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By Brett Ferguson and Heather M. Rothman
The House voted 244-188 Jan. 28 to pass its roughly $816 billion economic stimulus bill (H.R. 1), which includes $275 billion in tax incentives for individuals and businesses.
The centerpiece of the bill is a $145 billion Making Work Pay tax credit that would distribute up to $1,000 to tax filers through reductions in their payroll withholding levels over tax years 2009 and 2010.
Critics of the provision complained that it would only add about $10 per week to single filers' paychecks and give joint filers $20 more per week, although for 2009 lawmakers intend for withholding levels to be adjusted to provide the full year's credit over the remaining months of the year. JCT Chief of Staff Edward Kleinbard told the Senate Finance Committee Jan. 27 if the withholding levels are changed on June 1, married workers would see their biweekly paychecks rise by $82.
The bill, crafted in close consultation with President Obama, also featured about $20 billion in tax incentives for renewable energy production, $18.3 billion for an expansion of the refundable portion of the child tax credit, and $15 billion for an extension of the net operating loss carryback period for businesses, from two years to five years.
If a business elects to carry losses back over five years, the House bill penalizes it by requiring that the total value of the NOLs be reduced by 10%. Financial institutions receiving aid from the Treasury Department's Troubled Asset Relief Program enacted in 2008 would not be allowed to use the provision under the new stimulus bill.
Although no Republicans voted in favor of the House bill, instead favoring their own substitute that would have been based largely on cuts in tax rates for individuals and businesses, House Speaker Nancy Pelosi (D-Calif.) argued that Democrats tried to make sure Republican ideas were included in the legislation.
Passage of the House bill comes a day after the Senate Finance Committee approved a similar stimulus package that also features a one-year alternative minimum tax “patch” and help for some companies that face a tax liability due to canceled debt.
Breaks for Bank Mergers Repealed
In addition to blocking TARP recipients from the expanded NOL carryback provision, Democrats also included a provision to overturn IRS Notice 2008-83, which allows banks to use the built-in losses of banks they acquire.
The Treasury Department in the notice provided an exemption from §382, which sharply restricts the ability of businesses to use losses booked by companies they acquire against their own tax liability, as part of its response to the financial markets crisis.
Critics of Treasury's action said the 2008 law was intended to prevent businesses from buying companies with large losses for the sole intent of using them as “shell” companies that produce nothing other than tax savings. While the proposal in the new bill will not disallow the exemption for any acquisitions or legally binding written agreements that were in place prior to Jan. 16, it will prevent banks from using those tax benefits on any future acquisitions.
In its description of the proposal, the Joint Committee on Taxation said the provision states that Congress finds that Treasury did not have the authority to authorize an exemption from §382(m) and that it is inconsistent with the congressional intent behind the law. JCT estimated that the provision would raise $6.5 billion in revenues from 2009-2018.
New Tax-Exempt Bonds Authorized
The legislation also authorizes several tax-privileged bonds, including $11 billion in qualified school construction bonds—a new category of tax-credit bonds. A taxpayer holding the bonds is entitled to a tax credit and the bonds can be sold by states or large school districts to pay for the construction, rehabilitation, or repair of any public schools.
New recovery zone bonds may be issued to states for use in cities or regions that have high unemployment rates or have seen a sharp decline in employment and economic activity. Recovery zone bonds are estimated to cost the Treasury $6 billion over 10 years, a $1.1 billion increase from the original estimate, while the qualified school construction bonds are estimated to cost $9.9 billion, a $900 million increase spending.
The House bill also features $2 billion for the creation of a national pool of tax-exempt bonds for use by Indian tribes for economic development and a “taxable governmental bond” that would allow issuers the ability to elect an option providing holders with a tax credit worth 35% of the interest payable on the bonds.
Lackluster Reaction from Business Sector
Bruce Josten, executive vice president of the U.S. Chamber of Commerce, said he is concerned that the House bill lacks the necessary provisions to revive the economy.
“President Obama and Congress are right to take swift and bold action on the stimulus, but it is just as important to get it done right as it is to get it done quickly,” Josten said. “To move the economy forward immediately, the stimulus should focus on spurring investments to drive economic growth and removing roadblocks that will make American companies more competitive in the global market.”
Josten said many provisions that could have provided incentives for businesses to retain or create new jobs were left out, as was tax relief for companies that reduce their debt.
“The good news is we expect a number of changes in the Senate version,” Josten said. “What the Finance Committee has outlined this week is a good first step. We're encouraged to see they recognize the value of cancellation of indebtedness and have included that provision in the bill.”
Reid said Republicans will not insist on any procedural motions that will slow action on the bill.
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