- The Washington Times - Wednesday, January 8, 2003

An economic stimulus package ideally provides fiscal relief to debt-plagued states, enhances unemployment insurance and strengthens jobless benefits, and the president's $674 billion plan fails to deliver on all counts, analysts at the Center on Budget and Policy Priorities said Wednesday.

"The short-term benefits should be moderate and the long-term benefits should be substantial," said Robert Greenstein, executive director of the Washington-based CBPP when asked what a recovery plan should look like.

William Gale, senior fellow at the Brookings Institution, said President George W. Bush's focus on permanently ending double taxation of dividend income would not provide an economic boost because people who collect dividends tend to be better off than the rest of society.

"If you give Warren Buffett $10,000, he's not likely to spend it," said Gale.

Bush reportedly considered direct aid to the states, which face a combined $90 billion shortfall according the American Legislative Exchange Council, but did not propose helping states in the plan the president outlined Tuesday before the Economic Club of Chicago.

"States currently face a budget shortfall of about $40 billion to $50 billion and are projecting that figure to rise to $60 billion to $70 billion next year," the National Governor's Association said. "Given that 49 of the 50 states have balanced budget requirements it does not matter whether states reduce spending or increase taxes — their actions will be a drag on economic activity."

"Bush wants to make the 2001 tax cut permanent," Gale said. "To do so would cost another $600 billion or more in the longer term. The size of the tax cut is wildly incommensurate with the need. The tax cut is regressive."

Gale's analysis found households with around $1 million income in 2003 would get 17 percent of the tax cut, households with income around $100,000 would get 58 percent and the 70 percent of U.S. households with less than $50,000 income, 13 percent. Households with income below $40,000 would get only about $100 in tax relief each.

Gale said by 2010 the tax shift distribution would move permanently from the middle class to the upper class with taxpayers with incomes around $100,000 getting 69 percent of the tax cut.

"Dividend relief is not for the elderly," Gale said. "These are not the destitute elderly. Only 5 percent of the dividends go to elderly households with incomes of less than $50,000."

Greenstein said Bush's plan is "98 percent tax cut and 2 percent benefits for the unemployed."

"The plan is remarkable in a number of respects," he said. "It is remarkably inefficient as stimulus, costing $674 billion to inject about $100 billion into the economy in 2003, when the economy is weak; remarkable in its fiscal profligacy, swelling budget deficits for years to come, and remarkably tilted toward those at the pinnacle of the income scale, the very group that gains the most from last year's tax cut."

Dividend tax cuts would cause states to lose more than $4.5 billion in tax revenue a year, said CBPP Deputy Director Iris Lev, who found the proposed exclusion of corporate dividends would reduce tax revenue in 43 of the 50 states and the District of Columbia.

California would be hardest-hit losing $113 million; New York, $55 million; and Illinois, $14 million. Florida, which has no state income tax, would lose nothing.

According to Gale, a dividend tax cut would encourage investors to leave bonds and go to stocks causing interest rates to rise. A higher federal budget deficit would drag down national savings by an estimated $200 billion by the end of the decade wiping out the net effect of the tax cut.

"As a growth package this is not a well designed package," he said. "It gives windfall gains to investors for their previous investments, doesn't fix the minimum alternative tax (for low income taxpayers), is fiscally irresponsible and unduly weighed to upper income households."

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