Calif. tax hikes may swallow stimulus

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By S.A. Miller

Sen. Dianne Feinstein's message for Californians who gripe about the $7.70 per week tax cut from President Obama's economic stimulus package: They would have got nothing if she had her way.

"If I had my druthers, I would have done [only] an infrastructure and safety net package," the California Democrat said. "I didn't have my druthers."

Taxpayers from coast to coast are less than impressed with the plan's $400-a-year refundable tax credit, which would show up in most paychecks this spring as an added $13 per week when federal withholding rates are adjusted. It drops to about $7.70 a week at the start of 2010.

"It's an extra bag of popcorn and a Pepsi, if you know what I mean," said Glen Falke, 64, an arborist from upstate New York. "It's not a big deal for me."

But residents of cash-strapped California are especially underwhelmed because a slew of proposed state tax increases - on everything from the gas tax to sales tax - threaten to wipe out the modest payday bonus from Mr. Obama.

"That $13 isn't going to do much when the state is raising everything," said Linda Fernandez, 65, a special-education teacher in San Dimas, Calif.

"The middle class never really benefits," she said. "The problem is all politicians promise us the world and very few can deliver much."

Mrs. Feinstein said, "Maybe that is the case. Maybe it's offsetting [higher state taxes] ... But it's less than it would have been."

The stimulus includes aid to states and local government in the form of new types of tax-preferred bonds for economic development and school construction and repair projects. But the state tax increases are still on the table in California.

The "Making Work Pay Tax Cut" is a signature program in Mr. Obama's $787 billion plan, though the Democrat-led Congress slashed the credit from the proposed $500 a year to $400 for individuals and from $1,000 for couples to $800.

The tax credit is less for higher earners, phasing out completely at $100,000 for individuals and $200,000 for couples filing jointly.

Mrs. Feinstein said voters should look at the "whole tax package," which, including breaks for businesses, total about $275 billion, a little less than a third of the entire bill.

The child tax credit in the bill will put about $825 more in tax credits in the pockets of qualifying low-income families with at least three children. The bill would expand the 15 percent credit to every dollar earned over $3,000 from the current $8,500 threshold.

There also is an expanded earned-income tax credit to boost refunds for low-income workers.

A new $2,500 tax credit for college education expenses goes to individuals earning less than $80,000 a year and couples making less than $160,000. First-time homebuyers get an $8,000 tax credit.

Social Security beneficiaries, veterans receiving Department of Veterans Affairs benefits and state government and railroad retirees get a one-time $250 payment.

The plan also helps 23 million middle-class families by suspending the alternative minimum tax (AMT), which would otherwise wallop families making as little as $50,000 a year with a 26 percent or 28 percent income tax rate.

Congress every year suspends the AMT, a 1969 law intended to make sure the rich pay a certain minimum tax, but which increasingly hits the middle-class because it wasn't indexed for inflation. This year Congress put the AMT suspension in the stimulus at a cost of about $70 billion, prompting the reduction in the plan's income tax cut.

Mrs. Fernandez said none of these provisions will put much cash in her pocket, though she wants the stimulus to succeed in reviving the economy. "We're hoping," she said.