So With QE2 Now Dead Until 2011, What Fiscal Stimulus Measures Lie In Store?
Today's NFP number means QE is now firmly off the table until 2011: monetary stimulus is stuck with QE lite for at least 3-4 months. Incidentally, this was the big catalyst that everyone was looking for to go all in on stocks. And with the economy still deteriorating, the only option is fiscal stimulus, but don't call it a stimulus as that costs political brownie points. So what are the options that Obama has before him? Goldman's Alec Phillips highlights the options which can be summarized as: a hiring credit, a payroll tax cut, a small business tax cut, bonus depreciation, and an extension of the Build America Bond program. His full thoughts below.
Speculation that the administration may propose further fiscal measures continues to increase. An article in today’s Wall St. Journal suggests that the White House is compiling a list of fiscal policy options to support the economy. This comes on the heels of discussions the White House said the president had last week with advisors to explore “next steps,” and his statement on Monday that his economic team “is hard at work in identifying additional measures” that he would be addressing these proposals “in further detail in the days and weeks to come.”
As we noted last week, the opportunity for fiscal policy to provide more support is limited by political constraints (see “Could Fiscal Policy Do More? US Daily, August 26, 2010). But that doesn’t mean that the administration won’t propose additional measures. If the president decides to propose additional measures, it is likely that he would chose to do so next week following what is likely to be a weak payroll report on Friday (we expect private sector payrolls to be flat, and overall payrolls to decline by 125,000) and a few days ahead of the start of the last congressional work period prior to the election.
The main decision the administration and congressional Democrats must make is whether to propose additional spending on investment projects or to focus on various forms of tax incentives. The middle ground that could be taken is to focus on policies that are implemented through the tax code, but that incentivize hiring, investment, or some other behavior. Among the options that seem most likely to be considered:
A hiring credit: Congress enacted a credit in March 2010 that exempts employers from the 6.2% paying Social Security payroll tax on newly hired employees through the end of the year, and provides an additional $1,000 for employees retained for 52 weeks or longer. The cost of this credit is reasonably modest (the Treasury expects hires thus far will reduce payroll taxes by about $6 billion) and it could be expanded. The most effective expansion would likely be to simply lengthen the period that payroll taxes are waived, so that employers have somewhat longer term certainty regarding their labor costs. Previous congressional proposals included an income tax credit (rather than a payroll tax exemption) of several thousand dollars for a new hire, which has the advantage of simplicity but would tend to focus the incentive effects mainly in the lowest-paying parts of the labor force.
Payroll tax cut: Like the hiring credit, a payroll tax credit already exists under current law. The 2009 Recovery Act lowered tax liabilities for individuals with incomes under $100,000 by roughly $400 per person, for a total of $60bn in annual tax savings. The administration proposed extending the Making Work Pay (MWP) credit, as it is known, it in its FY2011 budget, but there has been relatively little discussion of extending it, perhaps because many taxpayers never realized they received it in the first place. If the administration makes a proposal in this area, the most obvious would be to expand or modify the existing MWP credit, potentially by simply raising the threshold at which the Social Security payroll tax starts to be applied.
Small business tax cut: Policymakers continue to focus on the challenges facing small businesses, so efforts in this area seem likely. First, the small business bill that is currently pending on the Senate floor should pass by mid-September. As a reminder, this would provide modest tax relief for small firms (roughly $7 billion over ten years) and would provide up to $30 billion in capital to banks to backstop small business lending. The most obvious option would be to increase the threshold for small business expensing, from $250,000 currently to a much higher figure—potentially in the millions—and make firms with greater amounts of investment eligible (the incentive currently phases out for firms with investment greater than $800,000). A less likely option would be some type of broader tax relief for small business. This would neutralize any concern that the expiration of tax rates on higher incomes will hit small businesses, but would have a lower bang for the buck if it does not incentivize hiring or investment.
Bonus depreciation: The administration has already proposed 50% bonus depreciation for 2010, following its expiration at the end of 2009, and this may be enacted as part of the pending small business legislation. To the extent that the administration wants to do something new in this area, it is possible that they could simply raise the percentage that may be expensed in the first year.
Infrastructure: The president has clearly identified this as a priority in recent comments, and already has proposals on the table to address infrastructure investment: extension of the Build America Bond (BAB) program, but at a slightly reduced subsidy rate, and a national infrastructure bank that would subsidize private investment in large-scale infrastructure projects that meet certain criteria, including through issuance of government guaranteed debt. Renewable energy incentives may also appear on a potential list of policy options, though we aren’t aware of any specific proposals in this area beyond further expansion of tax incentives.
One thing that appears less likely to be on the president’s list is the extension of the upper income tax cuts. While a compromise on the upper income-focused portions of the expiring 2001/2003 tax cuts may be necessary in order to extend the rest of the expiring tax cuts—not to mention to enact any new stimulus measures—such a proposal still seems unlikely to come from the Obama administration. Administration officials have downplayed the effectiveness of an extension of tax cuts for upper income over the last several days, with outgoing CEA Chair Christina Romer indicating as recently as this afternoon that the long term fiscal cost that creditors might extrapolate from a short term extension would be significant compared with the minor effect on consumption that an extension would have. But while the administration doesn’t appear to be considering a surprise endorsement of upper income tax cuts, it is nevertheless possible that congressional Democrats might opt to support it, in order to ease passage of the low- and middle-income extensions.