Key Findings

• With the economic slowdown creating budget gaps in many states, now is the appropriate time for them to tap the “rainy day” reserve funds they have set aside for just such a contingency.
• Most states have sufficient rainy day funds to reduce the amount of spending cuts or tax increases that would be needed to balance their budgets in the near term.
• Unlike spending cuts and tax increases, which worsen a downturn by further reducing overall demand, tapping a state’s reserve fund helps maintain overall demand by injecting savings into the economy.
• States concerned that the downturn could be deep and prolonged should respond not by hoarding their reserves but rather by devising a multi-year plan to address recession-induced budget problems.

Key Findings:

• States facing deficits due to the current economic downturn should avoid spending cuts that can further weaken their economies.
• Raising taxes, especially on wealthy households, is less economically damaging than cutting many types of services.
• To fill budget gaps, states should consider enacting temporary income tax surcharges.
• Nationwide, over $13 billion could be raised if every state with a personal income tax enacted a 1 percent rate increase for high-income taxpayers. An across-the-board surcharge equal to 5 percent of taxes owed could raise a similar amount.
• If enacted quickly, revenues from a surcharge could help states close gaps in their current year budgets.

Key Findings

The President’s 2009 budget provides $20.5 billion less for domestic discretionary programs outside homeland security than is needed simply to keep pace with inflation. In many areas, the cuts come on top of sizable cuts made in recent years. Examples of the proposed funding levels include (all figures adjusted for inflation):

• K-12 Education — 9.1 percent below its 2004 level;
• Head Start — 12 percent below its 2002 level;
• Repairing and Modernizing Public Housing — 45 percent below its 2001 level;
• Low-Income Energy Assistance — 22 percent below its 2008 level;
• Environmental Protection — 26 percent below its 2001 level.

These cuts would directly affect millions of Americans. The President’s budget documents, for example, show that the number of children with child care assistance would fall by about 200,000 between 2007 and 2009 under his budget.

Many of the cuts would hurt state budgets as well, by reducing support for a range of public services states help provide.

Key Findings

• Under a requirement enacted in 2003, the President is supposed to propose this year, and Congress is supposed to consider, legislation that would keep general revenues from covering more than 45 percent of total Medicare costs through 2013.
• While Medicare faces serious long-term financing challenges, this 45-percent limit is not a legitimate measure of Medicare’s financial health, since Medicare was designed to be financed in substantial part by general revenues (as well as by payroll taxes).
• The 45-percent limit effectively forecloses certain options for strengthening Medicare financing, such as a broad Medicare reform plan that includes measures to close part of Medicare’s financing gap by curbing abusive corporate tax shelters or scaling back tax cuts for the wealthiest Americans. Under the 45 percent limit, Congress’s options would be limited to raising regressive payroll taxes and beneficiary premiums and cutting benefits and payments to health care providers.
• A combination of measures — including added general revenues, as well as reforms in Medicare and the broader U.S. health care system — will likely be needed to address Medicare’s financing problems. The 45-percent trigger significantly complicates that effort by taking important reform options off the table.

Key Findings

• Rep. Charles Rangel’s proposal to replace the Alternative Minimum Tax with an income tax surcharge meets the criteria for tax reform. It would be simpler and more progressive — and likely more economically efficient — than the current AMT.
• The surcharge would affect only a small minority (about 3 percent) of households, all of them high income. It would be indexed to inflation, so it would never grow to affect the middle class.
• The proposal would reduce taxes for low-, middle-, and upper-middle-income households. It would scale back the 2001 and 2003 tax cuts for high-income households but still leave them with sizable net tax cuts. (Households with incomes over $1 million would still get an average tax cut of $21,000 in 2008, for example.)
• The proposal is also revenue-neutral, so it would add nothing to the deficit. In contrast, the proposal to repeal or sharply reduce the AMT without paying for it could add as much as $2 trillion to deficits over the coming decade (2008-2017). For this reason, the Rangel proposal would likely be better for the economy.

Key Findings

• In December, the President signed Head Start reauthorization legislation which had broad bipartisan support.
• The legislation called for expanding the number of low-income children served in the program and for new investments to raise the quality of the program.
• Two weeks after this legislation was enacted, the omnibus appropriations bill was completed. That legislation cut Head Start funding.
• Head Start funding in 2008 is 11 percent below the 2002 funding level adjusted only for inflation.
• Head Start is only one example of a broadly supported program that has been cut often in recent years because overall funding for domestic appropriated programs has been insufficient.

Key Findings

• The stimulus package passed by the Senate Finance Committee would provide additional weeks of unemployment benefits to jobless workers who are finding it difficult to find new jobs in this weakening economy.
• A broad range of economists agrees that providing unemployed workers with extended UI benefits is one of the most effective of all available tax and spending options for stimulating the economy, since these workers, struggling to make ends meet after losing their paychecks, are likely to spend these benefits quickly
• Extended UI benefits also meet the important stimulus criteria of being timely and temporary. They can be paid out almost immediately to workers who have run out of regular UI benefits — unlike tax rebates, which cannot begin to be paid until late May.
• Long-term unemployment rates are significantly higher today than just prior to the recession in 2001. More than one in every six unemployed workers who is searching for a job has already been out of work for at least 26 weeks. This suggests that many workers are having a particularly difficult time finding new jobs and that extended unemployment benefits will provide important relief to them.

Key Findings

• HOPE VI aims to rebuild severely distressed public housing, improve economic conditions in the surrounding neighborhood, and help very poor families progress towards self-sufficiency, but the human side has been its weakest component. A House bill reauthorizing the program will improve housing outcomes for residents of public housing that undergoes HOPE VI redevelopment and provide new opportunities for hard-to-house families. The bill also contains measures to help overcome employment barriers faced by very disadvantaged families, although these could be strengthened further.
• More than 100,000 of the public housing units slated to be demolished under the first 15 years of HOPE VI awards will not be replaced by other units affordable to poor families. The House bill would stem this loss of affordable housing, a critical change in light of the 20 percent increase in “worst case” housing needs since 2001, by requiring that all units demolished under future HOPE VI awards must be replaced, with narrow exceptions.
• The House bill also promotes, as part of any new HOPE VI awards, key goals such as: housing choice and deconcentration of poverty through mixed income redevelopment, location of off-site replacement housing in low poverty areas, and greater assistance for displaced families in using housing vouchers.

Key Findings

• 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.

Key Findings

• A fiscal stimulus package can be helpful if the economy goes into recession. It remains unclear, however, whether a recession will occur, and concern over the economy should not be used as an excuse for fiscally irresponsible tax cuts or other measures that permanently enlarge the deficit.
• Given the uncertainty about whether economic conditions will warrant fiscal stimulus, any fiscal stimulus measures enacted soon should be designed to take effect if a trigger — such as a decline in private employment over a three-month period as a whole — is pulled.
• To be effective, stimulus measures must be fast-acting and temporary. They also must be well-targeted to inject new spending into the economy quickly, which means they must focus on households that will spend, rather than save, the added income that the stimulus measures provide.
• Good candidates for effective stimulus include temporary increases in unemployment insurance, food stamps, and aid to state governments, and uniform tax rebates. In contrast, cutting income tax rates or taxes on capital gains or dividends, extending recent tax cuts after 2010, or new infrastructure projects would make poor stimulus candidates.

Key Findings

• The President has vowed to veto domestic appropriations bills — including the agriculture appropriations bill — that exceed the overall funding level he has proposed for those bills.
• The agriculture bill includes funding for the WIC program, which provides healthy foods and related nutrition services to low-income pregnant women and young children who are at nutritional risk.
• If WIC funding is reduced to the level the President’s budget proposes, the number of women, infants, and children the program serves will be cut by more than 500,000.
• Congress is now working on an omnibus appropriations bill that would split the difference between the levels the President seeks for the domestic funding bills and the levels Congress has approved. If Congress sets the WIC funding level half way between what the House has passed and the level the President proposed, the number of participants will be cut by more than 455,000. If Congress sets the level halfway between the Senate level and the President’s, the number of participants will be cut by 350,000.
• Research has found that the WIC program reduces low-weight births and child anemia and improves health and nutrition outcomes.