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A Stimulus By Any Other Name Is Just As Misguided

Last Friday President Obama signed into law the second round of economic stimulus legislation, which nobody in Washington is calling a second round of stimulus. Allow me, therefore, to introduce The Worker, Homeownership, and Business Assistance Act of 2009.

The new law extends unemployment benefits, extends and expands the first-time homebuyer credit, and expands a provision allowing businesses to use recent losses to offset profits from earlier years for tax purposes. It is designed as a follow-up to the first stimulus bill, passed last February, which was the $787 billion American Recovery and Reinvestment Act (ARRA).

The latest legislation will provide up to 20 additional weeks of unemployment insurance benefits for some workers, boosting the maximum coverage period to 99 weeks. The White House estimates that about 700,000 workers who have already exhausted their benefits but who remain out of work will benefit immediately from the extension. By year’s end, more than 1 million people are expected to take advantage of the extended benefits.

However, the benefits are not the same for everyone. Only those living in states with unemployment rates above 8.5 percent can qualify for the full 20 additional weeks. Others will get only 14 weeks of added benefits. This two-tiered system encourages workers to stay put in places where their employment prospects are worst, rather than move to states where their chances might be better. South Dakota, the state with the lowest unemployment rate in the country, had a rate of only 4.8 percent in September, while Michigan had the highest rate at 15.3 percent.

Out-of-work Michigan residents are perfectly free to move to South Dakota. No visa is required. The new law means taxpayers in South Dakota will help support idle workers in Michigan on a dole that will stretch to nearly two years.

The new law also extends the first-time homebuyer credit. The credit was originally included in ARRA. Congress subsequently increased the maximum payout from $7,500 to $8,000, eliminated a repayment requirement, and set a November 20, 2009 cut-off date. The new law postpones that cut-off until April 30, 2010.

The new law also makes the credit available to a wider group. Previously, the credit phased out for individuals making between $75,000 and $95,000 and for married couples making $150,000 to $170,000. Now individuals who make up to $125,000 and married couples making as much as $225,000 will be able to take full advantage of the credit. A new addition to the program also makes a credit of up to $6,500 available to non-first-time homebuyers who are leaving a home in which they lived for at least five years to move to a new principal residence.

The credit can only be used for up to 10 percent of a home’s purchase price, and the maximum amount is not quite 5 percent of the median home price. This means most buyers still have to pay 90 percent to 95 percent of the cost on their own. So, while the discount was probably a nice bonus for those already planning to buy homes, it probably wasn’t enough to entice many who would have otherwise stayed put to make the move into a home of their own.

Rather than creating new demand for homes, the credit just borrowed demand from the future. People who ordinarily would have bought homes next year accelerated the process in order to meet the original November deadline. Now, extension or no extension, there are simply not as many first-time homebuyers left. To keep inflating demand for housing, Congress had to throw something to people who already own homes.

Low interest rates and lower home prices, influenced heavily in some markets by sales of foreclosed properties, have done much more to stabilize the housing market than the tax credit has. Lower costs for homebuyers actually increase demand for homes, rather than simply moving it from one period to another the way a temporary tax credit does. The housing market is getting better, mostly on its own. The credit is a superfluous handout to buyers and to the real estate and construction industries, which get to tout a sales incentive paid for by taxpayers.

The last provision of the three-pronged bill aims to help businesses by allowing them to use their losses in 2008 or 2009 to offset gains from the preceding five years in order to reclaim some of their tax payments from those years. For example, a business that made $5 million in 2005 and then lost $5 million in 2008 can, using the magic of tax law, pretend that both the gains and the losses happened in 2005, making its net income for that year zero. The business can then get a refund from the IRS for whatever it paid in taxes on the $5 million it earned in 2005.

Usually businesses can use losses to offset gains only from the past two years, but ARRA gave small businesses the chance to carry back their net operating losses (NOLs) from 2008 for three, four or five years. The new law opens this option up to medium and large businesses as well, allowing them to carry back NOLs from either 2008 or 2009.

This allows companies to make money in the present, in the form of tax refunds, but only by first losing money. The companies that will benefit the most from the law are those that made profits during the boom years of 2003-2006 and then, through bad management or bad luck, lost big money during 2008 or 2009. Meanwhile, businesses that made money consistently will get no benefit. This does not exactly reinforce smart management and good behavior.

A more effective stimulus would create incentives for entrepreneurs and employers to start new enterprises, expand existing businesses and hire additional workers. Instead, Congress is doing just the opposite. The health care bill the House passed last weekend would, in concert with recent tax increases in several large states, subject successful business owners to combined federal and state income tax rates exceeding 50 percent. The coverage mandate in the health care bill would also make it more expensive to hire new workers.

By providing faster write-offs for capital expenses, a true stimulus bill could encourage business managers to buy new equipment now, even though they are not making much money today, because they would know that they could take the deductions in coming years when they expect higher profits along with higher tax rates. But the new law looks backward rather than forward, and subsidizes past losses rather than encouraging efforts to generate future income.

These suggestions may be good economics, but they run counter to the prevailing philosophy in Washington. Policymakers are treating Americans as victims of an economic disaster who need welfare to survive. News flash: The storm has passed and the time for rebuilding is here. Government can help, but it would help more if it provided citizens with hammers rather than handouts.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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