The Corner

House Stimulus Package: The Good, the Bad and the Ugly

The good (from Boehner’s press release):

Tax Relief for Employers:

Bonus Depreciation: The economic growth package will provide for a 50 percent bonus deduction on new equipment in the year it is placed in service, with certain exceptions for equipment with a “long life.” This temporary tax cut offers significant savings on new property with a depreciation period of 20 years or less. This will give employers – particularly small businesses – greater incentive to invest and create jobs for more Americans searching for work. The temporary bonus depreciation, coupled with expensing measures enacted in May 2003, resulted in a four percent increase in business spending in the first six months alone.

Section 179 Expensing: This provision allows employers, including small businesses, to fully expense $250,000 in both new and used tangible property in the year it is purchased up to an overall investment limit of $750,000. This will provide a particularly strong incentive for small companies to invest in their businesses so they can continue to provide good-paying jobs for the American people.

A tax break on capital costs is a good idea. New equipment and new facilities require new workers, and tend to raise wages for old ones. Making both of these provisions permanent would be better.

The bad:

Rebate Checks: The economic growth package will include rebate checks in the sum of two separate calculations, with an overall phase-out for those with adjusted gross incomes above $75,000 for a single taxpayer and $150,000 for married couples. Rebate checks will include a base amount determined by the greater of two options: (a) Income tax paid in 2007, with a maximum of $600 for a single taxpayer and $1,200 for married couples; or (b) $300 for an individual and $600 for a married couple, provided the individual or couple earned income of at least $3,000 in 2007.

A children’s bonus also will be included in the rebate check calculation. Anyone qualifying for the base amount also receives an additional $300 per child, with no cap on the number of children.

As the Editors have pointed out several times, consumer spending is not causing the economy to slow down, and rebate checks are more likely to be saved than spent. The rebate deal is structured so that many people who don’t pay income taxes (but do pay payroll taxes) will qualify for a check; according to the Washington Post, that was the tradeoff Nancy Pelosi offered in exchange for dropping Democrats’ demands for increased spending on unemployment insurance and food stamps. Not a terrible deal, but still unlikely to provide much stimulus.

The ugly:

Increased Loan-Guarantee Limits for FHA, Fannie Mae and Freddie Mac

Increase in Government Sponsored Enterprises (GSE)/Federal Housing Administration (FHA) Conforming Loan Limit: The conforming loan limits for both FHA and GSE (such as Fannie Mae and Freddie Mac) loans would be increased from $362,000 to $725,000 and from $417,000 to $625,000 respectively.

The FHA, Fannie Mae and Freddie Mac are tasked with helping low-income people afford houses. This proposal doesn’t just envision a much larger role for these agencies; it would actually hinder their pursuit of affordable-housing goals. A recent study from the Office of Federal Housing Enterprise Oversight points out the obvious:

Finally, a $500,000 mortgage owned or guaranteed by Fannie Mae or Freddie Mac would require twice as much capital for regulatory purposes as a $250,000 mortgage. Permitting the Enterprises to purchase jumbo mortgages, even if only for securitization, could absorb capital that would otherwise be used to support the purchase of a larger number of smaller loans, especially if Fannie Mae and Freddie Mac faced capital constraints.

Actually, we’re talking about a lot more than $500,000: Under the new guidelines, a borrower could make a 20-percent down payment on a $906,250 house, take out a $725,000 mortgage and qualify for federal assistance. I’m sorry, but why on earth should anyone who can afford a $900,000 house need the government’s help to do anything?

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