A look at the fiscal proposals unveiled by the Bush administration and the Democratic leadership. By David F. Seiders
The U.S. economy was essentially dead in the water as 2002 ended, and uncertainties about 2003 were heightened by the situations in Iraq, North Korea, and Venezuela. But new fiscal policy stimulus apparently will be added to the economic equation before long via proposals unveiled the first week of January.
The president's proposal, a "Growth and Jobs Plan," would make fundamental changes to the tax system in both the short and long term. The major components would (1) make all tax cuts enacted in 2001 but delayed to future years effective and permanent at the beginning of 2003, and (2) eliminate the double taxation of corporate income. The estimated 10-year cost of the entire package is $674 billion, compared with about $100 billion for the Democratic proposal.
If enacted, the plan would strengthen economic growth, the job market, and the stock market in 2003-2004 while increasing the budget deficit and putting some upward pressure on interest rates. While the long-term effects are open to debate, timely passage would undoubtedly deliver economic positives before the 2004 elections.
The president's plan contains nothing specific to housing, and the NAHB immediately noted the omission of a new homeownership tax credit that seemed to have some chance for inclusion. The short- and long-term impacts of the plan on the housing sector certainly could be a mixed bag, with the likelihood of short-term positives from a stronger economy and the possibility of long-term negatives from higher interest rates, devaluation of the mortgage interest and property tax deductions (via lower marginal tax rates), and reductions in the relative advantages of investment in owner-occupied housing over business fixed investment (via elimination of double taxation of corporate income). The new tax treatment of corporate income also would disadvantage REIT shares and could reduce demand for low-income housing tax credits and tax-exempt bonds. The results would weaken the two principal policy supports to the affordable rental market and the single-family mortgage revenue bond program.
Home builders that are organized as S-Corporations, partnerships, or proprietorships obviously would not benefit from the proposed tax treatment of corporate income. However, small businesses would be able to immediately expense up to $75,000 of equipment outlays (up from $25,000 under current law), and this amount would be indexed for inflation. Furthermore, the relatively large cut in the top individual income tax rate (from 38.6 percent to 35.0 percent) would reduce taxes and strengthen growth incentives for many small businesses. The White House says a high proportion in the top marginal tax bracket are small-business owners.
It's still too early to tell exactly what will be enacted into law, or when. And the elimination of double taxation of corporate income is highly controversial. But the administration apparently is in the driver's seat, and it seems likely that a package resembling the president's plan in most ways will make its way through the political and public-relations processes by Memorial Day. We'll adjust the NAHB's forecasts as the details and timing firm up. For now, the positive prospects greatly reduce the chances for a double-dip recession in 2003, barring disasters on the geopolitical/terrorism fronts.