Congress Strikes $789 Billion Stimulus Deal: Historic Bill Would Spur Road Building, Give Businesses Tax Breaks, Expand Broadband Access; Final Passage Expected Soon

By GREG HITT and JONATHAN WEISMAN

FEBRUARY 12, 2009, WSJ

1 WASHINGTON -- Congress and the White House reached accord on a $789.5 billion economic-recovery package that would shower hundreds of billions of dollars in tax relief on individuals and businesses and spark an infrastructure building boom, from the nation's ports and waterways to its schools and military bases. The deal all but clinches passage of one of the largest economic rescue programs since Franklin Roosevelt launched the New Deal.

2 President Barack Obama, speaking at a Northern Virginia construction site, hailed an "endeavor of enormous scope and scale." The package dwarfs the military budget and exceeds the cost of the entire Iraq war since the invasion of 2003.

Associated Press

ON BOARD: Senate Majority Leader Harry Reid, center, announces a compromise on a package of spending and tax cuts designed to jolt the economy. Reid, a Nevada Democrat, is flanked by Sens. Susan Collins of Maine and Arlen Specter of Pennsylvania, key Republican supporters of the bill.

Breaking It Down:

3 Impact of stimulus package:

Corporate

Taxes: Companies can defer taxes for five years on transactions aimed at restructuring balance sheets and repay the taxes over the following five years.

Write-offs: Small businesses will be able to write off some investments from their taxes; larger businesses will get to more quickly deduct the cost of investments in plant and equipment from their taxable income.

Health technology: Physicians will get bonuses of between $44,000 and $64,000 if they computerize medical-records systems. Hospitals will get as much as $11 million.

Personal

Payroll tax credit: $400 for low- and middle-income workers, $800 for couples.

Alternative Minimum Tax: Higher exemption will lead to an average tax-bill saving of $503 on income between $66,354 and $111,645.

First-time home buyers: No repayment requirement for a $7,500 credit

4 Defying two decades of mostly Republican-led efforts to diminish federal authority and focus on lifting the economy through tax cuts, the legislation would expand unemployment insurance, tilt federal assistance to the poor, launch major efforts to streamline health-care delivery and give Washington a larger hand in local education spending.

The plan may be only a down payment on the Obama administration's effort to turn around an economy that has shed 3.6 million jobs since December 2006. Both Mr. Obama and Democratic leaders lowered their work-creation expectation Wednesday. They had originally said their goal was to create, or save, four million jobs. Last night, they cut that to 3.5 million.

The president has framed the deal as the first leg of an economic program aimed also at unclogging credit markets, lifting the housing market and tightening regulation of the financial and banking sector.

The agreement came late Wednesday after last-minute dickering over education and school-construction funds that dramatized the intensity of negotiations. The House and Senate convened a conference committee to bless the legislation and clear the way for action in the House as early as Thursday. Both chambers are expected to pass the compromise shortly.

Full details weren't released Wednesday, as aides met late to draft formal language and said tinkering was still possible well into the night.

About $282 billion of the bill, or 35%, is dedicated to tax cuts, split roughly evenly between incentives for businesses and individuals. The rest is spending, including expanded unemployment benefits, food stamps and construction of highways and bridges, water-treatment facilities and high-speed Internet service, among other things.

10 The package includes a provision requiring materials purchased with funds from the bill to be U.S. made. That has spurred criticism from trading partners around the world. But the measure was softened from the original versions, and now includes a requirement that the provision be implemented consistent with U.S. international trade obligations, according to individuals familiar with the bill.

Lawmakers were still negotiating late Wednesday on whether to impose strict limits on salaries and bonuses for companies taking taxpayer bailouts.

The bill gives more aid for middle-class families and workers who lose their jobs, including fresh subsidies for health insurance. Businesses get a range of incentives for new investments. Small businesses with revenue under $5 million a year would be able to use current losses to reduce taxes paid over the past five years, a provision that cost about $2 billion. Large manufacturers had been covered in earlier version that cost more than $19 billion, but were rebuffed in final trade-offs on the bill.

The final deal included a $5.3 billion tax break that allows corporations to speed up deductions for investments in plants and equipment, and another allowing small businesses to deduct business expenditures of up to $250,000 directly from their tax liabilities.

Certain middle-class households that currently aren't hit by the Alternative Minimum Tax -- designed years ago to make sure the rich didn't escape taxation -- will remain shielded. The bill has $69 billion to ensure that for the next year. But a separate tax break for the middle class and working poor is now less generous than the president wanted.

15 Home buyers who hoped for a $15,000 tax credit to buy a new home, as promised by the Senate, will be disappointed. A proposed $35 billion credit to support home sales was jettisoned in favor of a more modest $2 billion to $3 billion provision.

The proposal would eliminate the repayment requirement in an existing tax credit for first-time home buyers, and raise the credit to $8,000 from $7,500. Congressional aides cautioned Wednesday that the credit's size was still subject to negotiation.

Consumers who had hoped for a big tax break for buying a new car also will be disappointed. An $11.5 billion break proposed by the Senate is now down to just $2 billion, with tighter limits on who qualifies. Among other things, the proposal would allow buyers a federal income-tax deduction on local taxes on new-car purchases.

The stimulus plan is more tilted toward tax relief than Mr. Obama's original one. It's raising questions about whether all the compromising to trim costs and hold onto a fragile coalition in the Senate could undermine Mr. Obama's main goal: saving or creating millions of jobs over the next two years.

"It's a good plan, but I don't think it's good enough," said Mark Zandi, chief economist at Moody's Economy.com, who crafted the economic models used by the White House and congressional Democrats to project the economic boost of the plan. "Three million additional jobs are doable and likely; four million I think will be a stretch."

20 Alan Blinder, a Princeton University economist and former Federal Reserve vice chairman, lamented some of the changes, especially cuts to proposed health-insurance subsidies that were made to make room for the AMT provision and the business tax break for past payments. Mr. Blinder, a Democrat, said the bill will undoubtedly be a boost to the economy, but not as big a boost as it would have been had the negotiators not made so many compromises.

In the final horse-trading, the White House agreed to trim a payroll-tax holiday and reduce proposed aid to ailing state governments, among other things.

The package includes less direct aid to states than Mr. Obama had proposed, but a last-minute funding increase cleared the way for the deal. A state "stabilization fund" intended to help cash-strapped states avoid budget cuts was boosted to $53.6 billion from $44 billion.

Of those funds, $40.6 billion would go to local school districts to avoid teacher layoffs or to build or renovate schools. A further $5 billion would be for bonus grants to schools and districts that meet educational performance measures. And $8 billion would be set aside to avoid cuts in "high-priority needs," such as police, fire and prisons. The overall stabilization fund is considerably higher than the Senate's $39 billion total but far less than the House's $95 billion.

With an $87 billion federal infusion to help pay for Medicaid, states will get a boost. But with total budget shortfalls of at least $350 billion projected over the next two years, state governments will still have to cut deeply, say economists at the Center for Budget and Policy Priorities.