Tax Provisions of the Economic Stimulus Package

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The economic stimulus package, P.L. 110-185, contained two major components: individual tax
rebates costing an estimated $117 billion in FY2008 and FY2009, and depreciation provisions
(bonus depreciation and small business expensing costing an estimated $46.3 billion. This report
describes the stimulus package’s major components and their likely impacts as an economic
stimulus.

n February 2008, the Congress passed H.R. 5140, the economic stimulus package, which was
signed into law as P.L. 110-185. The most important part of the proposal was the individual
income tax rebate, which accounted for around $117 billion of the packages’s estimated cost I

in FY2008-FY2009. The proposal also included two provisions for businesses that allowed a
speed-up in depreciation, which is expected to cost $51 billion in the first two fiscal years.
Because these business provisions shifted deductions into the present from the future, they
eventually result in revenue gains and a much smaller overall cost in the 10-year budget horizon.
These costs are shown in Table 1.

The centerpiece of the stimulus package is the tax rebate for individuals. Unlike the 2001 rebate,
the rebates have elements of refundability: families with no tax liability may also be eligible for a
rebate.
Table 2 lists the specifics of the provision. The rebate is technically a credit for 2008, but
payments would be mailed in 2008 based on 2007 returns. If taxpayers qualify for a higher credit
based on their 2008 circumstances, they could claim the excess on their 2008 returns. Essentially,
the rebate allows the larger of those based on either 2007 or 2008 circumstances.
Table 1. Estimated Budgetary Cost of P.L. 110-185
^{(billions of dol}^l^ars)
^{Provision FY20}⁰⁸^FY20⁰⁹^FY20^08-2⁰¹⁸
^{Rebates for I}^ndividuals^-106.7^-10.0^-116.7
^Approp^{riations to Carry O}^{ut Re}^bates^-0.2^-0.1^-0.3
^Increase^{Sec. 17}^{9 E}^xpe^{nsing a}^nd^{Phaseout Amou}^{nts for}²⁰⁰⁸^-0.9^-0.6^-0.1
^{50% Bon}^{us Dep}^reciation^-43.9^-5.6^-7.4
^{Total -151.}⁷^-16.3^-124.⁵
^Source:^{Joint Committee on Ta}^{xation, JCX-17-08, Fe}^brua^{ry 8,}²^008.

Table 2. Provisions of the Rebate
^{Provision Details}
^{General Rebate}^{10% of}^{the firs}^{t $}^6,00^{0 of taxa}^{ble income ($12,}⁰⁰^{0 for cou}^{ples), to extent}^{of tax liability;}
^Proposal^maximum^$6^00/$^1,20^{0, minimum}^$3^00/$⁶⁰^0.
^{Refundability}^$30^{0 re}^{bate ($}⁶⁰^{0 for cou}^{ples) a}^{vailable for those without tax liab}^{ility if earned income plus}
^Provisions^Social^{Security bene}^{fits, tier 1 railroad retirement, and vete}^{ran’s disability payments a}^{re at least}
^$3,00^0.*
^High-Income^{Phased out at 5}^%^{of income over}^$7^5,00^{0 for single individuals, $1}^50,0^{00 for}^{couples. Payment}
^Phaseout^{fully phased out}^{at $}^87,0⁰⁰^{for singles and $}¹⁷^4,00^{0 for individuals.}
^{Child Provisi}^ons^$30^{0 p}^er^{qualifying child if eligible}^{for any othe}^{r re}^{bate. Eligibility c}^{riteria are the sa}^{me as for t}^he
^{child credit.}
^{Other Feat}^ures^Disall^{ows the rebate to illegal im}^{migrants by}^re^{quiring a social sec}^{urity n}^umbe^r.
^Source:^{Congressional Researc}^h^Service.
^*^Note:^El^{igible income does not include SSI or pensions including}^government^{and military pen}^{sions (including}
^disability)^{, or any unear}^{ned inco}^{me including withdrawals from IR}^{As. It is limited to}^Socia^{l Security payment}^{s (old}
^{age, survivors and disability), tier 1 railroad retirement, and vete}^ra^{ns disability payments}^unde^{r titles 11,}^{13 a}^nd
^{15 of C}^hapter³⁸^{of the}^{U.S. Cod}^e.
There are five elements of the rebate proposals that are outlined in Table 2. The first is the basic
nature of the rebate, which is 10% of income up to a maximum, with a minimum payment. The
second element is the refundability feature, which extends benefits to lower income households
without tax liability. The third element is the treatment of high-income taxpayers whose payments
are phased out. The fourth element is the child rebate, which in all plans is set at $300 per
qualifying child and allowed if a basic or refundable rebate is received. The fifth element limits
the scope of the rebates by denying them to illegal immigrants through requiring the taxpayer
identification number to be a social security number.
Compared to the experience with a rebate in 2001, the proposed rebates are more favorable to
lower income individuals because of their refundability provisions. While the administration
originally proposed a package with no refundability, the House allowed a minimum payment for
low-income earners with at least $3,000 of income. The Senate extended the rebate to lower
income retirees (social security, railroad retirement, and veteran’s disability) and this extension
was adopted. Both changes expanded the number of taxpayers affected. Without any refundability
provisions, 37% of 151 million returns, or 56 million would have been excluded because of low
incomes or lack of tax liability. Adding low-income earners as in the House bill excluded only 30
million because of low incomes, that is, made an additional 26 million eligible. Adding retirees
meant only 10 million were excluded. Thus the refundability feature added 46 million taxpayers:

26 million due to the earnings rule and 20 million due to the retirees rule. (The stimulus also ¹

excludes about 9 million because of high incomes.) The original House bill was more
progressive (i.e., relatively more favorable to lower income households) than a non-refundable
rebate. The final law is more progressive than the House bill.

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Although some rebates in the past appeared to be relatively ineffective in increasing spending, ²
there is some evidence that the 2001 rebate was spent. In general, economic analysis suggests
that benefits that go more heavily to low-income individuals are likely to be more effective at
stimulating the economy in the short term, per dollar of payment, than those with smaller benefits
because lower income households are more likely to spend the rebate, and spending is necessary
to produce a stimulus. The extension of rebates to those with Social Security payments could be
quite complex administratively, since it would require filing and processing up to an additional 18 ³
million tax returns. (The IRS has announced a simplified tax return filing for these households,
using the 1040A tax form.)

The bill includes two business provisions aimed at stimulating investment. The first was bonus
depreciation, allowing 50% of investment with a life of less than 20 years (which applies mostly
to equipment) to be deducted when purchased. The second addressed a provision that allowed
small businesses to deduct all equipment investment when purchased, by increasing the ceiling on
eligible equipment and phasing out the benefit more slowly. These provisions are shown in Table

Table 3. Business Tax Provisions
^{Provision Details}
^Bonus^{For 200}^{8, allows 50% of eligible investme}^{nt (generally eq}^uipme^nt)^{to be deducted whe}ⁿ
^Depreciation^incurred.
^{Small Business}^{For 200}^{8, increases}^{the a}^mount^{of eligible investment (generally e}^quipme^{nt) ex}^pen^{sing from}
^Exp^ensing^$12^8,00^{0 to $}²⁵^0,00^{0; begin}^pha^{seout at $}⁸⁰^0,00^{0 instead of $}⁵¹^0,00^{0. Phaseout completed at}
^$1,05^0,00^0.
^Source:^{Congressional Researc}^h^Service.
The bonus depreciation provisions are the most costly of the business provisions, amounting to an
estimated $43.9 billion in FY2008 and $5.6 billion in FY2009. As with all of the provisions,
which largely involve timing, revenue is gained in future years as regular depreciation deductions
fall. Over 10 years, the cost is $7.4 billion, as shown in Table 1. The small business expensing
provision costs an estimated $0.9 billion in FY2008 and $0.6 billion in FY2009, with the 10-year
cost $0.1 billion.
Because these benefits arise from timing, neither the initial cost nor the 10-year cost provide a
good reflection of the value to the firm. For the benefit of bonus depreciation to the firm, the
discounted values (using an 8% nominal interest rate) would be about $18 billion.
Based on empirical evidence, it is unlikely that these provisions would provide significant short-
term stimulus. Investment incentives are attractive, if they work, because increasing investment

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does not trade off short-term stimulus benefits for a reduction in capital formation, as do
provisions stimulating consumption. Nevertheless, most evidence does not suggest these ⁴
provisions work very well to induce short-term spending. This lack of effectiveness may occur
because of planning lags or because stimulus is generally provided during economic slowdowns
when excess capacity may already exist.
Of business tax provisions, investment subsidies are more effective than rate cuts at providing a
short-term stimulus, but there is little evidence to support much stimulus effect. Temporary bonus
depreciation is likely to be most effective in stimulating investment, more effective than a much
costlier permanent investment incentive because it encourages the speed-up of investment.
Although there is some dispute, most evidence on bonus depreciation enacted in 2002
nevertheless suggests that it had little effect in stimulating investment and that even if the effects
were pronounced, the benefit was too small to have an appreciable effect on the economy.
Based on theoretical considerations, the likelihood of the expensing provision having much of an
incentive effect is even smaller. Firms may, for example, benefit from the small business
expensing, but it actually discourages investment in the (expanded) phase out range.
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