January 2009
Authors:
Patrick G. Heck patrick.heck@klgates.com
+1.202.778.9450
Cindy L. O’Malley cindy.omalley@klgates.com
+1.202.661.6228
Karishma Shah Page karishma.page@klgates.com
+1.202.778.9128
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As Congress returned this week, the debate on the economic recovery and other priorities began in earnest. While details remain fluid, some items are beginning to take shape. A number of meetings were held this week by tax-writing committees. In addition, advisors to President-elect Obama were on Capitol Hill today to discuss the recovery package. Formal action is unlikely to begin until after the inauguration.
Stimulus proposals continue to proliferate. Bonus depreciation and small business expensing are likely candidates for inclusion in the stimulus package. The package is also likely to include some form of middle class tax relief, possibly in the nature of a payroll tax credit.
One element of President-elect Obama’s stimulus proposal, the New Jobs Tax Credit, is receiving particularly skeptical reviews, even among the former Senator’s Democratic colleagues. Under the proposed one-year tax credit, businesses would receive a $3,000 tax credit for every job created or preserved.
The proposed credit is based on the New Jobs Tax Credit (NJTC) that was one of the four programs in the 1977 economic stimulus package. The NJTC was available to eligible taxpayers in 1977 and 1978. The NJTC provided a tax credit equal to 50 percent of the first $6,000 of wages per employee for increases in employment of more than two percent over the previous year and only if the total wages for the year were more than five percent above the total wages for the previous year. The program did not distinguish among workers by their skill or unemployment status. However, the subsidy for private employers to hire low-wage workers was a higher percentage of total wages for less skilled workers. The measure also had a number of limitations.
First, the credit was limited, with certain exceptions, to $100,000. Second, there was a limitation on the credit for new or rapidly expanding businesses.
Although the President-elect’s proposed credit is similar to the 1977 NJTC, it differs in some important respects. First, the President-elect is proposing to make the tax credit refundable so that businesses without taxable profits can utilize the program. Second, the proposed tax credit apparently would be less generous probably in an effort to keep costs down. Third, President-elect Obama would like to extend the credit to employers who “preserve” jobs. It remains unclear, however, how a credit to employers who
“preserve” jobs would be structured or implemented.

Lawmakers have also indicated that they would like the stimulus package to include a stronger focus on energy tax policy than taken in the Presidentelect’s stimulus proposal. The House and Senate, however, have disparate ideas on energy tax policy.
Consequently, the staff has indicated that the time needed to resolve those differences might make it difficult to include a robust energy compromise in the stimulus package.
Nevertheless, there seems to be some agreement to extend the placed-in service date for the section
45 production tax credit and to authorize additional monies for new clean renewable energy bonds
(CREBs) to fund facilities that generate energy from renewable sources. Tax-writers may also include a measure to make existing energy tax incentives more usable, such as allowing taxpayers to carryback credits, similar to net operating loss (NOL) carrybacks. There is some question about whether a carryback-type approach would be as effective as providing for refundability or tradeability.
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