Stimulus tax relief: Who's feeling it

Treasury has doled out $62.5 billion in tax breaks from the Recovery Act, but economists are split about how effective they have been.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Goldman, CNNMoney.com staff writer

chart_tax_relief3.03.gif
Obama's money moves
200 days in, the President is going for broke. Click for analysis of where he's succeeding - and where he’s not.
Should the $8,000 first-time homebuyer tax credit be extended beyond Nov. 30?
  • Yes
  • No

NEW YORK (CNNMoney.com) -- Are you feeling the relief?

This week, Americans got their first glimpse at exactly where the Recovery Act's tax relief is heading.

The six-month-old plan includes $288 billion of tax relief, and Treasury has made $62.5 billion of that available so far -- in the form of credits, payments and incentives to individuals and businesses.

Previously, Treasury has only provided a monthly total but the detailed figures show that most of the spending is on track.

The vast majority of tax relief is going to individuals, with the biggest chunk steadily appearing in workers' paychecks.

But economists are divided about just how stimulating the tax relief has been.

Making Work Pay. The biggest chunk for individuals is coming in the form of a refundable credit of up to $400 per person and up to $800 per couples who file jointly. For most workers, the credit shows up in their paychecks in $15 slices, assuming 26 pay periods per year.

So far, Treasury has made $23.2 billion available for the credits, known as Making Work Pay. The Congressional Budget Office estimated in February that the program would cost the government $116 billion through 2010.

Under the Bush administration, most individuals received a one-time $600 tax rebate in 2008. That helped lead to a temporary blip in spending.

But research has shown that people spend a larger chunk of what they get if the funds flow consistently than in one large sum.

In an effort to spur that type of spending, and ultimately help boost the economy, the Obama plan spreads out the $400 credits over the course of the year for two years.

There is significant debate over whether the effort is working as planned.

Consumer spending still took a 1% dive in the second quarter, according to the Commerce Department. But Dean Baker, co-director of the Center for Economic and Policy Research, said spending levels would have been much lower had the Recovery Act not included the credits.

Other experts say the tax credits haven't done much -- at least to this point -- to stimulate the economy.

"Stimulus has added a cushion, but it's not enough to affect consumers' underlying conditions," said Doug Roberts, chief investment strategist for Channel Capital Research Institute. "Consumers are still over-leveraged and tend to put the credit into the bank."

Other individual credits. Economists who are skeptical of Making Work Pay's contributions say tax breaks targeting specific kinds of purchases have had a bigger impact.

For instance, the Recovery Act offered $8,000 in a refundable credit to first-time home buyers and tax deductions for new car purchases for those earning less than $125,000.

"Where the recovery package has seen real bang for its buck is in the use-it-or-lose-it incentives made available to consumers," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "It's one of the few stimulating programs that has been very successful, because consumers want to take advantage of the deal before they lose it."

But Baker cautioned that those one-time incentive programs may hurt down the road.

"I'm troubled by these programs to the extent that they mostly just pull purchases forward that consumers would have made anyway down the road," said Baker. "Some bought items that they wouldn't have otherwise, but just moving up purchases doesn't help us get out of the downturn."

The government has so far made $12 billion of those individual credits available. Other individual credits also include $250 one-time payments for those who don't work, an Alternative Minimum Tax tax exemption, and college tuition credit among other programs. CBO estimated those credits would total $141 billion by the end of next year.

Business tax incentives. The Recovery Act has made $17.2 billion of tax breaks available for businesses to encourage companies to invest in equipment or to help them secure a cash cushion to get through the downturn and minimize layoffs.

Companies have used most of those incentives already. CBO had estimated in February that the incentives would total $23 billion this year.

Some economists are skeptical that the the tax breaks have done much to help businesses start spending again.

"Businesses don't want these subsidies now, they want to see more demand for their goods," said Baumohl. "How does simply giving tax incentives to invest going to help when there's already so much capacity that's not being used?"

On the other hand, Economic Outlook Group's Baker argued that that the incentives have stimulated manufacturing, especially in the energy sector, which has seen ethanol refinery construction soar in recent months.

Other tax relief. Stimulus includes several tax relief measures to help the vulnerable, the biggest of which is a provision to help eligible jobless workers pay for health insurance under Cobra.

Cobra coverage allows newly unemployed workers to keep health insurance provided by their former employers for a set period of time.

The government has been subsidizing 65% of the premiums under Cobra for up to 9 months for workers who have been laid off between Sept. 1, 2008, and Dec. 31, 2009. CBO estimated the cost of the Cobra tax relief would be $24.7 billion, and Treasury said it has so far made $7.6 billion available.

Treasury has also made $500 million of an estimated $22 billion in energy incentives available. The credit is for businesses to secure electricity produced by wind energy through 2012 and for electricity produced by other renewable resources through 2013.  To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
These 10 food trends could dominate 2015 So long, kale. Here's what's expected to shake up the food industry next year. More
Beyond Russia: Geopolitical hot spots in 2015 Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More
These 20 antique guns could fetch big bucks Morphy Auctions in Pennsylvania is putting nearly 1,000 old guns on the block. Here are just a few. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.