The Internal Revenue Service, busy with the tax-filing season, would have a “major challenge” issuing checks before May or June at the earliest, testified Peter Orszag, director of the Congressional Budget Office.
On top of that, it could take eight to 10 weeks to distribute the checks that are proposed as part of an economic stimulus package, he said.
The IRS doesn't have the information technology to deal with 2007 tax filings and preparing the checks, he said at a hearing of the Senate Finance Committee. The panel, headed by Sen. Max Baucus, D-Mont., will meet again Thursday to further discuss what form an economic stimulus package should take.
President Bush and congressional leaders met Tuesday to discuss a proposed package of $150 billion or more to boost the lagging economy. Orszag said the risk of a recession is significantly elevated. But a well-designed economic stimulus of up to 1 percent of the gross domestic product - about $140 billion to $150 billion - would reduce that elevated risk to more normal levels, he said.
The legislation would probably include tax rebates for individuals, tax cuts for businesses, and funding for additional food stamps and unemployment benefits.
Baucus suggested that instead of giving $800 per person, the government could give $400 per adult plus another $400 to families for each child. That would get significant dollars to families to spend but also wouldn't cost the government as much, leaving some money available for other purposes such as food stamps, Baucus said.
Orszag said the most effective rebate would focus on lower-income households and those with difficulty borrowing, because they will be most likely to spend the money quickly. The more Congress targets lower-income and credit-constrained households, “the bigger the bang you get for your buck,” he said.
Of similar rebates given in 2001, one-third of the money was spent within three months and two-thirds within six months, he said.
Baucus and other Democrats on the panel said they wanted the money to reach even people who don't file income tax returns or who pay only Social Security and Medicare taxes.
The overall package should take effect in months, Orszag said, and the more delivered in the first half of 2008 the better. If the package doesn't kick in until the economy is already getting back on track, it runs the risk of adding to inflation.
Another effective stimulus would be transfer payments such as unemployment benefits and food stamps, which would allow the money to get out the door quickly to people who spend most of it, Orszag said. A preliminary analysis shows that cash could actually be received by beneficiaries in about two months.
Sen. Pat Roberts, R-Kan., said there isn't such a thing as “temporary” with the food stamp program and that once the spending levels were raised, the increase would likely remain.
Money to state and local governments could also help, but it depends entirely on how well it is targeted and how the states would choose to spend the money, Orszag said.
On the business side, lawmakers are considering several tax incentives, including “bonus depreciation,” which would allow companies to deduct 50 percent of business investments made this year.
Baucus said he was surprised that Orszag's report found that business stimulus options would have only small or medium effects on the economy.
Orszag explained that a corporate tax cut would have some effect on new investments, but the biggest effect is on investments that have already been made. Measures passed in 2002 and 2003 to allow businesses to expense some capital assets were disappointing because they didn't cause the expected effect on investments and provided only a modest stimulus, he said.
Orszag said lawmakers should keep their eyes on the “real economy” and not over-respond to short-term moves in stock market. The Federal Reserve on Tuesday morning announced it cut a key interest rate by three-quarters of a percentage point.
But Orszag said quick congressional action may also be necessary. Although the rate cut may calm the financial markets, he explained, there's usually a lag of a year to 18 months before Federal Reserve actions affect the economy.
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