Jon Kyl, January 28, 2008

Leaders in the U.S. House of Representatives, along with officials from the White House, recently announced a legislative proposal that is intended to encourage near-term economic activity. The package includes tax rebates for certain wage earners, tax incentives to stimulate business investment and job creation, and adjustments to federally-backed home loans for high-end mortgage holders.

The centerpiece of the package is the rebate checks -- generally $300 per person $600 for couples) for those with at least $3,000 of earned income, but phasing out for individuals with incomes above $75,000 ($150,000 for couples). Families with children would receive an additional $300 per child. Individuals with incomes of $87,000 or more and couples with incomes of $174,000 or more would not receive any rebate.

Proponents of the rebates believe that taxpayers will immediately "spend" the rebate, thus offering a short-term infusion of money into the economy. Other economists dispute that this would provide any meaningful economic growth. Because the Internal Revenue Service is busy processing tax returns through April, the earliest checks might be mailed is June -- which, even if the theory of stimulating growth is valid, may be too late to provide the quick help to the economy the President is looking for.

The second part of the stimulus package provides tax incentives for business investment. Businesses of all sizes could take a 50 percent bonus depreciation (or expense -- i.e., write off for tax purposes -- half the cost of the investment) in the first year that new equipment is purchased. Helping businesses invest in new equipment will make it easier for them to grow and create more good-paying jobs. If we are entering an economic slow-down, helping businesses create jobs may be the most beneficial thing Congress can do.

The package also proposes to allow small businesses to fully expense $250,000 in both new and used tangible property up to a limit of $800,000. Encouraging small businesses to grow is particularly important, since they create most of the new jobs in America.

These business incentives have worked in the past. While experts disagree, I believe these incentives were more "stimulative" than rebates given out in 2001. The temporary bonus depreciation and small business expensing were also enacted in May 2003, and resulted in a four percent increase in business spending in the first six months alone, according to House Republican Leader John Boehner.

The last major component of the agreement allows more subprime mortgage holders to refinance into federally-backed loans by increasing the conforming limit on the Government Sponsored Enterprises (GSE) loans from $417,000 to as high as $625,000, and Federal Housing Administration (FHA) loans from $362,000 to as high as $725,000 in high-cost markets. A total cap on the number of these loans, which are administered by Freddie Mac and Fannie Mae, would also be increased for one year.

While it is always encouraging to see the President and Congress are working together with the goal of strengthening our economy, I am leery of the temptation to "do something," without really understanding the effect. The cost, after all, is $150 billion added to the deficit; and the $150 billion has to eventually come from the taxpayers. So, this could end up being very bad policy, especially if it adds significantly to the deficit and fails to appreciably help the economy. Because the legislative package will originate in the House of Representatives, I am reserving my judgment until the Senate acts, because, already, there are Senators who have signaled an intention to add tens of billions of dollars in new government spending to the package. And politicians will have a hard time resisting the temptation to "give" voters money in an election year.

Congress must remember that entrepreneurs and businesses create jobs and generate economic growth -- more and more government spending does not. And at the end of the day, most folks would rather have a job, than a $300 government check.

Senator Jon Kyl, a Republican, represents Arizona in the U.S. Senate. He serves on the Senate Judiciary Committee, the Finance Committee, and the Energy and Natural Resources Committee.