We have all heard about the debate regarding the percentage of the Obama Stimulus Bill that is tax cuts as opposed to expenditures. Originally, there was discussion that it should be up to 40% of the total of the bill. There were arguments because it had slipped to 33%. In the final package, I don't see much at all in the way of real cuts -- certainly not tax cuts that will stimulate the economy in the near future.
Clarity in tax laws is what affects the economy, even with higher taxes. For example, last week California cut a ridiculous budget deal that had really clear tax increases, which are sure to slow the economy. The four points – raising the sales tax 1%, raising the gas tax 12 cents per gallon, raising the car license fee from .65% to 1.15%, and putting a surge charge of 2.5% on taxpayer's tax bills for the next couple of years are all calculable and predictable. You know that when buy gas or pay your annual car fee, you are going to get hit for more taxes. When you buy a TV for $1,500, you can plan for $15 extra in sales tax.
With the elements of the Stimulus Bill related to taxes, I cannot tell you when or if there will be benefits that actually materialize. For individuals, a large portion of the tax savings is a one-year correction to the tax code to limit tax hitting about 70 million Americans with the Alternative Minimum Tax (AMT). Allowing for the fact that only one person in a back office on the fifth floor of a very large building in Washington actually understands the AMT, how are these 70 million Americans going to know that they saved taxes from a tax they never knew existed? How are they going to quantify how much they are saving? Even if they could figure out what they are saving are they now going to go out and spend this mystery savings? Even if they knew about these savings, they would not happen until March or April 2010. So much for this "tax cut" being a stimulus.
Almost every other tax cut aimed at individual taxpayers will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. A new credit called "Making Work Pay Credit" has been added to the maze of credits that already exist and deeply confuse tax preparers. Maybe it is the planned counterbalance to the expansion of welfare in the spending part of the bill. This credit, combined with expansion of the Child Tax Credit, Earned Income Credit and another new higher education tax credit, will not appear until next tax season if these credits appear at all. Regarding the last credit, there are already a myriad of ways people can benefit from spending on higher education, I am not sure how this helps.
Since most people don't qualify for these credits because their incomes are too high, only a small portion of the populace will ever see benefit from these credits. What these will do is encourage more fraudulent tax returns being filed to take advantage of these refundable credits. The only way that most people will get any benefit is because this Obama Stimulus Bill is so inept their incomes may now qualify at the lower levels. At least Californians will be able to get benefit from an offset for their higher sales tax rates because there is a new deduction for sales taxes paid on the purchase of new cars. This falls under the definition that "the Lord giveth and the Lord taketh away." That is if the new deduction does not qualify the taxpayer for the AMT tax, thus eliminating any benefit. It is all so very complicated and unclear.
If you run a business, the tax benefits are even more cosmic. There is an extension of increased depreciation deductions for fixed assets purchased (forklifts, computers). This is a real benefit that I have seen for my clients this year. If you are not expanding your business and you are not buying capital assets, what benefit is this going to do for you? Maybe this will excite a few businesses, but until next year little will be changed in purchasing patterns. Also, there is an expansion of the time to carryback the losses you are incurring in your business to prior years and recoup taxes paid in those years. This will benefit very few businesses. Many will decide tax returns that are past the period that the IRS can audit will not be wise to open up and allow the taxman to look at for three more years.
The list goes on. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear tax benefits. Of course, the $7,500 will only offset the inflated price for the vehicle because of the cost to make it a plug-in hybrid. So how are they better off?
Combine these nebulous tax reductions with the assured tax increases to occur next year (with the expiration of the Bush tax rate reductions) and you understand why the financial markets are not jumping for joy. As a CPA, I cannot effectively advise my clients what is coming for them in the near future. I can only say watch your wallets; there is more going to the government. So much for us getting a stimulus.