CENTER ON BUDGET & POLICY PRIORITIES

REPORT BY CHAD STONE/CHIEF ECONOMIST,

RE: THE NOVEMBER EMPLOYMENT REPORT

Today’s devastating jobs report confirms that the economy is in a serious recession. Good policy in the months ahead is vital to limit the damage, but even so this recession is likely to be the longest, and possibly one of the deepest, since World War II.
Today’s report also makes it more likely that unemployment will reach 9 percent by the end of 2009, as Goldman Sachs has predicted. The Center on Budget and Policy Priorities estimates this could swell the number of Americans living in poverty by up to 10 million and the number of Americans in deep poverty, with incomes below half the poverty line, by up to 6 million, as explained below.
This week the National Bureau of Economic Research determined that a recession began in December 2007. In the ensuing 11 months, employers have shed jobs each month and the losses have accelerated sharply in recent months. Overall labor market trends are grim.
Private and government payrolls combined have shrunk for 11 straight months, and net job losses so far this year total 1.9 million. (Private sector payrolls, which began shrinking in December 2007, have seen a cumulative loss of 2.1 million jobs over the past 12 months.)
Almost two-thirds of the payroll job losses have occurred in the last three months: 533,000 in November, 320,000 in October, and 403,000 in September.
The official unemployment rate, which was 5 percent at the start of the recession last December, reached 6.7 percent in November, and other indicators show even greater labor market weakness.
The percentage of the population with a job (61.4 percent) has fallen to its lowest level since 1993.
The Labor Department’s most comprehensive alternative unemployment rate measure — which includes people who want to work but are discouraged from looking and people working part time because they can’t find full-time jobs — stood at 12.5 percent in November, up 3.7 percentage points so far this year and the highest level on record in data that go back to 1994.
More than one-fifth (21.4 percent) of the 10.3 million unemployed have not been able to find a job despite looking for 27 weeks or more.

The current recession is 11 months long and counting. If this were the average post-World War II recession, it would have lasted 10 months and ended in October (see Figure 1).  If it were like the most recent two recessions it would have ended in August. Instead recent economic conditions point to a continuing contraction in economic activity, which, if it continues past April 2009 as economic forecasters increasingly think it will, would produce a recession longer than any in the postwar record.
Past recessions have been accompanied by protracted spells of joblessness for unemployed workers and increases in poverty and hardship for low-income Americans. The Center has examined the relationship between rising unemployment and growing poverty in each of the last three recessions. If the same relationship holds in this recession and unemployment reaches 9 percent, the number of people in poverty will rise by 7.5-10.3 million, and the number living below half the poverty line will rise by 4.5-6.3 million. The increase just in the number of children living below half the poverty line will be 1.5-2 million.
As the Congress and President-elect Obama prepare an economic recovery package, it is important to remember that support for unemployed workers and those with limited means not only helps those hit hardest in a recession but is among the most effective and fast-acting ways to help arrest an economic contraction and turn the economy around.
View the Statement on CBPP Website:
http://www.cbpp.org/12-5-08ui-stmt.htm
http://www.cbpp.org/12-5-08ui-stmt.pdf  2pp.
Additional Background Analysis:
RECESSION COULD CAUSE LARGE INCREASES IN POVERTY
AND PUSH MILLIONS INTO DEEP POVERTY
Stimulus Package Should Include Policies To
Ameliorate Harshest Effects of Downturn
http://www.cbpp.org/11-24-08pov.htm
http://www.cbpp.org/11-24-08pov.pdf  15pp.

Economist: Georgia’s Job Losses to Grow Until 2010

By TMICHAEL E. KANELL /The Atlanta Journal-Constitution / Wednesday, November 19,'08

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, predicted Wednesday that the already gloomy unemployment picture in Georgia and metro Atlanta will worsen at least through next year before a light rebound.
“We expect significant layoffs in the state,” Dhawan said in a report to be released today at the center’s quarterly conference.
By the end of 2008, the state will have lost 75,100 jobs — more than one-third of them “premium,” relatively better-paying positions, Dhawan said. Georgia’s unemployment rate, 6.5 percent in September, will rise to 7.5 percent next year and to 8 percent in 2010.
From the start of the job cuts to the end of 2009, Georgia payrolls will bleed a stunning 170,000 jobs — 4 percent of the total, he said.
Metro Atlanta, which accounts for about two-thirds of the state’s jobs, will likewise account for the majority of this year’s job losses, he said: Atlanta payrolls will shed 45,600 jobs.
Metro Atlanta will lose 42,100 jobs next year before adding a modest number — 17,200 positions — in 2010.
The worst losses are coming in construction, where 12,200 jobs disappeared in the past two quarters, according to Dhawan. Housing construction, which provided so much of the muscle for Atlanta’s boom, has shriveled dramatically. New housing permits will end this year down by 54 percent — after a 35 percent drop in 2007, Dhawan said.
The number of permits will slide again next year before bottoming out in 2010, he said.
U.S. picture also bleak - Nationally, paralleling the recessions of 1990-91 and 2001, the current downturn will be followed by an expansion that does not bring job growth, Dhawan said.
Although anemic growth will return late next year, “real” economic recovery is two years away, he said. Large-scale job losses will continue into the second half of 2009, even if the economy begins an expansion that will feel very much like a downturn.
Dhawan blamed this fall’s volatility in credit markets for undercutting the economy.
“This recession is much more severe than projected in our August report,” Dhawan wrote. “So far, we have lost a million jobs and I expect we will lose 2 million more within the next 12 months.”
More global than in the past - Georgia through the 1980s and 1990s was among the nation’s leaders in job growth and seemed to suffer less when the national economy slipped. But lately, unemployment in Georgia has been running at least as high as the national average — and in the past several months, Georgia’s jobless rate has been slightly higher than that of the United States.
“Now, more than ever, our fortunes are tied to what happens nationally and even globally,” Dhawan said. The state has been facing pain from a range of forces: a struggling real estate sector — where foreclosures have been at near-epidemic levels — the recent closing of two auto plants, the mergers of Delta with Northwest and of Wachovia with Wells Fargo. Consumers are reeling and bankruptcy filings are climbing.
Meanwhile, the increase in export trade has been undercut by both a stronger U.S. dollar and a worldwide economic slowdown.


OUR ECONOMIC JUSTICE POLICY

We believe that if a person works 40 hours per week, then he/she should be able to access basic housing. Existing federal guidelines have been used to determine what a living wage should be. The first guideline dictates that no more than 30% of a person's gross income should be spent on housing. The second is Fair Market Rents (FMR's), established by HUD, nationwide, for both rural and metropolitan areas. FMR's are based on the gross rent estimates, which include shelter rent and the cost of utilities, except for phone service. , Though the average livable wages for cities across the U.S. is calculated $12.75, federal minimum wage remains at $5.25.

Those with disabilities, or who are unable to work for other reasons, lack the resources to obtain or maintain decent housing. 40% of those without housing are working. Many who manage to maintain housing with low paying jobs, do so out of their food or health care budgets and budgets for other basic needs. This may explain why 42 million Americans are without health insurance and why one in four children, in Georgia, go to bed hungry. It explains why over 7 million Americans experienced homelessness last year and why millions are continually at risk of becoming homeless. The Task Force continually strives to educate and advocate for livable wages for all and for access to basic needs, including decent housing and quality health care for all [including those who cannot work].

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BELOW ARE A FEW ARTICLES RE: HEALTHCARE FROM OUR ARCHIVES THAT RELATE TO DIFFERENT ASPECTS OF HEALTHCARE AS IT RELATES TO POVERTY AND HOMELESSNESS...

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MINIMUM WAGE EARNERS SEE NEW RAISE VANISH

Associated Press / 7-23-08

Seventy cents in federal standard immediately eaten up by gas, food costs...

WASHINGTON - About 2 million Americans get a raise Thursday as the federal minimum wage rises 70 cents. The bad news: Higher gas and food prices are swallowing it up, and some small businesses will pass the cost of the wage hike to consumers.

The increase, from $5.85 to $6.55 per hour, is the second of three annual increases required by a 2007 law. Next year's boost will bring the federal minimum to $7.25 an hour.

Workers like Walter Jasper, who earns minimum wage at a car wash in Nashville, Tenn., are happy to take the raise, but will still struggle with the higher gas and food prices hammering Americans.

"It will help out a little," said Jasper, who with his fiancee support a family of seven, and who earns the minimum plus commissions when customers order premium car-wash services.

The bus fare he pays each day to get to work already went up to $4.80 this spring from $4. "I'd like to be on a job where I can at least get a car," he said.

Last week, the Labor Department reported the fastest inflation since 1991 — 5 percent for June compared with a year earlier. Energy costs soared nearly 25 percent. The price of food rose more than 5 percent.

So the minimum wage hike is "a drop in the bucket compared to the increases in costs, declining labor market, and declining household wealth that consumers have experienced in the past year," Lehman Brothers economist Zach Pandl said.

The new minimum is less than the inflation-adjusted 1997 level of $7.02, and far below the inflation-adjusted level of $10.06 from 40 years ago, according to a Labor Department inflation calculator.

Twenty-three states and the District of Columbia have laws making the minimum wage higher than the new federal requirement, a group covering 60 percent of U.S. workers, according to the Economic Policy Institute, a think tank.

"You get desperate, because you can't really pay for everything," said Gladys Lopez, 51, a garment worker from Adjuntas, Puerto Rico, who makes military uniforms and has earned the federal minimum for 18 years.

She says she would need to make at least $50 more a week to pay all her bills and take care of her 84-year-old mother, whom she supports.

When the minimum rises again next year, catching up with more states, more than 5 million workers will get a raise, said Lisa Lynch, dean of the Heller School for Social Policy and Management at Brandeis University.

Some small businesses are already making plans to raise prices to offset the higher wages they have to pay their workers.

David Heath, owner of Tiki Tan in College Station, Texas, said the increase will force him to raise prices for his monthly tanning services by about 12 percent. Tiki Tan had been paying its employees $6 per hour.

"There just isn't any room for profit, and so this is why prices will have to go up," he said, citing the wage increase and higher fuel costs. "I have to recoup those costs."

The increase in the minimum wage could push food prices even higher by rising the pay for agricultural workers, said Brian Bethune, chief U.S. economist at consulting firm Global Insight.

But he said he did not expect the change to have a major impact on the economy because recent increases in productivity, which enables companies to produce more with fewer workers, are keeping labor costs in check.

That makes it unlikely the minimum wage increase will trigger a "wage-price spiral," in which workers facing higher costs demand more pay, which in turn causes companies to raise prices higher, sending inflation coursing through the economy.

And most businesses, even restaurants and other service sector companies, already pay above the minimum wage anyway. Dan Whitaker, general manager at Anis Bistro in Atlanta, a casual French restaurant, said employees earn at least $8 an hour.

"You can't get a dishwasher for minimum wage," he said.

Victory! 13 More Weeks of Unemployment Benefits

Coalition on Human Needs Reports from Capitol Hill:
Congress Enacts and President Signs Bill Adding Domestic Items to War Funding

Jobless insurance, veterans’ education benefits, protection against Medicaid cutbacks, and disaster relief are top domestic priorities enacted by Congress last week. These items were attached to the bill extending funding for the Iraq and Afghanistan wars that the President signed on June 30.

Backed by House and Senate leadership, these domestic provisions were initially opposed by the President and some of his allies in Congress. But the work of advocates and the bad news of growing unemployment strengthened the hand of the majority in Congress to hold firm for adding 13 weeks of extended unemployment insurance to the supplemental spending bill, at a cost of $8.2 billion over 10 years.

Similarly, there were strong advocacy efforts to improve education benefits for GI’s, to help states cope with the aftermath of flooding and tornadoes, and to stall a set of Medicaid regulations that would significantly reduce benefits and/or increase state costs. The final vote on the domestic items in the Senate was 92-6 on June 26.

The House had previously passed this package with a similarly overwhelming 416-12 vote on June 19. Such veto-proof majorities spared Congress from having to negotiate further reductions in their domestic priorities.

Although advocates feel very good about these victories, the President’s veto threats did cause Congress to scale back some of its original domestic proposals. Initially, both House and Senate approved a 13-week extension of unemployment insurance for all those who had exhausted their state benefits, plus another 13 weeks in states with jobless rates above 6 percent. The second 13 weeks in high unemployment states was dropped to get the President’s support. Similarly, language was included to restrict the extended benefits to those who had worked for 20 weeks or more.

Since many states with antiquated systems ignore a worker’s most recent 3-6 months of earnings, this provision will exclude some workers (disproportionately young and low-income) who really have well over 20 weeks of work. In other instances, states have approved UI benefits for low-income workers with relatively few weeks of work, but their benefits have also been low and of short duration. The federal extension would have only given such workers half of their state benefit after it was exhausted. Still, UI opponents made grossly exaggerated claims about how many weeks of UI could be received after only a couple of weeks of work, and the restrictions were included.

The 13 weeks additional weeks of UI benefits is extremely important because close to 4 million workers either have already exhausted their 26 weeks of state benefits or will do so by March 2009.

For more information and state impacts, see the National Employment Law Center’s statement.

The supplemental spending bill also delays the implementation of six different Medicaid regulations put forward by the Bush Administration, preventing them from taking effect any earlier than April 1, 2009, and thus allowing the next Administration to decide what to do with the proposals.

These regulations would deny federal Medicaid funds to states for such services as transportation of students with special health needs to school-based health services, certain rehabilitation services, and some case management for children in foster care or others with disabilities. If these regulations are implemented, children and other vulnerable people will lose benefits, states will face greater expenses at a time when shrinking revenues are forcing state budget cutbacks, or a combination of both. Congress had also sought a moratorium on a regulation to restrict federal reimbursements for routine hospital outpatient services, such as vaccinations or annual check-ups, but that regulation was not included among the moratoria finally agreed upon.

The GI education benefit would provide in-state college tuition and a housing stipend to veterans who have served at least 36 months, at a cost of $63 billion over 10 years. Veterans have 15 years to use this benefit and can transfer an unused portion to a spouse or dependent.

The full cost of the legislation through the end of FY 2009 is $186.5 billion, of which $161.8 billion is for the FYs 2008-2009 costs of the wars. The domestic provisions for that same period cost $24.7 billion, and also include $2.7 billion for disaster relief for the Midwest and to rebuild levees destroyed by Hurricane Katrina.

Corporate Tax Reform Could Benefit the Economy

by Aviva Aron-Dine

Unpaid-For Rate Cuts Would Likely Hurt Most Americans

Recently, proposals for federal corporate tax cuts and corporate tax reform have received increasing attention. The corporate income tax appears to have joined the long list of tax issues likely to be addressed, or at least debated, over the next few years.

Over the coming decades, the United States is projected to face large fiscal difficulties. Rising health care costs and the aging of the population will make it a challenge to meet existing federal commitments, much less to make new investments in areas like covering the uninsured, early childhood health care and education, and science and technology.

In this fiscal environment, those who seek to reduce the overall level of corporate revenues by cutting the corporate tax rate without broadening the tax base would need to show that the economic costs of current tax rates are large enough to warrant directing scarce resources toward corporate tax cuts rather than other priorities.

This report finds that the economic evidence does not meet that burden of proof.

Key findings include:
Some advocates of cutting the corporate income tax rate have greatly exaggerated both the level of tax that U.S. corporations pay and the economic effects of the corporate income tax.
While the statutory U.S. corporate tax rate is relatively high, effective corporate tax rates — the share of their profits that corporations actually pay in taxes — are much lower, due to the plethora of corporate tax breaks in the tax code.

Effective tax rates also differ substantially among different types of investment. For example, some categories of corporate investment are taxed at rates close to the statutory rate, while debt-financed investment is subject to a negative effective marginal rate.

These large discrepancies create opportunities for revenue-neutral or revenue-raising tax reforms that could benefit the economy by leveling the playing field for different types of investment and thereby removing economic distortions that the current tax code creates.
The evidence does not support claims that unpaid-for (i.e. deficit-financed) corporate tax cuts would significantly benefit the economy. In fact, a Joint Committee on Taxation analysis found that such tax cuts would actually slightly reduce economic growth over the long run.

Because deficit-financed tax cuts eventually would have to be paid for (through reductions in programs or increases in other taxes), they would probably leave most Americans worse off even if they generated small economic gains.

This analysis is posted to: http://www.cbpp.org/6-4-08tax.htm http://www.cbpp.org/6-4-08tax.pdf, 21pp.

Low-Income Workers & Families Hardest Hit by Economic Decline Need Help Now...

By Neil Ridley, Elizabeth Lower-Basch, and Matt Lewis / Updated May 5, 2008

American workers and families are being squeezed between a declining labor market and increasing costs for food, fuel, and other basic needs. Low-income workers and families are especially vulnerable to the challenges of a weak economy. The new employment data released last week continue to indicate that the economy is in a downturn—one that will have the most significant and damaging impact on low-income workers and their families. For the fourth month in a row, the Bureau of Labor Statistics (BLS) reports U.S. employers eliminated jobs from their payrolls.1 In addition, the number of unemployed people who had lost permanent jobs reached 2.1 million—nearly half a million more than a year ago.

Action is needed now to help those hardest hit by the economic downturn. Congress and the president should enact a relief package that provides assistance to unemployed workers and disconnected youth, helps low-income individuals and families meet basic needs, and provides targeted state fiscal relief to keep critical services available. This paper describes the economy’s impact on vulnerable adults and youth, and lays out recommendations for action that can make a real difference in the lives of low-income workers and their families.

Workers with the least education and experience have been most vulnerable in past recessions. There is overwhelming evidence that the employment prospects of low-skilled workers are more sensitive to changing economic conditions than those of high-skilled workers. Individuals with limited education and work experience are more likely to experience declining employment and wages as the labor market weakens.2 Employers are sometimes reluctant to let highly skilled workers go even when there is little work, for fear of not being able to replace them when demand picks up; they are more likely to let go or cut the hours of younger, less educated, and less experienced workers.

The weakening economy has already begun to hit vulnerable workers. Adults with the lowest education levels have experienced rising unemployment during the past year. In April 2008, unemployment among both high school graduates and adults with less than a high school diploma was substantially higher than it was in April 2007.

In another indicator of a weak labor market, more people report that they are working part-time even though they want full-time employment. The number of workers in involuntary part-time positions has increased sharply since November 2007 and is up by 849,000 since early 2007. Especially in the service sector, reduced demand is rapidly passed on to workers in the form of reduced hours. However, workers are often required to remain “on-call,” making it difficult for them to take a second job to pick up additional income.

The weakening economy is damaging job prospects for the nation’s youth, which were weak even before the current economic downturn. During a recession, when growing numbers of adults face unemployment, it is even tougher for young people to find jobs. Securing a job this coming summer is likely to be particularly hard. Andrew Sum at the Center for Labor Market Studies has demonstrated that the youth employment-population ratio, which measures the percentage of the nation’s 16- to 19-year-olds who are employed, is a predictor of summer employment conditions. In April 2008 the percentage was about half a percentage point lower than it was in April 2007 and 10 points lower than it was in 2000. Summer jobs are an important way for youth to build work experience, as well as a way for youth to contribute to family income and educational expenses.

Earnings for non-supervisory and production workers continue to decline. According to the Economic Policy Institute, real earnings for those workers grew during most of 2007, but began dropping in October and November due to inflation and declining wage growth. This indicator continued to fall in March 2008.

Low-income workers and families face tough choices as they manage their household budgets. Even in good times, basic needs—food, housing, health care, energy, transportation, and child care—consume most of low-income workers’ budgets. Low-income workers, including many with incomes well above the official poverty line, often find themselves deciding which bills can and cannot be paid each month, and relying on food banks or other community supports to make up any shortfall. When they experience a decline in income due to job loss or reduced hours, or face unexpectedly high costs, there is no fat in their budgets that can be sacrificed—they have to cut into the meat. In particular, there is good evidence that when faced with unusually high heating bills, poor families are forced to spend less on food, sometimes with serious nutritional consequences.

The number of people receiving Food Stamps is reaching record levels, just one example of the effects of the economy on families. As of January 2008, 27.7 million people were receiving Food-Stamp benefits, up 5 percent from a year previously. The Congressional Budget Office projects that more than 28 million people will receive benefits next year, the most in the program’s history. Fourteen states are already serving record numbers. Many families are driven to apply for Food Stamps by the combination of reduced income and sharp increases in the cost of food; energy; and other basic needs, which hit low-income families particularly hard.

However, receipt of Food Stamps is not sufficient to guarantee food security. In fact, more than half of Food Stamp recipients are still considered “food insecure,” meaning that they have had to adjust the quantity or quality of the food they eat due to their limited budgets. In addition, America’s Second Harvest reports rising demand for food assistance from food banks across the country. Many food banks are unable to meet this demand, and are having to turn people away or provide more limited food baskets than usual.

Low-income households have little savings to fall back upon and limited access to credit. Nearly half (44.2 percent) of all households in the lowest income quartile are “asset poor” meaning that they do not have enough net worth to allow them to subsist at the federal poverty level for three months without income. Low-income families also have poor access to mainstream financial institutions, such as bank loans and credit cards. When they are able to borrow money, it is often through mechanisms such as payday loans and bank overdrafts, with extremely high effective interest rates.

Finally, low-income individuals and families that receive help from state programs, such as health care, child support, or community-based services, bear the brunt of any cuts in services. During economic downturns, state tax revenues decrease as demand for assistance increases. There is already evidence that many states, confronted with declining revenues, are cutting programs that serve low-income and vulnerable residents. Large cuts to federal child support enforcement funding add to state budget demands and, if not replaced, will reduce child support income received by low-income families, reduce employment-related services to unemployed non-custodial parents, and compete for funding with other child and family programs.

Recommendations: The evidence of a weakening labor market is unmistakable. While our nation has many programs that are intended to offer relief, they provide an increasingly torn safety net which is allowing too many to fall through. Congress and the administration should take immediate action to help those hardest hit by the economic downturn, and provide targeted, state-fiscal relief to keep critical services available.

In addition to helping the most vulnerable individuals and families, these actions would also stimulate the economy. Economists of all political persuasions agree that the best way to stimulate the economy is to put money in the hands of people who will spend it quickly. Economists also recognize that low-income individuals and families are more likely to immediately spend any money received. Fiscal relief will prevent states from having to cut programs when they are most needed. Both direct assistance to families and state-fiscal relief are needed to address the needs of those most affected by any recession—people who lose their jobs or their health-insurance coverage, and low-income families who were already struggling to make ends meet even under better economic conditions.

Help Unemployed Workers and Disconnected Youth - Ensure Income Support for Unemployed Workers - Unemployment Insurance (UI) is the first-line response to a declining economy. It is a crucial source of temporary financial assistance for jobless workers and their families. As part of the stimulus package, Congress should adopt a temporary program to provide additional weeks of federally-funded extended benefits for workers who exhaust their regular UI benefits, including adequate funding to administer the program. In April 2008, nearly 18 percent of unemployed workers had been out of work for more than six months. As the economy weakens and job prospects diminish, people are more likely to remain unemployed for half-a-year or more.

However, an extension of UI benefits for current recipients is just the first step. Only about two of every five unemployed individuals receive UI benefits. If an extension is approved, it will still leave out large numbers of low-wage, part-time, and other workers in some states. Low-wage workers are twice as likely to be unemployed as high-wage workers; yet, they are half as likely to receive UI benefits, according to the Government Accountability Office. To ensure that low-wage, part-time, and other vulnerable workers have access to UI, Congress should enact provisions such as those included in the Unemployment Insurance Modernization Act. This legislation provides incentive funding to states that count the most recent earnings of workers and extend benefits to part-time workers and others who leave jobs for compelling family reasons.

Direct Funding for Summer Jobs to Areas with High Youth-Unemployment Rates. - A $1 billion summer jobs program would put money in the pockets of thousands of low-income youth in economically distressed communities. These dollars would flow immediately into the local economy. Just as important, these jobs will be the first exposure to the work environment for many youth, and will help them develop appropriate work skills and behaviors, and provide important community service. The program should include a provision that 30 percent of funds can be spent beyond summer months for transitional jobs for out-of-school youth.

The Workforce Investment Act of 1998 substantially curtailed the use of federal funding for summer jobs. Nonetheless, each year, communities across the country mount summer jobs efforts, although at a substantially reduced level from past years, with long waiting lists and thousands of young people turned away. Stimulus money directed to those communities with the summer jobs programs in place could eliminate waiting lists and ensure that these dollars circulate in the local economies throughout the summer.

Help Low-Income Individuals and Families Meet Basic Needs - Expand Food Assistance to Low-Income Individuals and Families. - A temporary increase in Food Stamp benefits to current recipients will help low-income families afford more food. This is critical, both because of the recent increases in the cost of food and because food is a part of the budget that gets squeezed when other living expenses increase. The value of Food Stamps has been eroded over the past decade because of a freeze in the standard deduction, the amount of family income that is assumed to be required for other household needs. An increase in Food Stamp benefits is one of the fastest and most effective ways to put additional spending power in the hands of low-income individuals and families, and thus to stimulate the economy. While the Farm Bill includes some important improvements to the Food Stamp program, these will be phased in over time and will not provide any immediate relief to needy individuals and families.

Increase Funding for Energy Assistance - High energy prices are hurting everyone, but they are especially overwhelming to the budgets of low-income households. While other households may be foregoing extras, low-income households are sacrificing essential needs, including food, medical care, and prescription medications. The Low Income Home Energy Assistance Program (LIHEAP) is targeted to help the elderly, disabled, and households with young children afford their energy bills. However, it only reaches about 16 percent of eligible households and in recent years has covered a smaller fraction of energy costs for those households. Without additional assistance, many households will lose energy in the coming months as winter shut-off moratoriums expire, and state assistance budgets will be strained heading into the cooling season.

Expand and Improve the Dependent Care Tax Credit - One of the largest components of the budget of a low-income family is the cost of child care. The U.S. Census Bureau estimates that the poorest families pay 29 percent of their income for child care while higher income families pay only 6 percent of their income. As family incomes decline during a recession, child care takes larger and larger shares of that income, yet families cannot eliminate the cost—child care is a needed support if parents and guardians are to go to work each day.

The Child and Dependent Care Tax Credit (CDCTC) is the largest tax subsidy for child care; however, the design of the credit means that it is largely inaccessible to low-income families. As part of the stimulus, Congress should take three steps to offset the high cost of child care for low-income families: first, make the CDCTC refundable, so that parents who have no tax liability but need child care to work can benefit; second, increase the limits to better reflect the current costs of child care; and third, permanently index the CDCTC so that the size of the credit grows as inflation increases the costs of child care.

Encourage States to Provide Cash Assistance to Needy Families. - The safety-net role played by Temporary Assistance for Needy Families (TANF) has been greatly diminished in recent years. During the 2001 recession, caseloads continued to decline even as poverty levels rose significantly. The changes made by the Deficit Reduction Act (DRA) of 2005 further restrict state flexibility and discourage states from allowing unemployed workers to receive welfare. While some states have used their own funds to provide assistance outside of the narrow framework of the federal rules, these programs will be under increased pressure as states face budget deficits.

Congress should enact the contingency fund fixes that received bipartisan support in the pre-DRA reauthorization bills in order to make additional funds available to states that experience increases in need, and extend the supplemental grants past FY 2008. Congress should also provide penalty relief to states that experience caseload increases as a result of the recession, so as not to discourage states from letting people back on the rolls. Finally, targeted modifications to the participation rate requirements should be adopted to allow states to count education and training for longer periods during times of economic distress.

Targeted State Fiscal Relief to Keep Critical Services Available - Forty-nine states have constitutional requirements to balance their budgets each year. During an economic downturn, the decisions that state legislatures and governors have to make to keep their budgets balanced—cutting spending, raising taxes, or both—can have the pro-cyclical effect of deepening and prolonging the slump.

Leverage income for single-parent families by restoring child support enforcement. Congress should immediately and permanently reverse the 20 percent federal child support enforcement funding cut included in the Deficit Reduction Act of 2005. States and counties are preparing to lay off staff and cut back on services in the coming months. According to the Congressional Budget Office, $5 billion in support payments to families will go uncollected over the next five years unless funding is replaced. In addition, critical initiatives to help low-income fathers obtain jobs will be eliminated or cut back.

Next to earnings, child support is the second largest income source for poor, single-mother families that receive it—30 percent of the family’s budget. Support payments play a stabilizing role during economic downturns, helping families get from paycheck to paycheck and weather job losses. Families spend the money very quickly. State data suggest that 97 percent of child-support funds dispensed to family debit cards are spent down by the end of the month.
Ensure adequate resources to provide low-income families needed health care. The federal medical assistance percentage (FMAP) for Medicaid should be raised temporarily to ensure that states have sufficient revenues to continue to provide low-income families and individuals access to critical health-care services. This additional federal support will be particularly critical if more individuals lose their jobs and health insurance for themselves and their families.

Congress should also place a moratorium on a number of pending and proposed Medicaid regulations which will siphon off billions of federal dollars currently being used to provide access to essential health-care services. For example, the Centers for Medicare and Medicaid Services (CMS) recently issued regulations which slash federal funds for targeted case management services under Medicaid—an estimated $1.28 billion over five years. These regulations are likely to harm many low-income individuals, particularly children in foster care, children with special education needs, individuals with disabilities, and seniors. Increasing the FMAP will not be as effective if Congress allows CMS to continue to drain billions of federal dollars from the program through the regulatory process.

Our thanks go out to “CLASP” (The Center for Law and Social Policy) for this report. The full version, complete with graphs and charts, can be found at:
http://www.clasp.org/publications/compiled_indicators_piece_may5_cm.pdf

Employment Verification System Dangerous for U.S. Workers & Vulnerable Populations

Attempts are being made to implement a national employment eligibility verification system (EEVS). It is being touted as a way to keep undocumented immigrants from entering the U.S. workforce. However, many experts and advocates believe it will not meet its intended goal and will instead overburden the Social Security Administration and harm workers, the elderly and people with disabilities.

Two bills have been introduced in the House that would mandate the establishment of such a program. One is the Secure America Through Verification and Enforcement (SAVE) Act, H.R. 4088, sponsored by Representatives Heath Shuler (D-NC) and Tom Tancredo (R-CO). The other is the New Employee Verification Act of 2008, H.R. 5515, which was introduced by Representative Sam Johnson (R-TX). Each would require that all 7.4 million employers in the U.S. verify the employment eligibility of every employee with the Social Security Administration (SSA). The system would be modeled after the Department of Homeland Security’s experimental Basic Pilot program, recently renamed E-Verify. Various entities that have reviewed Basic Pilot/E-Verify – including independent researchers commissioned by the U.S. Department of Homeland Security (DHS) in 2007, the Government Accountability Office, and the Social Security Administration’s Office of the Inspector General – have found it riddled with problems.

One of the biggest issues with E-Verify, which raises concerns for the proposed national employment verification system, is the high error rate in SSA’s database. According to SSA’s Office of the Inspector General an estimated 17.8 million agency records contain discrepancies that can cause the system to incorrectly classify someone as ineligible to work. This would mean, according to SSA, that if E-Verify becomes a mandatory national program, 2.5 million workers a year could be misclassified as unauthorized to work. It would be up to each individual to then contest the erroneous classification with SSA.

All of this would have the negative effect of preventing SSA from meeting its current responsibilities. It would most certainly delay the already slow processing of applications for benefits for people with disabilities. It is expected that SSA would have to contend with 3.6 million extra visits or calls made to its field offices per year if EEVS is implemented. As it is SSA is struggling to keep pace with its current caseload. In 2007 there were 1.4 million disability cases pending at the initial claims, reconsideration, and hearing levels. The inevitable slowdown in services would further hamper the agency’s ability to administer benefits and would also hurt individuals’ prospects for work as they wait long periods for their work eligibility issues to be resolved.

A further complication with E-Verify, and consequently EEVS if implemented, is that it provides very few safeguards to workers. The DHS commissioned evaluation of E-Verify found that 22 percent of employers restricted work assignments, 16 percent delayed job training, and 2 percent reduced pay while workers challenged the errors in the SSA database. It also found that some employers did not even notify workers of the database error or discouraged them from contesting the claim, and worse still, that close to half of the employers participating in E-Verify screened workers before they hired them which is against program rules. The National Council of La Raza captures the damaging effects of pre-screening: “Preemployment screening is an extremely harmful practice, because people who are authorized to work but have errors in their records are denied jobs without ever knowing that a database error was the culprit, and without having an opportunity to correct the error.”

Implementing EEVS would not only have adverse affects on the current U.S. workforce and the SSA’s ability to issue benefits, but it would also be costly. The Congressional Budget Office estimates that the implementation of the SAVE Act, which would impose a national EEVS, would cost the federal government $23 billion over 10 years. Additionally, it would decrease federal revenue by $17.3 billion dollars over that same time period.

Republicans have filed a discharge petition to bring the SAVE Act directly to the floor of the House, bypassing any committee review. The petition needs 218 signatures; thus far 185 signatures have been collected. House leadership plans to schedule a series of hearings on EEVS to better educate Members about the inherent problems with this program.

22 States Face Major Budget Shortfalls in 2009; Others Expect Budget Problems

By Elizabeth C. McNichol and Iris Lav

Summary - At least twenty-five states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 25 states, specific estimates are available for 22 states and the District of Columbia; the combined deficits of these 22 states plus the District of Columbia are expected to total at least $39 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn and contribute to the further slowing of the national economy, as well.

The Center on Budget and Policy Priorities currently is monitoring state fiscal reports and is in touch with state officials and/or relevant state nonprofit organizations in the 50 states and DC.

The fiscal situation appears to be as follows.
· Over half of the states are anticipating budget problems.
· The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $38.8 to $40.5 billion, averaging 8.8 – 9.2 percent of these states’ general fund budgets. (See Table 1.)

· Another three states face budget shortfalls that will need to be closed for fiscal year 2009, but information on the size of those deficits is not available. They are Louisiana, Michigan, and Mississippi. Analysts in three other states — Connecticut, Missouri, and Texas — are projecting budget gaps a little further down the road, in FY2010 and beyond.

This brings the total number of states identified as facing budget gaps to 28 — more than half of all states. The remaining 22 states did not foresee FY2009 budget gaps at the time of the survey either because their budgets remain strong or because they have not yet prepared updated revenue and spending projections for fiscal year 2009. The list of states facing budget gaps is likely to grow as additional state budgets are released in preparation for the upcoming legislative session.

Some mineral-rich states — such as New Mexico, Alaska, and Montana — are seeing revenue growth as a result of high oil prices. Other regions’ economies are less affected by the national economic problems. For example, states with high levels of farm exports are benefiting from the high price of corn and soybeans and the falling value of the dollar. This does not mean, however, that local governments in those states will escape fiscal stress. Some states with mineral revenues or farm exports have been affected by the housing bubble and could face widespread local government deficits.

In states facing budget gaps, the consequences could be severe — for residents as well as the economy. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets. Even if the economy does not fall into a recession as it did in the earlier part of this decade, actions will have to be taken to close the budget gaps states are now identifying. The experience of the last recession is instructive as to what kinds of actions states may take.

· Cuts in services like health and education. In the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.

· Tax increases. Tax increases may be needed to prevent the types of service cuts described above. However, the taxes states often raise during economic downturns are regressive — that is, they fall most heavily on lower-income residents.

· Cuts in local services or increases in local taxes. While the property tax is usually the most stable revenue source during an economic downturn, that is not the case now. If property tax revenues decline because of the bursting of the housing bubble, localities and schools will either have to get more aid from the state — a difficult proposition when states themselves are running deficits — or reduce expenditures on schools, public safety, and other services.

Expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. Tax increases also remove demand from the economy by reducing the amount of money people have to spend.

The federal government — which can run deficits — can provide assistance to states and localities to avert these “pro-cyclical” actions.

States Have Restrained Spending and Accumulated Rainy Day Funds - Many states have never fully recovered from the fiscal crisis in the early part of the decade. This fact heightens the potential impact on public services of the deficits states are now projecting.

State expenditures fell sharply relative to the economy during the 2001 recession, and for all states combined they remain below the FY2001 level. (See Figure 1.) In 18 states, general fund spending for FY2008 — six years into the economic recovery — remains below pre-recession levels as a share of the gross domestic product.

In a number of states the reductions made during the downturn in education, higher education, health coverage, and child care remain in effect. These important public services will suffer even more if states turn to budget cuts to close the new budget gaps they now anticipate.
One way states can avoid making deep reductions in services during a recession is to build up rainy day funds and other reserves. At the end of FY2006, state reserves — general fund balances and rainy day funds — totaled 11.5 percent of annual state spending. These reserves are estimated to decline to 6.7 percent of annual spending by the end of this fiscal year.

Reserves can be particularly important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to avert the need for substantial budget cuts or tax increases.
Federal Assistance is Needed - Federal assistance can lessen the extent to which states take pro-cyclical actions that can further harm the economy. In the recession in the early part of this decade, the federal government provided $20 billion in fiscal relief in a package enacted in 2003. There were two types of assistance to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants to states, based on population. Each part was for $10 billion. The increased Medicaid match averted even deeper cuts in public health insurance than actually occurred, while the general grants helped prevent cuts in a wide variety of other critical services. The major problem with that assistance was that it was enacted many months after the beginning of the recession, so it was less effective than it could have been in preventing state actions that deepened the economic downturn. The federal government should consider aiding states earlier, rather than waiting until the downturn is nearly over.

Families Helped by Child Tax Credit Expansion Work Hard in Low-Paying Jobs

[A MESSAGE FROM THE CENTER FOR BUDGET AND POLICY PRIORITIES]

Nursing Home Aides, Cooks, Pre-School Teachers & Construction Workers Would Get a Boost


by Sharon Parrott and Arloc Sherman

The House AMT “patch” bill (H.R. 3996) would expand the Child Tax Credit by lowering the earnings threshold that families must meet to qualify for the refundable portion of the credit. Under the bill, law, by contrast, families must have earnings above $12,050 in 2008 to qualify for the refundable child tax credit.

According to the Tax Policy Center, this provision would benefit 13 million children — including
2.9 million children who would become newly eligible for the benefit and 10.1 million children who would see their CTC increased due to this provision. Families that are “newly eligible” are those with incomes between $8,500 and $12,050. A broader group of low-income families would see their


CTC increase as a result of this provision, because the size of their credit is based on the amount by which the family’s earnings exceed the threshold.

Who are these families that would benefit? Census data provides important information about these families and the jobs the parents hold:

• Most of the children helped live in families in which a parent works throughout the year. Some 70 percent of the children who would benefit live in families in which a parent works 30 or more hours per week for at least 50 weeks during the year. A majority of the remaining families experienced periods of unemployment during the year, but when they were employed, worked at least 30 hours per week.

• Many of the children helped live in families that include individuals with disabilities.
Nearly one in ten children — 1.1 million children — who would benefit live in a family where either a parent or a child has a disability. An expanded CTC would provide assistance to these families in which parents struggle to maintain jobs and meet the health and other expenses they incur due to the disability.

• Parents who would be assisted work in a broad range of low paying jobs; many perform difficult jobs that provide critical services, like caring for the elderly or teaching young children.

• 480,000 parents provide health care services to the elderly or the ill as nursing home workers, home health aides, personal care assistants, medical assistants, and other low paid health care professionals.

• 240,000 parents provide child care, serve as teaching assistants, or are preschool or kindergarten teachers.

• 310,000 parents earn a living by cleaning or maintaining the grounds of homes, office buildings, schools, or other community institutions.

• 410,000 parents work as cashiers in grocery stores and a broad array of other businesses.

• 470,000 parents work as cooks, waiters or waitresses, or assist cooks with food preparation.

• 360,000 parents earn a living as construction workers, carpenters, or painters.

• 120,000 parents work as laborers in the agriculture sector.

All of the figures presented here are Center for Budget and Policy Priorities calculations based on the March 2006 Current Population Survey.

Families Helped by Child Tax Credit Expansion Work Hard in Low-Paying Jobs

[A MESSAGE FROM THE CENTER FOR BUDGET AND POLICY PRIORITIES]

Nursing Home Aides, Cooks, Pre-School Teachers & Construction Workers Would Get a Boost

by Sharon Parrott and Arloc Sherman

The House AMT “patch” bill (H.R. 3996) would expand the Child Tax Credit by lowering the earnings threshold that families must meet to qualify for the refundable portion of the credit. Under the bill, law, by contrast, families must have earnings above $12,050 in 2008 to qualify for the refundable child tax credit.

According to the Tax Policy Center, this provision would benefit 13 million children — including
2.9 million children who would become newly eligible for the benefit and 10.1 million children who would see their CTC increased due to this provision. Families that are “newly eligible” are those with incomes between $8,500 and $12,050. A broader group of low-income families would see their

CTC increase as a result of this provision, because the size of their credit is based on the amount by which the family’s earnings exceed the threshold.

Who are these families that would benefit? Census data provides important information about these families and the jobs the parents hold:

• Most of the children helped live in families in which a parent works throughout the year. Some 70 percent of the children who would benefit live in families in which a parent works 30 or more hours per week for at least 50 weeks during the year. A majority of the remaining families experienced periods of unemployment during the year, but when they were employed, worked at least 30 hours per week.

• Many of the children helped live in families that include individuals with disabilities.
Nearly one in ten children — 1.1 million children — who would benefit live in a family where either a parent or a child has a disability. An expanded CTC would provide assistance to these families in which parents struggle to maintain jobs and meet the health and other expenses they incur due to the disability.

• Parents who would be assisted work in a broad range of low paying jobs; many perform difficult jobs that provide critical services, like caring for the elderly or teaching young children.

• 480,000 parents provide health care services to the elderly or the ill as nursing home workers, home health aides, personal care assistants, medical assistants, and other low paid health care professionals.

• 240,000 parents provide child care, serve as teaching assistants, or are preschool or kindergarten teachers.

• 310,000 parents earn a living by cleaning or maintaining the grounds of homes, office buildings, schools, or other community institutions.

• 410,000 parents work as cashiers in grocery stores and a broad array of other businesses.

• 470,000 parents work as cooks, waiters or waitresses, or assist cooks with food preparation.

• 360,000 parents earn a living as construction workers, carpenters, or painters.

• 120,000 parents work as laborers in the agriculture sector.
All of the figures presented here are Center for Budget and Policy Priorities calculations based on the March 2006 Current Population Survey.

Many Cuts Come on Top of Sizable Reductions in Recent Years

THE PRESIDENT'S BUDGET WOULD CUT DEEPLY INTO IMPORTANT PUBLIC SERVICES & ADVERSELY AFFECT STATES

[A MESSAGE FROM THE CENTER ON BUDGET AND POLICY PRIORITIES]

by Sharon Parrott, Kris Cox, Danilo Trisi, and Douglas Rice

The President’s 2009 budget would provide some $20.5 billion less for domestic discretionary programs outside of homeland security — a broad category of programs that includes everything from child care to environmental protection to medical research — than the 2008 level, adjusted for inflation.

The budget calls for reductions in a broad range of services, including some areas that have seen sizable cuts in recent years. For example, the budget would cut child care, environmental protection, and job training — all areas for which funding in 2008 is well below funding earlier in the decade, after adjusting for inflation.

In other areas, the budget does not call for large new cuts, but nor does it reverse sizable cuts that have been made in recent years. K-12 education is such an area. After the No Child Left Behind initiative was enacted, funding for K-12 education increased for several years. Since 2004, however, funding has failed to keep pace with inflation. In 2008, funding for K-12 education is 8.9 percent below the 2004 level, in inflation-adjusted dollars. The President’s proposed funding level falls just short of what would be needed to keep pace with inflation. As a result, under the President's budget, K- 12 funding in 2009 would fall 9.1 percent below the 2004 funding level, adjusted for inflation.

Head Start is another example. Head Start funding has essentially been frozen since 2002, without adjustment for inflation. As a result, when inflation is taken into account, funding in 2008 is 11 percent below the 2002 level. The President’s proposed 2009 funding level falls 12 percent below the 2002 inflation-adjusted level.

As a result, significant additional funding would be needed to restore many programs to the levels in place earlier this decade. For example, in K-12 education alone, an additional $3.7 billion above the President’s 2009 budget request would be needed to restore funding to 2004 levels (after adjustment for inflation). To restore child care and Head Start funding to 2002 inflation-adjusted levels would require an additional $1.4 billion above the President’s budget request.
Many of the proposed cuts in domestic discretionary programs would adversely affect state budgets. A large number of domestic discretionary programs provide funding to states for various types of services such as education, low-income energy assistance, environmental protection, and mass transit. The President’s budget would cut overall funding for domestic discretionary grants to state and local governments by $19.1 billion, as compared to 2008 funding levels adjusted for inflation. (Funding would be $15.1 billion below 2008 funding levels even without adjusting for inflation.)

It is important to note that despite some rhetoric to the contrary, these programs have not grown rapidly in recent years. In 2008, funding for domestic discretionary programs outside homeland security is lower as a share of the economy than it was in 2001. And, between 2002 and 2008, the overall funding level for domestic discretionary programs outside homeland security declined 2.6 percent in real per capita terms.

New Federal Law Could Worsen State Budget Problems

NEW FEDERAL LAW COULD WORSEN STATE BUDGET PROBLEMS:States Can Protect Revenues by "Decoupling"
2/13/08 By Nicholas Johnson

The federal “economic stimulus” package enacted today not only cuts federal taxes, but also threatens to reduce many states’ corporate and personal income tax revenue this year and next year. The potential revenue loss comes at a particularly problematic time for states, because about half the states are already facing budget shortfalls for the current year, the upcoming year, or both; more states will be in trouble if the economic downturn worsens. Some states are already enacting cuts in K-12 education, higher education, health care and human services, among other areas in order to balance their budgets.

The revenue loss results from a provision of the stimulus package known as “bonus depreciation.” Bonus depreciation allows a business to claim an immediate federal tax deduction of up to 50 percent of the cost of new equipment purchases, rather than following the standard accounting approach of depreciating the full cost gradually over the several year useful life of the equipment. Most states’ personal and corporate income taxes are based on federal law. So tax cuts at the federal level that reduce federal taxable income normally reduce state taxable income as well and therefore cost states money.

Because the bonus depreciation provision is retroactive to January 1, 2008, affected states will experience immediate revenue loss in the current fiscal year and the upcoming fiscal year. We estimate that under current state law, some 23 states stand to lose an estimated $1.7 billion in corporate and individual tax revenue in the current and upcoming fiscal years.

There is a way states can protect themselves from this immediate and large revenue loss. States can, at their own option, pass a statute to "decouple" their business depreciation rules from the section of the federal tax code that allows bonus depreciation. During the 2001-04 period, when a similar bonus depreciation provision was in effect, over 30 states fully or partially decoupled from it, with minimal adverse consequences.

What Is Bonus Depreciation? “Bonus depreciation” is a change to the way businesses subtract from their taxable income the cost of purchasing machinery or equipment. Normally, when a business purchases a piece of machinery or equipment, the tax deduction for the cost of the purchase must be spread out over time — up to 20 years, depending on the type of product. (Equipment that is likely to break down or become obsolete more quickly is more rapidly depreciated than more durable equipment. Real estate has an even longer depreciation schedule, and is not eligible for bonus depreciation.) Contrary to the general accounting rules that match the deductions to the approximate useful life of the machine or equipment,, “bonus depreciation” allows businesses that purchase machinery or equipment in 2008 to deduct 50 percent of the cost right away. The remaining 50 percent is then depreciated over the normal depreciation schedule.[1]

The “bonus” applies to machinery and equipment placed in service anytime in calendar year 2008, meaning that businesses can begin immediately to claim the deduction in their estimated tax payments. It expires December 31, 2008, by which time it will have reduced federal taxes on profitable businesses by an estimated $49.5 billion.

Why Are Some States Affected, and Others Are Not? A state might lose revenue due to the new federal “bonus depreciation” law for either of two reasons.

· A state’s tax code might be written in such a way that it automatically reflects any change in federal tax law. This is sometimes called “rolling conformity.” (Note that some states in this category decoupled from bonus depreciation in 2001-04, but the legislation to decouple was written so narrowly that it does not automatically apply to the 2008 bonus depreciation.)

· A state’s tax code might be written in such a way that it reflects the federal tax code as it existed on a particular date, but the practice in the state is that the date is routinely moved forward to incorporate federal tax changes. Specifically, if the state moved the date forward in order to conform to “bonus depreciation” in 2001-04, it is reasonable to expect that — absent specific efforts to “decouple” — the state will incorporate bonus depreciation now and hence lose revenue.

States in either of those categories are shown in Table 1 as being likely to lose revenue. Other states are protected automatically from revenue loss due to “bonus depreciation.” In most cases, this is either because they have fixed-date conformity for their tax code as a whole (or for depreciation provisions in particular), or because they have a specific provision that requires businesses to “add-back” any benefit they receive from Section 168(k) — the section of the federal tax law that allows bonus depreciation.

Such states are shown as having no revenue loss in Table 1. However, it is possible that some of those states might consider enacting legislation that would bring their codes into conformity with the new federal stimulus law and hence lead to lost revenue. Table 2 at the end of this paper provides the potential revenue loss were all states to choose to conform — an unlikely scenario in most states, but perhaps plausible in a few.

How Can States Decouple From Bonus Depreciation? The last time the federal government enacted “bonus depreciation,” in 2002-2004, over 30 states amended their state laws to prevent revenue loss. (Then, as now, states were facing significant budget shortfalls due to an economic slowdown, and could not afford additional loss of revenues.)

The state statutes to decouple from 2002-04 bonus depreciation typically were quite simple: They merely required businesses to calculate their taxable income as if bonus depreciation had not been enacted. Some are more detailed about the steps involved, requiring businesses to add back to their federal taxable income the amount of the bonus depreciation deduction, and then allowing them to subtract the amount of depreciation they would normally have claimed. A few states use variations on the latter approach, for instance requiring that the “bonus depreciation” deduction be spread out over a number of years, which roughly mirrors the normal depreciation law. There is no obvious advantage to any one of these approaches.

However, states should decouple in such a way that the decoupling applies to any future bonus depreciation beyond 2008 — or even better in such a way that the decoupling applies to any future changes in any part of the federal tax law. This would prevent any future federal tax law change from automatically reducing state revenues.

What Are The Short-Term and Long-Term Revenue Implications of Decoupling from Bonus Depreciation? The federal government expects to lose $49.5 billion in federal fiscal years 2008 and 2009 (combined) as a result of bonus depreciation. If the affected states face a proportionately equivalent revenue loss, as it is reasonable to expect they would, this represents potential revenue loss of approximately $1.7 billion, as shown in Table 1.[2] It is somewhat unclear what portion of this revenue would fall in state fiscal year 2008 and what portion would fall in state fiscal year 2009. But in most states the distinction is not very important, because any shortfall in 2008 would have to be made up in 2009.

If the federal government allows bonus depreciation to expire on December 31, 2008, as it is now scheduled to do, then no revenue loss would be expected to occur after 2009. However, there is no guarantee that bonus depreciation will expire on schedule. In the early 2000s, for instance, bonus depreciation was enacted and then a year later extended; in the end bonus depreciation was in effect for more than three years. Moreover, 2008 is an election year, so additional “stimulus” tax cuts (such as an extension of bonus depreciation) are entirely possible, especially if the economy does not recover rapidly.

Some proponents of conforming to bonus depreciation may argue that bonus depreciation is merely a timing shift. A state that loses money from bonus depreciation in 2008 and 2009 might expect to begin recouping a portion of the revenue loss beginning in 2010, because of the way bonus depreciation interacts with the regular depreciation schedule. Since more of the purchase cost is depreciated in the first year, less is depreciated in subsequent years.
This timing shift is likely to be of little solace to states facing budget problems now. Moreover, even in the longer term, states should be suspicious of the “recoupment” argument for the following reasons:

· As noted above, it is not clear whether in fact the federal government will allow bonus depreciation to expire as scheduled. If it does not, recoupment would be substantially delayed.

· Although the recoupment of revenue could begin as early as 2010, the bulk of it would occur after 2011. (Some of it could be recouped as far into the future as 19 years from now, or perhaps never, if corporations go out of business before making up the lost revenue.) This is of little help to states that are legally required to balance their budgets in 2008, 2009, and 2010 as well as all subsequent years, as nearly all states are.

· Allowing corporations to pay less taxes now, based on the premise that they will pay an equivalent amount in increased taxes five, ten or 15 years into the future, is equivalent to giving those corporations an interest-free loans. Like any interest-free loan that gets repaid, there is a hidden cost to the borrower, in this case the state. (As a recent Wall Street Journal article noted, the cost of this “interest-free loan” that results from bonus depreciation is not reflected in the official Congressional cost estimate due to a loophole in federal budget rules.[3])

What Are The Short- and Long-Term Economic Implications for A State of Decoupling from Bonus Depreciation?

Of the measures considered by Congress to stimulate the economy, bonus depreciation is one of the least effective, according to the Congressional Budget Office. Moody’s Economy.com found that for every dollar spent on bonus depreciation, the economy would grow by just 27 cents. Part of the reason this stimulus strategy is considered relatively ineffective is that studies of the 2001-04 bonus depreciation program found that it did little to stimulate business investment. Most of the benefit went to firms that were planning to buy new equipment anyway. A better approach to stimulating a state economy would be for a state to decouple from the federal change and use the revenue to balance the budget — thereby reducing the need for the state to cut spending or raise new revenues. In contrast to the relatively weak stimulus effect of bonus depreciation, Moody’s found that each dollar spent mitigating state budget shortfalls could yield $1.36 in increased economic growth.

December Unemployment Rate

FROM THE CENTER ON BUDGET AND POLICY PRIORITIES:

STATEMENT BY CHAD STONE, CHIEF ECONOMIST,ON THE LABOR DEPARTMENT'S DECEMBER UNEMPLOYMENT REPORT

Today's report shows that the economy is entering 2008 with a weakening labor market. Employers expanded their payrolls by a meager 18,000 jobs in December, private payrolls actually shrank by 13,000 jobs, and the unemployment rate rose from 4.7 to 5.0 percent. These data are very disappointing, but even so they do not mean that the economy is currently in recession, and Congress should not rush to judgment on the need to enact a fiscal stimulus package that, if not carefully designed, could do more harm than good.

Today's report also is a strong reminder that before the next recession comes, Congress needs to strengthen the Unemployment Insurance (UI) system, which cushions the impact on consumers of the economy's ups and downs. The percentage of unemployed workers who have remained without a job for more than 26 weeks (the normal duration for regular unemployment benefits) and continue to search for work is considerably higher than on the eve of the last recession. In December 2007, 17.5 percent of all unemployed workers were long-term unemployed, compared with just 11.1 percent in March 2001.

The federal government has temporarily extended unemployment benefits in every recent recession, but often not until well after the need has become evident. Having an extended benefits program ready to go if labor market conditions deteriorate significantly would be a prudent contingent stimulus policy.

In addition, longstanding gaps in the UI system leave many workers ineligible even for regular UI benefits when they lose their jobs (and hence for any extended benefits in a recession). In October 2007, the House passed a long-overdue UI reform measure that would provide states with incentives to modernize their UI systems so more female, low-income, and part-time workers who lose their jobs through no fault of their own can qualify.

The House bill reflects recommendations made over a decade ago by a bipartisan, congressionally chartered commission. And it is fully paid for through a renewal of the federal UI surtax, a step President Bush called for in his last budget.

The Senate should act expeditiously on this or similar legislation when it returns this month, so these reforms are in place to reduce hardship in the next recession, whenever that occurs.

Marginal Rate Reductions and Extensions of Tax Cuts Expiring in 2010 Not the Right Medicine for the Economy’s Current Ills...

The following is a message from the Center on Budget and Policy Priorities. It helps us to understand how economic policy affects us in the long term. This is merely an overview. A detailed analysis can be found on their website @ http://www.cbpp.org/1-15-08tax.htm.

By Aviva Aron-Dine

With today's release of CBO's report, "Options for Responding to Short-Term Economic Weakness", we wanted to draw your attention to the Center's new analysis which finds that:

· Reductions in personal and corporate marginal income tax rates would do little to stimulate the economy — far less than other options like extending unemployment benefits, providing aid to states, temporarily increasing food stamp benefits, or providing tax rebates to low- and moderate-income households.

· Marginal rate cuts have low “bang-for-the-buck” as stimulus because they target dollars to groups unlikely to spend them quickly. Across-the-board cuts in personal income tax rates overwhelmingly benefit upper-income households, while corporate rate cuts direct funds to profitable corporations but offer no incentive for these businesses to boost investment or production in the near term.

· Extending the 2001 and 2003 tax cuts would have virtually no stimulus effect, since it would not put a dollar in anyone’s pocket until 2011. Meanwhile, it would substantially worsen the nation’s budget outlook, likely damaging the economy in the long run and possibly even depressing investment in the short run if it caused long-term interest rates to rise.

· If policymakers want to use the tax system to provide economic stimulus, rebate checks targeted to low- and moderate-income households are among the best available options. Contrary to a common misconception, the available evidence indicates that the rebates delivered to households during the 2001 recession were reasonably effective at boosting demand and stimulating the economy.