WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
January 18, 2008
Policymakers Look at Economic Stimulus Proposals
As Members of the House of Representatives returned to Washington, the focus turned to an economic stimulus package. In a speech this week, the president said Congress must act on an economic growth package as soon as possible. In testimony before the House Budget Committee, Federal Reserve Chairman Ben Bernanke supported the idea of an economic stimulus package, but warned to be effective, the package must be timely, temporary and targeted. House Speaker Nancy Pelosi has said she hopes an economic stimulus package will pass both the House and the Senate and be signed into law by March 1.
SIFMA sent a letter to policymakers this week urging them to include changes to the mortgage revenue bond (MRB) program in any economic stimulus package.
The Alliance for Growth, of which SIFMA is a member, sent a letter to lawmakers, indicating that an extension of the lower tax rates on capital gains and dividends would provide certainty to turbulent financial markets and ensure sustained economic growth in the long-run.
The Active Finance Working Group, of which SIFMA is a member, sent a letter to lawmakers urging an extension of the active financing exception (AFE) under Subpart F.
The Joint Economic Committee held a hearing this week to explore options to be included in the economic stimulus package.
The Congressional Budget Office released a paper, “Options for Responding to Short-term Economic Weakness,” which outlines and assesses some fiscal policy options to stimulate the economy.
The National Surface Transportation Policy and Revenue Study Commission released its report to Congress on the future of the surface transportation program.
The HOPE NOW alliance released a progress report this week on the number of homeowners it has helped since its creation. During the fourth quarter of 2007, mortgage servicers in the organization modified subprime loans three times faster than in the third quarter. HOPE NOW assisted 370,000 homeowners during the second half of 2007 and more than 16 percent of borrowers responded to the outreach letters sent by HOPE NOW members in November.
President Calls for Economic Growth Package
In a speech this week, the president said an economic growth package is needed as soon as possible. He called on Congress to ensure the economic growth package follows specific principles: 1) the growth package should be big enough to make a difference and should represent one percent of GDP; 2) it should include broad-based tax relief, which will directly impact economic growth; 3) it should be temporary; 4) it should take effect right away; and 5) it must not include an increase in taxes. President Bush said the economic growth package should bolster business investment and consumer spending. Bush said the package should include tax incentives for businesses to make major investments this year and include direct and rapid income tax relief to consumers. The president said once Congress acts on an economic growth package, it should immediately act to make the 2001 and 2003 tax cuts permanent.
Bernanke Said Economic Stimulus Must be Timely, Temporary and Targeted
Federal Reserve Chairman Ben Bernanke said any economic stimulus package would need to be implemented quickly so the effects on spending are felt within the next twelve months. Bernanke pledged the Federal Reserve would enact “substantive” interest rate cuts if needed to counter threats to the economy and said fiscal and monetary stimulus together may provide broader support to the economy. Bernanke suggested a fiscal stimulus requiring long lead times or realized over a protracted period would not produce the favorable outcome most needed. He stressed the need for any fiscal program to be temporary and targeted. While Chairman Bernanke did not endorse any specific proposals, he said a combination of tax rebate checks, business investment incentives and increases in spending programs could be beneficial. Bernanke said those who support making the 2001 and 2003 tax cuts permanent would say they would be of benefit for long-term growth purposes, but in terms of the stimulus package, evidence suggests measures that put money in the hand of households and businesses that will spend it in the near term would be more effective.
Bernanke said U.S. financial markets have been in turmoil since late summer due to increased investor concerns surrounding the credit quality of mortgages, in particular, subprime mortgages with adjustable rates. Chairman Bernanke noted the increase of subprime mortgage delinquencies created a lack of investor confidence in previously highly-rated structured credit products. The lower investor confidence led to decreased investment and in turn a significant tightening of credit and pressure for financial institutions to take write-downs on losses. Bernanke stated that securitized mortgage packages had made finding a solution more difficult, but noted the industry’s efforts to find solutions through new accounting rules and letters to servicers and banks encouraging loan modifications when appropriate. Chairman Bernanke estimated that if 20 percent of the subprime mortgages currently outstanding became delinquent, the resulting loss would be $100 billion. If the worst-case scenario of a complete collapse occurred the loss would be in the area of $500 billion. Rep. Marcy Kaptur (D-OH) asked Bernanke which firms began the securitization of mortgages and if Wall Street firms should be held responsible monetarily for the cost to the taxpayers of a stimulus package. Bernanke said Fannie Mae and Freddie Mac were the innovators of securitization. Bernanke explained financial firms are taking great losses and individuals are losing positions in response to the turmoil in the mortgage markets.
SIFMA Urges Policymakers to Include Changes to MRB Program in Stimulus Package
In a letter sent to Treasury Secretary Henry Paulson, House and Senate Leadership and the Chairmen and Ranking Members of the Senate Finance and House Ways and Means Committees, the Senate Banking and House Financial Services Committees and the House Financial Services Housing Subcommittee and the Senate Banking Housing Subcommittee, this week, SIFMA urged the lawmakers to include changes to the Mortgage Revenue Bond (MRB) program in any economic stimulus package. Under current law, state and local government housing finance agencies issue tax-exempt qualified mortgage revenue bonds to support new mortgages for qualified first-time homebuyers for owner-occupied single-family homes. SIFMA suggested temporarily expanding the current MRB program to allow refinancing of existing subprime loans; increasing the private activity bond volume cap for MRBs; exempting housing bonds from the Alternative Minimum Tax (AMT) for a defined period of time; and repealing the 10-year rule for MRBs. SIFMA said making the suggested changes to the MRB program will enhance the flexibility and the capacity of state and local governments, allowing them to help low- and moderate-income families.
Alliance for Tax Fairness and Growth Urges Policymakers to Extend Rates on Capital Gains and Dividends
The Alliance for Tax Fairness and Growth, of which SIFMA is a member, sent a letter to lawmakers urging them as they examine fiscal policy options to stimulate short-term economic growth, to also consider fiscal policies that will provide market certainty and ensure long-term economic growth, such as an extension of the lower tax rates on capital gains and dividends. In a letter sent to Treasury Secretary Henry Paulson, House and Senate Leadership and the Chairmen and Ranking Members of the House Ways and Means and Senate Finance Committees, the Alliance said the 2003 tax law produced substantial and immediate economic benefits that resulted in sustained economic growth and job creation. The Alliance said extending these tax rates would provide the economy and the financial markets with certainty and stability needed to ensure sustained growth in the future.
Active Finance Working Group Calls for An Extension of the Active Financing Exception Under Subpart F
The Active Finance Working Group, of which SIFMA is a member, sent a letter to lawmakers urging an extension of the active financing exception under Subpart F. The active financing exception under Subpart F ensures that manufacturers and financial service firms are not double taxed on certain income earned from their overseas operations. The AFE is scheduled to expire at the end of 2008. Without an extension, the manufacturing and financial services sectors will face a steep and immediate tax increase. The Working Group said an extension of the AFE is critical to maintain competitive balance and quality long-term U.S. jobs in both the manufacturing and financial services sectors. In times of economic slowdown, stabilizing the financial markets is one of the most important things we can do to avoid or reduce a recession. Providing the markets with certainty by extending AFE would do just that.
JEC Examines Economic Stimulus Options
During the Joint Economic Committee’s hearing this week, Chairman Charles Schumer (D-NY) said acting quickly to enact a stimulus package could make the difference between a slight and a protracted recession. He said any effective proposal needs to include a combination of tax cuts and spending. Schumer said he believes an extension of the 2001 and 2003 tax cuts should not be part of a stimulus package. Schumer added extending unemployment insurance, extending the food stamp program, tax rebates and tax holidays have all been historically successful. Former U.S. Treasury Secretary Lawrence Summers recommended an initial stimulus in the $50-$75 billion range. Summers suggested across the board rebates would help avoid debates on one sector benefiting from the stimulus over another. Economic Policy Institute President Lawrence Mishel said a stimulus package would need to be of sufficient size and scope and be comprised of increased unemployment compensation, fiscal relief for states, targeted tax rebates, and increased federal spending on food stamps. Mishel also recommended an increase in infrastructure spending, especially school repair and maintenance, to generate job growth. William Beach, director, Center for Data Analysis, The Heritage Foundation, recommended Congress address economic policies such as tax policy, mortgage markets regulation, and long-term spending to improve near and long-term U.S. economic performances.
Beach said making the Bush tax cuts permanent now would provide a stimulus now and in 2011. Summers warned making the tax cuts permanent today could increase projected deficits over subsequent decades by trillions of dollars, therefore, increasing national debt projections and increasing costs for capital. Summers told Chairman Schumer a housing market solution should only be incorporated into an overall stimulus package if it does not, in any way, delay enactment of the stimulus. Beach suggested any solution to the mortgage crisis by Congress should: 1) respect private property by avoiding legislative changes to empower bankruptcy judges to change mortgage terms or freeze interest rates; 2) not extend new subsidies to the housing sector; 3) lightly reform mortgage credit regulations; and 4) make Congressional actions temporary and limited.
CBO Releases Paper on Economic Stimulus Options
The Congressional Budget Office (CBO) released a paper entitled "Options for Responding to Short-Term Economic Weakness." The paper discusses the differences between monetary and fiscal policy options and assesses some of the fiscal policy options such as reducing personal taxes, providing incentives for businesses and spending proposals. The CBO found the most effective types of fiscal stimulus are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them. The CBO also warned when evaluating options to help people who have been affected by the turmoil in the mortgage market, it is important to strike a balance between helping financially distressed families meet their basic needs, being fair to other families and not reward imprudent behavior that might create additional costs in the future. The CBO also said further declines in housing prices are probably necessary to correct imbalances in the economy and policies that attempt to prevent market prices from correcting could make the situation worse.
In its paper, the CBO goes on to discuss pending bankruptcy proposals—CBO said while the proposals would make the treatment of mortgage debt consistent with the treatment of secured debt on other consumer goods, the rationale behind the current differential treatment was that it would lower mortgage interest rates and encourage homeownership. The CBO said while the bankruptcy proposals would give distressed homeowners another option for reducing their debt and give mortgage lenders a greater incentive to restructure debts outside of the bankruptcy court system they could add to the caseload of the bankruptcy court system causing delays in resolving cases. The CBO also warned the bankruptcy proposals could lead to higher mortgage interest rates.
Commission Releases Report on Future of the Surface Transportation System
The National Surface Transportation Policy and Revenue Study Commission, authorized under the Safe Accountable, Flexible and Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU), released its report to Congress on the future of the surface transportation program. In the report, the Commission said at least $225 billion must be invested annually for the next 50 years to upgrade our existing transportation system to a “state of good repair.” The Commission recommended: a) increasing the Federal fuel tax from 5 to 8 cents per gallon per year over the next five years after which the fuel tax should be indexed to inflation; b) imposing a new Federal ticket tax on users of the system to supplement funding from fuel taxes and general funds; and c) increasing State fuel taxes and other highway user fees. The Commission also recommended Congress remove certain barriers to tolling and pricing; put into place an approval process with strict criteria for tolling or pricing routes on the Interstate System and promote the use of a nationwide uniform system of electronic tolling. The Commission also recommended Congress encourage the use of public-private partnerships (PPPs) where State or local governments are willing to use them. States should ensure certain terms are included in PPP agreements including the condition and performance of the facility are adequately maintained over the life of the concession agreement and the facility is returned to the State in good repair at the end of the agreement and no non-compete clauses.
The National Surface Transportation Policy and Revenue Study Commission presented the ideas included in its report to the House Transportation and Infrastructure Committee during a hearing this week. House Transportation and Infrastructure Committee Chairman James Oberstar (D-MN) and Ranking Member John Mica (R-FL) said Congress should not wait until the highway reauthorization bill in 2009 to improve the nation’s infrastructure.
Bills Introduced This Week
The Middle Class Job Protection Act (H.R.4995), introduced by Rep. Eric Cantor (R-VA), would reduce the corporate tax rate by ten percent to 25 percent and would incorporate fifty percent bonus depreciation in 2008 and 2009. H.R.4995 would also allow for Section 179 expensing for up to $250,000 for purchases up to $1 million during 2008 and 2009. The bill also includes a five-year net operating loss carryback and an extension of carryback period for business tax credits for three years.
Rep. Tom Reynolds (R-NY) introduced legislation (H.R.5031) that would patch the alternative minimum tax (AMT) for 2008. TheStealth Tax Relief Extension Act of 2008 would raise the exemption level for individuals from $44,350 for tax year 2007 to $46,200 for tax year 2008. H.R.5031 would also raise the exemption level for joint returns to $69,950 in tax year 2008.
The Week Ahead
- The Senate Finance Committee will hold a hearing on the economic stimulus proposals on Tuesday, January 22.
- On Wednesday, January 23, the House Budget Committee will hold a hearing to review the CBO Budget and Economic Outlook.
- The Senate Finance Committee will hold a second hearing on the economic stimulus proposals on Thursday, January 24.
- Also on Thursday, January 24, the Senate Budget Committee will hold a hearing to review the CBO Budget and Economic Outlook.