Stimulus Sins

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Stimulus Sins

InsideCapitolDome
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Stimulus Sins

Oregon is being hit by a double-whammy, stuck in a recession and now facing a $720million budget shortfall. Adding insult to injury, many of the leading economic stimulus proposals being considered by Congress, some of which are championed by the Oregonian (“Getting the economy moving,” 11/27/01), will worsen Oregon’s fiscal crisis.

To succeed, an economic stimulus package must include fiscal relief for the states and serious funding of additional Unemployment Insurance.

Accelerating the upper-income federal income tax rate cuts, favored by the Republicans and the Oregonian, will not be an effective stimulus. The bulk of the relief will come after the recession is expected to have passed. Instead, these cuts will burden the nation’s long-term fiscal outlook and will likely drive up long-term interest rates, counterproductive to private-sector investment. The recipients of this tax cut already make far more than they spend in a year, and can be expected to save, not spend, their windfall.

Accelerating the depreciation of business equipment could act as a stimulus if limited to one year, by speeding up planned investments. . Accelerating it over three years, as proposed by the Bush administration and the House, will be counterproductive, giving an incentive to wait until the business climate looks more certain. Furthermore, accelerated depreciation will further depress revenue for Oregon, costing the state between $38 million and $100 million. Additional state budget cuts will result in, as noted by the Wall Street Journal, the states taking away what the feds give to the stimulus effort.

All of these business tax cuts miss the fundamental cause of our current recession. Businesses are laying off workers because demand for their products has fallen – not because the companies don’t have enough cash on hand. If demand does not pick up, then companies will continue to lay-off workers and the cuts will be a wealth transfer to the owners of these companies. With spending and consumer confidence falling, and unemployment rising, lower interest rates and tax cuts will not be enough to boost consumption. Additional federal spending, with Unemployment Insurance taking the lead, is required.

The Oregonian’s dismissal of Democratic efforts to support health care spending, saying “it would do nothing to stimulate the economy,” is unfounded. Rising unemployment is causing thousands of workers to lose employer-provided coverage. If not stemmed, the decrease in health care spending will act as a drag on the economy. Also, falling Medicaid reimbursement rates, which the Senate Democratic proposal would reverse, will cost Oregon $20 million in FY 2002 alone. Addressing health care will be powerful stimulus by shoring up an important sector of consumer spending and by providing vital fiscal relief to states faced with mounting budget deficits.

The Oregon and US economies are structurally sound and currently suffering from a cyclical downturn. Long-term tax cuts to businesses and upper-income households are not called for. We need a temporary spending boost. Additional Unemployment Insurance and vital fiscal relief to the states, supplemented by one-time federal tax rebates targeted toward low and middle-income households, will do the trick.

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Written by staff at the Oregon Center for Public Policy.

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