President Bush must love this!
WASHINGTON -- President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion in tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.
The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated, and may make it easier to win over Republicans who have stressed that any initiative should rely relatively heavily on tax cuts rather than spending.
The Obama tax-cut proposals, if enacted, could pack more punch in two years than either of President George W. Bush's tax cuts did in their first two years. Mr. Bush's 10-year, $1.35 trillion tax cut of 2001, considered the largest in history, contained $174 billion of cuts during its first two full years, according to Congress's Joint Committee on Taxation. The second-largest tax cut -- the 10-year, $350 billion package engineered by Mr. Bush's in 2003 -- contained $231 billion in 2004 and 2005.
The largest piece of the overall tax relief would involve cuts for people who pay income taxes or who claim the earned-income credit. It would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, providing a credit to offset Social Security and Medicare payroll taxes of $500 per individual or $1,000 per family.
On the campaign trail, Mr. Obama said he would phase out a similar tax-credit proposal at around $200,000 per household, but aides said they haven't settled on an income cap for the latest proposal. This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion.
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. In effect, this would entitle companies to receive cash from the government that they otherwise couldn't have claimed.
A second provision would entice firms to plow that money back into new investment. The investment write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.
A separate element would offer a one-year tax credit for companies that make new hires or reverse layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.
Business lobbyists are pushing hard for Congress to allow companies that haven't paid corporate income taxes to get a break, too. Start-up companies, alternative-energy firms and large corporations that have been swallowing losses for years -- such as automotive and steel companies and some airlines -- have already begun lobbying for such "refundability."
They argue that a provision to claim losses on back taxes will have little effect on the economy if firms that need it most -- struggling companies that weren't obligated to pay any taxes -- can't benefit from a tax break.
For years, the tax code has allowed poor individuals to get tax checks even if they don't pay income taxes to begin with. But such largesse hasn't been granted to businesses.
Mr. Obama, however, doesn't back payments to companies that haven't paid taxes, aides said. Instead, under his plan, businesses that haven't been paying taxes would be able to get payments from tax credits they would have taken in 2008 and 2009 for incentives offered by Congress, such as the production tax credit offered to wind-power and other renewable-energy firms. These amounts would likely be relatively small.
"We're working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private-sector jobs and strengthening the middle class?" said transition-team spokeswoman Stephanie Cutter. "We're guided by what works, not by any ideology or special interests."
As these details are being worked out, Mr. Obama and his family left Chicago during the weekend for Washington, hoping to quickly project a shift in power even though Inauguration Day remains two weeks away.
The president-elect's daughters, Malia and Sasha, begin classes at the exclusive Sidwell Friends School on Monday, while the family takes up temporary residence at the Hay Adams Hotel a block from the White House.
Mr. Obama will be on Capitol Hill Monday, first to meet with House Speaker Nancy Pelosi (D., Calif.) and Senate Majority Leader Harry Reid (D., Nev.), then with the broader bipartisan leadership of Congress. The stimulus package will be front-and-center in those discussions.
On Tuesday, the new Congress convenes with Democrats' enhanced majority. On Wednesday, Mr. Obama plans to attend a White House luncheon with Mr. Bush and the three living ex-presidents.
Democratic leaders and Obama aides now acknowledge that congressional Democrats' initial goal of passing the recovery package before Mr. Obama's Jan. 20 inauguration is unrealistic. Instead, they are hoping for passage before Feb. 13, the first recess of the new Congress.
"We certainly want to see this package passed through the House of Representatives no later than the end of this month, get it over to the Senate, and have it to the president before the break in early February," House Majority Leader Steny Hoyer (D., Md.) said on Fox News Sunday.
But Republicans are already criticizing parts of the package. Senate Minority Leader Mitch McConnell (R., Ky.), speaking Sunday on ABC's "This Week," questioned one of the biggest pieces of the plan, which would send as much as $200 billion to state governments largely to expand the federal share of Medicaid, the health program for the poor.
Mr. McConnell suggested structuring that aid as a loan, saying this would encourage the states to "spend it more wisely."
An array of business tax cuts, aimed largely at job creation, could help overcome such GOP opposition to the overall stimulus package, enabling the Democrats to present their plan as a balanced mix of tax cuts and spending. It also would likely encourage large companies and businesses to lobby hard for its enactment.
Mr. Obama's team has spoken of wanting to attract significant Republican support to the initiative, not simply squeezing it through by picking off a Republican moderate or two. Mr. Obama's aides argue that even the money going directly to the states could be counted as a tax cut of sorts, since it may forestall state tax increases.
Mr. Obama's aides have already enlisted business groups to rally behind spending for roads, bridges and other public-works projects. Norman R. Augustine, a former chairman and chief executive of Lockheed Martin Corp., will testify before the House Democrats' Steering and Policy Committee Wednesday in favor of an infusion of federal infrastructure spending.
But the tax cuts may hold more sway with Republicans.
Obama Eyes $300 Billion Tax Cut - WSJ.com