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The Elephant in the Room

Amending the alternative minimum tax in the recovery bill could mean half a million fewer jobs for American workers, writes Scott Lilly.

El Senador Charles Grassley (R-IA) insta a que el presidente reactive su a agenda de comercio para avanzar acuerdos con Corea del Sur, Colombia, y Panamá en Washington, el miércoles, 7 de septiembre, 2011. (AP/J. Scott Applewhite)
El Senador Charles Grassley (R-IA) insta a que el presidente reactive su a agenda de comercio para avanzar acuerdos con Corea del Sur, Colombia, y Panamá en Washington, el miércoles, 7 de septiembre, 2011. (AP/J. Scott Applewhite)

Critics of President Obama’s economic recovery plan have argued that the proposal is not stimulative enough. Two weeks ago Senator Susan Collins (R-ME) claimed that the package, “includes spending for some programs that would neither boost the economy nor create jobs.” As recently as last week, she elaborated, “We’re trying to focus it on spending that truly helps stimulate the economy. People have different views on whether or not a program meets that test.”

But there is one huge provision in the package passed by the Senate today that fails utterly and completely to meet any rationale measures of job creation. That provision was not requested by the president and was not contained in the House-passed legislation. Yet it alone accounts for most of the difference between the Collins-Nelson substitute and the House-passed stimulus, and it will dramatically reduce the job creation impact of the package.

The provision is the annual fix to the alternative minimum tax problem, which was thrown into the stimulus package in the Senate Finance Committee by Senator Charles Grassley (R-IA)—an opponent of the House bill and the Collins-Nelson substitute. Grassley told National Public Radio, “Every year we have a tax problem with the alternative minimum tax… the committee adopted my amendment so that we don’t hit those 24 million middle income people. Now is that stimulus? Not exactly, [underlining added] but when you have… uncertainty in tax policy it is not good for the economy.”

There is no uncertainty about whether the alternative minimum tax will get fixed, but the question before the committee was whether they would do it later in the year and pay for it by closing loopholes and reversing some of the tax giveaways that have been passed in recent years or pass this difficult issue off on the stimulus bill where it would be classified under budget rules as an emergency and not require offsets. A Grassley staff assistant explained to an Iowa newspaper, “it was important for the alternative minimum tax to be included in the stimulus because past fixes have occurred so late in the year, and that he [Grassley] didn’t want a fix to be ‘held hostage’ as part of some other bill.”

Grassley also observed as part of his interview with National Public Radio that, “There is certain upkeep that government has to do every year. Why would you use a stimulus package for an excuse?”

I guess the answer to that question is that these items create jobs. This is not an issue that should—as Senator Collins seems to imply—be determined by subjective judgment. We have a good deal of empirical information about how specific spending proposals or tax policies will affect economic activity and job creation. What’s more, there is reasonably broad consensus within the economics community about the magnitude of those effects.

If you do not wish to use analysis from left-leaning economists, try Mark Zandi, an economic advisor to Senator John McCain’s (R-AZ) presidential campaign and CEO of Moody’s Zandi published a paper in January that tracks the effect of a package similar to the one passed by the House. The paper contains a table that Zandi entitled “Fiscal Stimulus Bang for the Buck.” There are a few tax cut proposals that provide less stimulus than the AMT patch, but only very few. Most tax proposals, including non-refundable lump sum tax rebates and across-the-board tax relief provide more than twice the stimulus as the AMT provision in the Senate bill. Most spending, including the majority of provisions eliminated from the Senate bill to accommodate the AMT, provide three times as much stimulus.

Moodys fiscal stimulus table

Including this legislative problem child to the stimulus package and reducing other provisions to accommodate it dramatically reduces the Senate bill’s job creation. It does the exact opposite of what critics of the president’s proposal claim they intended.

The AMT’s $70 billion price tag crowds out $40 billion in fiscal relief to the states; $20 billion in repair and maintenance for local schools, community colleges, and universities; and $10 billion in assorted other programs, including child care block grants and Head Start. If you use Zandi’s analysis, the programs eliminated have a stimulative effect equal to more than $100 billion, while the AMT proposal that replaces them has a stimulative effect of only $35 billion. That $65 billion loss could cost the economy something on the order of half a million jobs over the next several years.

The president’s commitment to creating 4 million jobs can not be met if the package that is produced by the conference contains both the alternative minimum tax and is limited to the parameters of the Collins substitute.

The AMT issue should and can be dealt with this year just as it has repeatedly been handled in the past as part of the normal annual cycle of reviewing the tax code. As Senator Grassley obviously fears, that process will drive a reexamination of loopholes and tax giveaways that he and many others on the tax writing committees would prefer not to revisit. On the other hand, 500,000 jobs are worth the inconvenience.

More from CAP on economic recovery:

Column: Getting the Stimulus Bill Right

Background brief: Recovery and Reinvestment 101

Interactive Maps: Recovery Beyond the Beltway

Interactive: Design Your Own Stimulus Package

Video: How the Recovery Package Creates Jobs

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Scott Lilly

Senior Fellow