WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
January 25, 2008
House Leaders and Administration Announce Agreement on Stimulus Package
Treasury Secretary Henry Paulson and House leadership announced the details of an approximately $150 billion economic stimulus package agreed to in principle this week. The package includes tax rebates of up to $600 for individuals and up to $1,200 for couples. The package also includes tax cuts for business investment. The Economic Growth Package includes a one-year increase in the government-sponsored enterprise (GSE) conforming loan limits and a permanent increase in the Federal Housing Administration (FHA) loan limit. The House is expected to take up the legislation the week of February 4. Senate Finance Committee Chairman Max Baucus (D-MT) said he intends to draft an economic stimulus package including spending provisions not included in the House-Administration package.
Senate Banking Committee Chairman Chris Dodd (D-CT) outlined the 2008 agenda for the Banking Committee.
House Financial Services Committee Chairman Barney Frank (D-MA) announced the 2008 agenda for the Financial Services Committee.
SIFMA sent a letter to House and Senate leadership requesting that any economic stimulus package include an extension of the active financing rules under Subpart F.
The Coalition for Patent Fairness, of which SIFMA is a member, sent a letter to Senate leadership this week urging the Senate consider the Patent Reform Act (S.1145).
SIFMA submitted comments to the Treasury and the IRS arguing for a more fundamental change to the withholding tax regulations, providing that as a general rule, there is no withholding tax due on redemption distribution transactions.
In preparation of its scheduled mark-up of an economic stimulus package next week, the Senate Finance Committee held two hearings to explore stimulus options.
The Chairman of the House Financial Services Subcommittee on Capital Markets sent a letter to regulators asking whether legislative or regulatory reforms are needed for the bond insurance industry.
The administration announced the establishment of the President’s Advisory Council on Financial Literacy.
Also this week, Senate Minority Leader Mitch McConnell (R-KY) announced that Sen. John Sununu (R-NH) was appointed to the Senate Finance Committee to fill the spot vacated by former Sen. Trent Lott. Sen. Bob Corker (R-TN) was appointed to fill Sen. Sununu’s seat on the Senate Banking Committee.
Administration and House Leaders Announce Agreement on Stimulus Package
Speaker of the House Nancy Pelosi (D-CA), House Minority Leader John Boehner (R-OH) and Treasury Secretary Henry Paulson announced a $146.3 billion economic stimulus package this week. The 2008 Economic Growth Package would provide tax relief up to $600 for an individual and up to $1,200 for a married couple as well as an additional $300 per child. The agreed-to proposal includes a one-year increase in the conforming loan limits for the government-sponsored enterprises (GSEs) from $417,000 to a maximum of $729,750. The plan also includes a permanent increase in the Federal Housing Administration (FHA) loan limit to a maximum of $729,750. The limits for both will be 125 percent of the median home price. It is unclear how this will be calculated—on a MSA or more broadly. The package is also expected to include a number of provisions included in FHA reform legislation approved by the House last year. A similar bill was approved by the Senate last year. It will not include the affordable housing fund included in the House-passed FHA bill. The Economic Growth Package would also provide for a fifty percent bonus deduction on purchases of new equipment and would double the Internal Revenue Code Section 179 expensing limit to $250,000. In a press release issued after the announcement of the plan, SIFMA offered support for the temporary increase in the GSE conforming loan limits. SIFMA also urged the quick passage of the FHA Modernization Act and called on Congress to enhance the flexibility and capacity of state and local governments by amending the mortgage revenue bond (MRB) program.
The House is expected to take up the stimulus package the week of February 4. The Senate Finance Committee announced it would hold a mark-up of an economic stimulus package next week. Finance Committee Chairman Baucus (D-MT) said he plans to draft a stimulus package which includes spending provisions not included in the House-administration plan. House and Senate leaders hope to have a final bill by February 15, when the House and Senate are scheduled to begin the one-week President’s Day recess.
Dodd Announces Banking Committee Agenda
Senate Banking Chairman Chris Dodd (D-CT) announced the anticipated agenda for the Banking Committee in 2008. Dodd said the first priority will be to address economic problems facing consumers, businesses and the financial markets. The Committee will hold a hearing on Thursday, January 31 on the next steps required to reduce foreclosures and stimulate the economy. Dodd said The Homeowner Preservation and Protection Act of 2007 (S.2452), which he introduced in December, will be the subject of hearings early in the year and he hopes to move a predatory lending bill as soon as possible. The Banking Committee is expected to move legislation concerning industrial loan companies (ILCs) in the coming weeks. The Committee will also hold hearings on government-sponsored enterprises (GSE) reform and will markup a bill early in the year. The Committee is expected to hold a number of oversight hearings including one to hear from the financial regulators on the state of the financial markets and a hearing on credit card marketing and bill practices. Dodd said the Banking Committee will continue its examination of executive compensation, proxy access, hedge fund regulation and accounting and regulatory issues surrounding the increasing globalization of securities markets. Dodd also expressed interest in moving the National Infrastructure Bank Act (S.1926), which he introduced in August 2007 with Sen. Chuck Hagel (R-NE).
Also this week, Dodd sent a letter to Senate Majority Leader Harry Reid (D-NV) outlining his suggestions for an economic stimulus package. Dodd said the stimulus package must address the problems in the housing market. He recommended the economic stimulus package include the establishment of the Federal Homeownership Preservation Corporation; an increase in the funds for Community Development Block Grants (CDBG); modernization of the Federal Housing Administration (FHA) and a temporary increase in the conforming loan limits. Dodd said he is working on a proposal to create the Federal Homeownership Preservation Corporation to purchase outstanding mortgages at steep discounts. The discounts would be passed on to homeowners in the form of new, lower-balance mortgages insured by the FHA or backed by the GSEs.
Frank Announces HFSC Agenda
House Financial Services Committee Chairman Barney Frank (D-MA) outlined the Financial Services Committee’s 2008 agenda this week. He said his highest near-term priority is the economic stimulus package. Frank said the committee may revisit some issues related to The Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915), including the extent to which mortgage assignees have liability for abusive subprime loans. Chairman Frank said the Financial Services Committee also plans to schedule committee hearings on several issues highlighted by recent events in the housing finance and credit markets, including structured investment vehicles (SIVs), possible changes in the implementation of the Community Reinvestment Act (CRA) and the Home Mortgage Disclosure Act (HMDA). The Committee is expected to examine a number of supervisory issues including a hearing on the bond insurers and on sovereign wealth funds. Chairman Frank also expressed general support for Chairman Dodd’s Federal Homeownership Preservation Corporation proposal.
In response to a question, Chairman Frank said he is supportive of the Securities and Exchange Commission’s (SEC) approach to develop a regime for the mutual recognition of foreign securities firms and exchanges. Frank said he has not focused on issue of the comparative regulation of investment advisers and broker-dealers highlighted in the recent RAND Study on the issue. He said he is skeptical of SEC Chairman Chris Cox’s proposals to increase the disclosure and accounting standards for municipal market participants. Frank said general obligation debt backed by states and localities is very safe.
SIFMA Urges Inclusion of AFE Extension in Stimulus Plan
In a letter sent to House and Senate leadership, SIFMA requested that any economic stimulus package considered by Congress include an extension of the active financing rules under Subpart F. The current rules are scheduled to expire at the end of this year. SIFMA said the current active financing rules ensure that U.S.-based financial services firms are not double taxed on the active financing income earned through their international operations. Failure to extend these rules would result in a significant tax increase on the U.S. financial services sector and would also result in unequal treatment among industries because active financial services income would be double taxed while the active income of other industries would not. SIFMA said an extension of the active financing rules will provide a significant economic boost at a critical time for an industry facing significant challenges. The Active Finance Working Group, of which SIFMA is a member, also sent a letter to lawmakers last week urging an extension of the active financing exception under Subpart F.
Coalition Urges Floor Consideration of Patent Reform Bill
The Coalition for Patent Fairness—of which SIFMA is a member—sent a letter to Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) expressing support for the Patent Reform Act (S.1145). The Coalition also urged that the bill be scheduled for floor action as soon as possible. The bill will benefit both American workers and American consumers by stimulating innovation, growth and competitiveness by restoring balance to the patent system.
SIFMA Urges Presumption of No Withholding Tax on Redemption Distributions by Publicly-Traded Corporations
Proposed Treasury regulations would provide new escrow procedures that could be used by brokers as an alternative to collecting withholding tax on the full amount of redemption distributions by publicly traded corporations to foreign investors. Under these procedures, brokers would be permitted to hold back the amount of the withholding tax in escrow and use the 60-day period following the redemption distribution to obtain from a foreign investor a certification showing a reduction in the percentage of shares actually and constructively owned by the investor following the distribution. Upon receipt of the necessary certification, the broker would be permitted to release the escrowed funds to the investor. SIFMA submitted comments to the Treasury and IRS arguing for a more fundamental change to the withholding tax regulations providing that, as a general rule, there is no withholding tax due on these transactions. While the proposed procedures could be used to good effect in some cases and thus are a useful first step, they would not be workable in most cases to avoid unjustified withholding. The general rule urged by SIFMA would properly reflect the fact that the vast majority of redemption distributions by publicly traded corporations are correctly characterized as non-taxable exchanges of stock by investors rather than as dividends subject to withholding tax.
Senate Finance Committee Weighs Stimulus Options
In preparation for its scheduled mark-up of an economic stimulus package next week, the Senate Finance Committee held two hearings this week to explore stimulus options. During the first hearing, Peter Orzag, director, Congressional Budget Office (CBO), said a package representing three-quarters to one percent of GDP may be required to be effective. Orzag suggested the stimulus plan include spending initiatives directed toward households, businesses and state and local governments which will likely have an effect on the economy quickly and does not necessarily need to target a specific source of economic weakness. Orzag said while housing-targeted proposals may help an important problem, their direct impact on the economy would not be big enough on a macro scale to compare to some of the other proposals discussed. In his testimony, Orzag said expanding the mortgage-revenue program could hurt first-time homebuyers by propping up home prices and questioned whether the benefits received would justify the impact on federal revenues. Finance Committee Chairman Max Baucus (D-MT) asked the CBO to work with the Joint Committee on Taxation to evaluate a stimulus package comprised of rebates of $400 for individuals, $800 dollars for couples with an additional $400 rebate for each child.
During the panel’s second hearing, Martin Feldstein, president and CEO, National Bureau of Economic Research (NBER), suggested a fiscal stimulus plan include a combination of a flat tax rebate for taxpayers and an increase in tax transfers for non-taxpayers enrolled in programs such as the food stamp, Temporary Assistance for Needy Families (TANF) and Social Security programs. Feldstein also recommended including investment incentives similar to those enacted in 2003 and waiving pay-go rules. He recommended against including an extension of the unemployment insurance program or including increased spending on infrastructure programs. Jason Furman, director, the Hamilton Project, recommended including a temporary increase in food stamps, a temporary increase and possible expansion of unemployment insurance, and a temporary and one-time refundable rebate to taxpayers. Furman suggested the size of the tax rebate should be $550 per individual, $1,100 per couple and an additional $275 per dependent with a total stimulus package of $145 billion. Sen. Charles Schumer (D-NY) suggested the stimulus package include a combination of tax cuts and spending incentives. He strongly supported including direct resources to the housing crisis, such as an increase in funding to non-profit foreclosure prevention organizations and an increase in the conforming loan limits.
Kanjorski Launches Investigation of Bond Insurance Industry
House Financial Services Subcommittee on Capital Markets Chairman Paul Kanjorski (D-PA) sent letters to regulators this week asking whether legislative or regulatory reforms are needed for the bond insurance industry following the rating downgrades of two large bond insurers. In a letter sent to the Federal Reserve, the Securities Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve Bank of New York, the National Association of Insurance Commissioners and insurance regulators in Maryland, New York and Wisconsin, Kanjorski asked the regulators to provide him with information on the problems faced by the bond insurance industry, the implications on the economy and the steps being taken to protect investors. The Capital Markets Subcommittee is tentatively scheduled to hold a hearing on the issue on February 14.
President Announces Council on Financial Literacy
The administration announced the establishment of the President’s Advisory Council on Financial Literacy this week. The council—which will be chaired by Charles Schwab, founder and CEO, Charles Schwab—will work to bring national attention to the need for better financial education and to find ways to improve financial literacy. The council will be administered within the Treasury Department and will consist of sixteen members appointed by the president. The Advisory Council on Financial Literacy is expected to have its first formal meeting in February.
Bills Introduced This Week
The Fair and Simple Tax (FAST) Act, introduced by Rep. David Dreier (R-CA), would replace the current individual tax system with three tax brackets—10 percent, 15 percent and 30 percent. H.R.5105 would also lower the corporate tax rate by ten percent; repeal the estate and gift tax; reduce the individual tax rate on capital gains and dividends to ten percent; and index to inflation the alternative minimum tax (AMT) for both corporate and individual taxpayers. The FAST Act would also create three savings accounts—the Retirement Savings Account, the Lifetime Savings Account and the Lifetime Skills Account. Sen. Christopher Bond (R-MO) introduced companion legislation (S.2547) in the Senate.
Rep. Scott Garrett (R-NJ) introduced the Middle Class Jobs Protection Act (H.R.5109). H.R.5109 would cut the corporate tax rate to 25 percent; implement a 50 percent bonus depreciation rate for 2008 and include Section 179 expensing for 2008 of up to $250,000 for purchases up to $1 million. The bill would also allow a five-year carry-back of Net Operating Loss and a three-year carry-back for the foreign tax credit.
The Week Ahead
- The president will give the State of the Union address on Monday, January 28.
- On Tuesday, January 29, the House Budget Committee will hold a hearing entitled “Using Fiscal Policy to Bolster the U.S. Economy.”
- Also on Tuesday, January 29, the Senate Finance Committee will consider the nomination of Douglas Shulman to be the Commissioner of the Internal Revenue Service.
- The Senate Budget Committee will examine the long-term budget outlook on Tuesday, January 29.
- The House Judiciary Subcommittee on Commercial and Administrative Law will hold a hearing on the mortgage foreclosure crisis on Tuesday, January 29.
- On Wednesday, January 30, the Senate Budget Committee will consider economic stimulus proposals.
- The Senate Banking Committee will hold a hearing on foreclosure prevention on Thursday, January 31.