maintain health care coverage, and access to job training and retraining. We should also increase the minimum wage, provide tax rebates for low to moderate income working families left out of the last round of full rebates, and give aid to struggling state and local governments. Such a program would put money into the hands of those who need it most and who are most likely to spend it, thereby meeting immediate needs and providing a positive jolt for the economy. Additional interventions, such as investments in the nation’s infrastructure—roads, bridges, our industrial base, schools and other basic needs—would also be appropriate both to stimulate the economy and to address critical infrastructure deficiencies, including basic domestic security needs.
PART ONE The Administration's Worker Relief Package: Too Little for Too Few
The key components of the Administration’s worker relief package are a federally-funded temporary Emergency Extended Unemployment Compensation (EEUC) program; an expedited HHS waiver process to allow states to tap unspent S-CHIP funds to extend health coverage to uninsured adults; and a $3 billion National Emergency Grants program to help dislocated workers in states experiencing plant closures or massive layoffs and dislocations after September 11th. Notably, the Administration’s worker relief package involves virtually no new federal funding.
Emergency Unemployment Assistance—Too Little for Too Few: The proposed Emergency Extended Unemployment Compensation (EEUC) program would provide 13 weeks of additional benefits, funded entirely by the federal government, to certain unemployed workers who exhaust their regular (typically, 26 weeks) benefits. The EEUC benefits are limited to workers who lose their jobs after September 11th; qualify for unemployment benefits under their state UI programs; and worked in New York, Virginia, or a state experiencing a 30% jump in its unemployment rate compared with its rate during the three-month period preceding the September 11th attacks.
The EEUC program is far more limited than the Emergency Unemployment Compensation (EUC) program enacted to respond to the economic recession in 1991. The EUC program provided for federally-funded emergency unemployment benefits for unemployed workers in all states, while states’ individual unemployment rates determined only the numbers of weeks unemployed workers could receive emergency benefits. In contrast, because of the 30% trigger under the Administration’s proposed EEUC program, the Center on Budget and Policy Priorities estimates that unemployed workers in only 17 states will become eligible for EEUC benefits (assuming the current recession is comparable to the recession of the early 1990s). The Department of Labor projects that the federal government will spend $5 billion on EEUC benefits, again assuming this recession is comparable to the recession of the early 1990s. This level is only one-seventh of the $35 billion (2002 dollars) in emergency unemployment benefits that the federal government provided unemployed workers during the recession in the early 1990s. Finally, the duration of benefits under the proposed EEUC program is only 13 weeks, less than half the weeks available to workers in the hardest hit states under the 1991 benefits program.
In addition to falling short of previous emergency relief programs, the Administration’s proposed EEUC program completely misses the mark for many unemployed workers, including many who will experience hardships greater than those experienced by those covered under the program. First, the September 11th qualification date for benefits eligibility leaves out millions of workers who have been hurt by the recent economic downturn. In August, unemployment rose to 4.9%, the highest rate in four years. Over one million manufacturing jobs were lost between July 2000 and August 2001. All unemployed workers will experience considerably greater difficulty in finding new jobs if the economy continues to weaken, but the Administration’s proposed EEUC program singles out only some of them—those workers losing their jobs after September 11th—for federal emergency benefits.
Second, eligibility for EEUC benefits is limited to individuals who have exhausted their regular UI benefits. As a result, the program excludes workers ineligible for state UI benefits, a group that includes many low wage and part-time employees. Finally, the 30% trigger leads to anomalous results: similarly situated workers will be treated differently under a federal benefits program, depending solely on the state where they live or work. Indeed, because of the 30% trigger, workers in states with relatively high unemployment rates before the September 11th attacks may actually be less likely to have access to EEUC benefits than those in states with relatively low pre-September 11th unemployment rates.
The Health Care Proposal—No "There" There: The core health care component of the Administration’s stimulus package—expedited waivers coupled with the availability of $11 billion in unspent S-CHIP funds—neither sets new policy nor provides new funding to extend health care coverage to the needy. The proposal does not guarantee that unemployed workers will have health coverage, and any coverage they receive from unspent S-CHIP funds will be at the expense of poor children.
The waiver policy predates the September 11th attacks. The Department of Health and Human Services announced the Health Insurance Flexibility and Accountability (HIFA) demonstration in August of this year. HIFA invites states to use waivers to reduce health benefits and increase cost-sharing for covered individuals in "optional" populations (i.e., individuals whom states may, but are not required, to cover), and to use the savings to expand coverage to new populations. The President’s announcement of this program thus broke no new ground—it simply reiterated an already-announced initiative.
Reiteration of the HIFA demonstration does not guarantee health coverage for unemployed workers. HIFA does not require states to reinvest savings from reduced benefits and increased cost-sharing in expanding coverage to new populations, including low-wage workers. Section 1115 waivers need only be "budget neutral," i.e., the cost to the federal government cannot exceed what it would have been without the waiver. There is nothing to prevent states from receiving approval for a waiver that would spend less in combined federal and state funding than would have been spent without the waiver.
Moreover, even assuming states expand coverage to other groups, the tradeoff such expansions entail in terms of reduced benefits and increased cost-sharing are at the expense of an especially needy and vulnerable population. Nearly 12 million Medicaid beneficiaries—or 29 percent of all beneficiaries— are in "optional" groups, and under HIFA, states can impose unlimited cost-sharing on these individuals. These "optional" populations include 4.2 million children, 3.7 million adults, 2.3 million elderly, and 1.5 million people with disabilities. Many of these have incomes at or below poverty level (about $8,600 for an individual and about $14,600 for a family of three).
Tapping $11 billion in unspent S-CHIP funds robs Peter to pay Paul: Drawing down unspent S-CHIP monies to cover unemployed adults would strip coverage from poor kids, the program’s intended beneficiaries. The unspent S-CHIP monies available to states now reflect the savings from earlier years, when the program was gearing up. States are facing S-CHIP cuts in 2002 and have counted on drawing down their unspent funds to maintain coverage for eligible children. Already, OMB estimates that as a result of the S-CHIP cuts, states will be able to serve 400,000 fewer children starting in 2005. Diverting unspent S-CHIP funds to cover unemployed adults will only hasten the decline in coverage of poor children.
Unemployed adults need and deserve health care coverage, but the way to provide it is to put more money into the system—not to play a shell game with funds that were intended to provide health care coverage for kids.
National Emergency Grants—Funding Inadequate to the Task: States qualifying for funding under the $3 billion National Emergency Grant program could use these funds to subsidize COBRA payments (up to 75% of cost) for unemployed workers; provide unemployment benefits to individuals who are ineligible for regular or EEUC benefits, provided they enroll in job training programs; and to supplement the states’ job search and training programs. The proposed $3 billion total is insufficient to adequately fund any one of these efforts, let alone all of them. For example, one proposal under development that calls for subsidizing an even smaller portion of COBRA premiums (50%) for all COBRA-eligible workers, combined with a Medicaid option for low income workers without affordable access to COBRA coverage, is estimated to cost $16 billion. According to an AFL-CIO analysis, the proposed $3 billion in NEGs is adequate to help only 272,700 workers—but nearly 1.5 million workers have already lost their jobs this year, with more than 360,000 having been laid off since September 11th.
PART 2 New Tax Breaks—A Broken Record That Won't Work for Working Families
The signature and most costly component of the Administration’s proposed stimulus package is a new round of tax cuts and tax breaks. On the personal income tax side, the Administration is considering one-time rebates for millions of working Americans who received less than a full $300 rebate earlier this year and an acceleration of the rate reductions passed in the tax package. On the corporate side, the Administration is considering permanent changes that would allow corporations to write off the costs of new equipment and capital investments immediately instead of depreciating them over several years, and that would permit businesses to carry back losses for a period of five years instead of two. In addition, the Administration will apparently call for permanent repeal of the corporate alternative minimum tax, which is designed to preclude corporations from exploiting loopholes in order to avoid tax liability altogether.
The Administration claims these tax measures will cost only $60 billion, and that the spending and tax components of the proposed stimulus package are equally balanced. However, the Administration’s tax cost estimate counts only the immediate cost of these breaks, ignoring their long term costs. If the latter are taken into account, tax breaks account for 90 percent of the Administration’s proposed stimulus package.
The AFL-CIO supports a new round of rebates for low and moderate income tax payers who received no rebates or only partial rebates earlier this year. Beneficiaries of these rebates are hard-working Americans who incur substantial payroll tax liability. Like others who received full rebates earlier this year, they deserve a share of the tax cut pie. And unlike more affluent taxpayers, they will spend—rather than save—the rebates they receive, thus helping to stimulate the economy.
On the other hand, accelerating rate cuts and permanently reducing corporate tax obligations will disproportionately benefit the wealthy and will not have any significant positive impact on the economy. Instead, by further diminishing public resources now and in the future, these new tax breaks are likely to worsen rather than improve the nation’s economic situation.
Accelerating Rate Reductions—Helping Top End Tax Payers Most: One measure the Administration is considering would accelerate reduction of the 28 percent income tax bracket to 25 percent, with the full rate cut taking effect in 2002 rather than being phased in through 2006. While speeding up this rate reduction would affect some middle-income taxpayers, wealthier tax payers would benefit most from this change.
According to the Center on Budget and Policy Priorities, only one in four tax filers is in the 28 percent or higher tax bracket. In 2002, the income range for the 28th percent tax bracket is between $46,700 and $112,850 (for married tax filers; amounts vary depending on whether the tax filer has children). The benefit tax filers would enjoy from accelerating the rate cut depends entirely on where they fit within this bracket: those with incomes at the lower end would receive only very limited benefit from accelerating the rate cut, while those with earnings closer to the top end of the bracket would realize considerably greater benefit. And only tax filers with incomes greater than the 28 percent range would enjoy the full benefit of accelerating the rate cut for that range. Less than five percent of tax payers have incomes that place them in a tax bracket greater than the 28 percent bracket.
Aside from disproportionately benefiting the wealthiest tax payers, the proposed accelerated rate cut is unlikely to have a stimulative effect on the economy for two reasons. First, wealthier taxpayers are more likely to save rather than to spend these tax cut dollars. In fact, Federal Reserve Chair Alan Greenspan estimates that only 18 percent of the rebates mailed earlier this year were spent. Second, moving the effectiveness of the rate cut date up to 2002 does not inject new resources into the economy now or in the near future. At best, the benefits of these tax cuts would accrue in 2003, when the economy may have already recovered.
In short, speeding up the rate cut as the Administration proposes is an unfair, unproductive, and untimely response to the current economic crisis.
Corporate Tax Cuts Not The Answer Either: Nor will the proposed corporate tax breaks help boost the economy. In general, corporate tax cuts, such as accelerated depreciation allowances (the expensing changes the Administration is considering), are extremely expensive and have very little impact on business spending. As such, they have little or no stimulative value. In fact, such changes might even be counterproductive since concerns about future deficits created by these tax cuts could drive up long term interest rates further. In that case, companies might be encouraged to reduce, rather than boost, their investment spending.
While changing the expensing rules temporarily might induce corporations to make purchases now they otherwise would postpone, a permanent change in these rules provides no incentive for companies to spend now. And permanently repealing the corporate alternative minimum tax would encourage businesses, primarily large corporations, to exploit tax loopholes (and to seek new ones) to avoid income tax liability altogether.
The admitted need for economic stimulus does not justify such substantial and permanent changes in rules governing corporate tax liability. Any changes designed to encourage corporations to step up to the plate and do their part for economic recovery should be temporary—just as the proposed benefits for workers are temporary. No one should take advantage of the crisis we now face, involving concerns of national defense and economic security, to push through permanent corporate tax changes that will not enhance economic growth and that will further diminish our capacity to respond to the nation’s needs and demands in the future.
The bulk of the Administration’s tax proposals are reminiscent of the discredited "trickle down" theory that created an economy that was weaker, not stronger, and that fueled the growth of great income divides between Americans. Now is not the moment to repeat those failed policies. Speeding up this year’s tax cuts and passing new tax breaks for business will neither provide economic stimulus nor deliver resources to working families most in need of help. Instead of cutting taxes further, we should revisit this year’s tax cuts and postpone or repeal implementation of top rate cuts and the estate tax phase-out.
AFL-CIO Public Policy Department October 2001
Sources:
AFL-CIO Public Policy Department, Summary Analysis: Bush Proposals for Worker Relief, October 5, 2001.
Center on Budget and Policy Priorities, The Administration's Stimulus Proposal: Is It A Sound and Balanced Package?, October 9, 2001.
Center for Tax Justice, Should Big Corporations Be Exempt From Helping Pay For The War On Terrorism?, September 25, 2001; Administration Proposal To Accelerate Income Tax Cuts Would Overwhelmingly Benefit The Wealthy, October 5, 2001. |