Cost of Obama Stimulus Could Reach $1 Trillion Now That Newly Passed House Bill is Subject to Senate Compromise

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Without the benefit of a single Republican vote, House Democrats late yesterday (Wednesday) passed an $819 billion stimulus bill that has the blessing of U.S. President Barack Obama, but which could end up costing $1 trillion or more once it’s subjected to Senate compromises.

The bill – which passed 244-188, right along party lines – would cut taxes for individuals and businesses, funnel billions into infrastructure projects, ease budget shortfalls for state and local governments, and provide relief to the millions of Americans who’ve lost their homes, jobs or both. As proposed, the bill calls for $523 billion in direct spending, $275 billion in tax cuts and provides money for alternative energy, education and retraining, and scientific research, and Money Morning both found.

The biggest item in the stimulus bill is a tax credit to offset the first $500 that workers pay in payroll taxes. There are other tax cuts to spur business investment, hiring and energy efficiency.

"The American people need a plan that works," House Minority Leader John Boehner, R-Ohio, told journalists.

The bill now heads to the Senate, and the goal is to put the legislation on President Obama's desk by the middle of next month. The House had earlier rejected a Republican substitute that would have emphasized tax cuts. Republicans said that bill version would have created twice as many jobs as the bill that the Democrats have passed.

Yesterday’s House vote came the same day that President Obama met with corporate leaders in a high-level session that was supposed to allow the nation’s new chief executive to seek their insights on the stimulus package, but was really designed to lock in their support for the fledgling administration’s financial-crisis rescue efforts.

"When it comes to rebuilding our economy, we don't have a moment to spare," President Obama told reporters of his meeting with corporate leaders. “All we can do, those of us in Washington, is help create a favorable climate in which workers can prosper, businesses can thrive, and our economy can grow."

Despite that collegial showing, yesterday’s politically polarized stimulus vote clashes directly with President Obama’s Jan. 28 “near-promise” that he would work hard to deliver apolitical legislation with strong bipartisan support, reports.

The sense of urgency is building. After the U.S. economy lost nearly 2.6 million jobs last year, President Obama said his goal is to help save or create 3 million to 4 million jobs.

But job cuts have accelerated in recent months and have actually reached a near-fever pitch this week. On Monday alone, U.S. corporations announced more than 70,000 job cuts. Then yesterday, two Northwest U.S. corporate icons – airliner maker Boeing Co. (BA) and coffee retailer Starbucks Corp. (SBUX) together announced an additional 17,000 job reductions.

"Every week we delay is another 100,000 people unemployed," House Democratic leader Steny Hoyer, D-Md., told reporters.

The Congressional Budget Office (CBO) said earlier this week that the stimulus package would boost economic growth by 1.3 to 3.6 percentage points this year and by 1.2 to 3.5 percentage points in 2010. Much of the money in the bill wouldn't be spent until 2010 or even later, which may be appropriate, since the 2010 recovery is expected to be very weak, the CBO said.

"Policies that provide stimulus for an extended period of time may be appropriate," CBO Director Doug Elmendorf said.

The Next Battleground: The Senate

The real rescue-plan drama will unfold in the Senate, which is known for its more-collaborative culture, and where lawmakers have already been hard at work on a version of the stimulus that incorporates several proposals from the Republican minority – which is why the Senate version of the financial plan is already pegged at $900 billion.

That dollar figure is almost certain to grow, since additional compromises are likely. And since a number of key factors are likely to give the Senate bill more weight when negotiators from the two congressional chambers sit down to hammer out the joint legislation, it’s the higher-cost Senate bill that’s more likely to become law.

That process is virtually certain to push the plan's sticker price up to and over the $1 trillion mark, sources say.

That means the Obama stimulus plan is going to cost more, and probably look different, than the version passed yesterday [For a breakdown on the White House-based stimulus plan passed by House Democrats, check out the accompanying chart: “Highlights of the Obama Stimulus”].

What will give the GOP-backed version of the bill a higher chance of passage? First, the strongly partisan House vote – which lacked a single affirmative vote from Republicans – doesn’t have any of the bipartisanship that President Obama has said that he wants and promised that lawmers and U.S. taxpayers would see.

Democrats hold a 255-178 majority in the House, and an effective 58-41 majority in the Senate. Even so, Senate Majority Leader Harry Reid, D-Nev., also can’t count on a similar party-delineated vote in the Senate, for he needs at least two GOP votes to avoid a filibuster, and the more-collegial Senate prefers compromise over confrontation, BusinessWeek reported.

And finally, once the House and Senate merge their bills, Republican support will be needed to get the compromise  bill through the Senate – and to give President Obama the GOP support he says he wants, as well as a bill that he can sign.

"The real work is going to get done in the Senate," Daniel Clifton, a Washington policy analyst at Strategas Research Partners LLC, told BusinessWeek. The 244 House votes represents “a very low number—this gives the Senate leverage in negotiations with the House-Senate conference when the two bills need to be reconciled.

Despite President’s Obama's very real and very personal efforts to woo Republicans on Tuesday, not a single Republican voted in favor of the bill on final passage. Twelve Democrats voted against it, as did 176 Republicans.

Tax-and-Spend Gives Way to Tax Cuts and Spend Anyway

The Senate isn't waiting for the House to act. Senate committees have been at work, with the tax portions of the bill getting the stamp of approval from the Senate Finance Committee late Tuesday. Senators boosted the cost of the tax cuts in the House version of the bill by 24% to $342 billion, by agreeing to exempt millions of middle-class families from paying the onerous and controversial alternative minimum income tax (AMT) for one year, Reuters and other news services reported.

AMT was originally established to keep wealthy Americans from avoiding income tax altogether. But because it wasn’t indexed for inflation, it’s been increasingly catching middle-income taxpayers – with sometimes-devastating results. Economists say this particular measure won’t really do much to even nudge the U.S. economy toward a recovery, since it  simply extends a fix that has been in place for years.

Nevertheless, the provision enjoys strong GOP support.

Among the business provisions that could be tacked on in the Senate: A temporary reduction in the tax rate levied on companies bringing foreign-subsidiary profits back to the United States. While that provision is destined to be a Big Hit with Big Business, there’s a strong disagreement over its real stimulative value: Proponents say it would encourage companies to reinvest domestically, instead of overseas, while critics say the tax reduction does little more than reward companies for moving jobs elsewhere.

Democrats have traditionally loathed such proposals. That may be changing, however.

Another Senate bill proposal would permit companies to spread the taxes on bond-buyback profits over eight years , and could become even more alluring if some of that tax is actually excluded altogether. As it now stands, firms pay ordinary income tax on any gains from corporate bond buybacks that take place below the original issue price.

The biggest winners under such a change would be financial firms, hedge funds and private-equity players, MarketWatch reported.

Business interest groups continue to lobby for additional benefits from the big stimulus package. According to the Stanford Group, the U.S. dairy lobby hopes to see dairy prices increase by getting the government to pay them for culling their herds by as much as 300,000 animals, or 3.4% of the total. That could lead to an increase in milk prices at a time when U.S. grocery prices already are on the march. The National Dairy Council couldn't be reached for immediate comment, published reports state.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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