A FAIR CUT

Just as a campaign to make the size of the president’s tax cut the sole measure of its worth nearly overwhelmed the debate, Congress this week began meeting to decide what would go into the cut to make it effective. Members of the Senate Finance Committee should emphasize the original reason a tax cut was proposed, economic stimulus, which is needed more than ever three years into an economic slowdown.

The Senate, because Finance Committee member Sen. Olympia Snowe has remained stalwart in trying to minimize the effect on the deficit, has allowed for a $350 billion cut over 10 years; the House, $550 billion. Some popular suggestions for the package include accelerating tax rate reductions passed in 2001, increasing the child credit, tripling small business expensing limits to $75,000 and, most contentiously, eliminating taxes on dividends. But there are other options that could be both more effective as stimuli and of more help to states, which are struggling with health care costs in part because of a chronic inability of Congress to act comprehensively on the issue.

Mark Zandi of Economy.com recently analyzed the various proposals to stimulate the economy and measured them based on how much they cost the Treasury vs. how much they are likely to increase spending. Unsurprisingly, the plan to eliminate the tax on corporate dividends was one of the least effective. The most effective got money into the hands of working- and middle-class people quickly, so they would spend it soon. Some ways to do this are included in the president’s plan, such as accelerating plans to increase the child tax credit. Others were not in his package but should have been, such as fiscal relief to the states. Extending unemployment benefits beyond May is another. These would fit under the $350 billion cap.

The state stimulus idea is particularly important because it can also help with health care. A proposal offered by Sens. Susan Collins and John Rockefeller would temporarily boost Medi-caid rates and provide Medicaid grants to states. It mixes fiscal relief with immediate spending on essential state programs and could help Maine avoid cuts to care and further layoffs of health care providers for nonprofits statewide. But it is crucial that the proposal remain significant – it provided $30 billion over 18 months to states when the Senate supported it 80-19 earlier this year – and not be whittled down to meaninglessness.

The same is true for extending unemployment insurance. The Economy.com analysis found that unemployment benefits put $1.73 into the economy for every dollar of federal assistance (compared, for instance, with the dividend tax break, which added 9 cents for every dollar cut). With new claims for benefits above 400,000 nationally for the 11th straight week and the number of jobs at a 40-month low, extending the benefits beyond the end of this month is important to keeping middle-class families from falling into poverty. And the benefit is a temporary bump – in past slowdowns, it has always been ended when the economy recovered.

These proposals are not what the president envisioned when he proposed his tax cut, but they could achieve his aim more effectively, according to a wide political range of economists. All of the gimmicks currently being discussed to get around the Senate’s tax-cut limit – the false sunsets, double-counted offsets and a half dozen other tricks – can be easily anticipated and rejected by those for a responsible tax cut. What is crucial now is for the White House to stop trying to win the campaign over size and work with Congress to produce the most effective package possible without creating large deficits that will harm the government’s abilities to operate in the future.