Bush Stimulus Plan Calls for More Tax Cuts

President Bush pledged Thursday to unveil an economic stimulus plan next week that sources said will be twice the size of what had been under consideration, and is likely to include such Democrat-backed measures as state aid to create jobs.

Sources said the plan will include a larger-than-expected cut in the tax on corporate dividends, $100 billion or more over 10 years in state aid, a generous extension of unemployment benefits, and probably a speedup of tax rate cuts for all but the very highest earners.

The plan appeared aimed at answering criticisms that the administration’s tax policies favor the wealthy. In remarks at his ranch near here, Bush expressed concerns that the package not be seen as a sop to the rich as Democrats have charged.

“I’m concerned about all the people,” the president said. “I understand the politics of economic stimulus -- that some would like to turn this into class warfare. That’s not how I think.”

Sources said the price tag on the new, enlarged White House package could run as much as $600 billion over 10 years. Most speculation to date has pegged the cost of the expected package at about $300 billion.

White House officials have apparently decided that the economy is sufficiently weak, and the political dangers to Bush sufficiently great, that they are brushing aside concerns about growing budget deficits in order to pay for the expanded stimulus plan.

Even without the stimulus plan, the deficit is expected to run $150 billion this fiscal year, according to the Congressional Budget Office.

The plan’s centerpiece will, as expected, be a sharp reduction in the tax on cash dividends that companies pay shareholders, which would inordinately benefit wealthy investors.

Indeed, sources said the White House has decided to call for completely eliminating the tax for individuals at a cost to the government of $300 billion in lost revenue over the next decade. Administration officials previously suggested that they would only seek to halve the tax.

Such a move could provide a major boost for the stock market, which is still struggling to rebound from the worst decline in a generation.

But in order to quiet critics and improve the proposal’s chances of congressional passage, sources said the administration will package the dividend tax cut with an aid package to the states, an unemployment benefit extension and other measures that would primarily benefit low- and middle-income households.

To give the nation’s still-struggling economy the maximum boost possible, White House officials want to “front-load” the plan, scheduling its tax cuts and spending hikes to take effect in the first few years of the program.

While it was previously believed that the president would seek an immediate injection of no more than $40 billion in growth-spurring cuts and spending increases in the first year, sources said he now plans to ask for double that, or more than $80 billion.

The new proposal would come atop Bush’s 10-year, $1.35-trillion tax cut Congress approved in 2001, and will not include money to fulfill the president’s pledge to make the previously approved cut permanent.

White House spokeswoman Claire Buchan refused to comment Thursday concerning the size or contents of the plan, saying Bush is “still reviewing his options.” The president is scheduled to unveil the proposal Tuesday during a speech in Chicago.

In finalizing the new package, Bush said that what he has uppermost in his mind are those without jobs.

“What I’m worried about is job creation. And I’m worried about those who are unemployed.

“I am concerned about those who are looking for work but can’t find work,” he told reporters during a Thursday tour of his Texas ranch.

“And so next week when I talk about an economic stimulus package,” he said, “I will talk about how to create jobs, how best to create jobs, as well as how to take care of those who don’t have a job.”

As for the overall economy, Bush expressed his hope that investors realize that the strength of the economy is especially noteworthy -- “given the fact that we have been through a recession and a terrorist attack, a breach of corporate confidence because of some malfeasance.”

Despite all that, the president marveled that “the economy still grows. That’s very positive.”

As outlined by sources, Bush’s larger-than-expected stimulus plan would carry several political advantages.

* It would show the president acting decisively to turn around an economy that, while not sinking, seems unable to regain its former snap.

* In doing so, the measure would help expunge the political shadow of Bush’s father, former President Bush, who won a popular war against Iraq only to lose his ensuing reelection bid, largely because of the public perception he paid insufficient heed to a deteriorating economy.

* By including state aid and unemployment benefits, the new White House package could help attract Democrats’ support in the narrowly Republican Senate.

* Finally, by relying primarily on tax cuts, the proposal would extend the president’s tax-cutting roll, and help keep anti-government conservatives in his camp.

But the new plan is sure to come under intense criticism.

A wide array of economists, for example, believe the dividend tax cut will do little to revive growth.

“The direction of the policy is right,” University of Michigan tax economist Joel Slemrod said. “The problem is the magnitude of the effect is going to be pretty small.”

And even at $100 billion over 10 years, the administration’s proposal for state aid could be dwarfed by states’ financial problems.

The National Governors Assn. said in November that states are facing their worst fiscal crises since World War II and are struggling to close $67 billion in budget shortfalls this year alone.

Sources said the administration’s state aid proposal would funnel assistance to state labor and employment security departments and link the amounts given to a state’s success at encouraging the creation of new jobs.

Details are still being worked out. In the past, states have used federal grant money to partially subsidize employers who add workers during slack periods.

While an income tax cut is generally considered good news for taxpayers, the effect of Bush’s proposal to speed up the reductions will vary dramatically depending on whether the president is able to accelerate overall rate cuts -- which would affect virtually every U.S. household -- or whether he’s only able to speed up or create special deductions and credits for any one of a number of targeted groups.

The administration appears to have settled on speeding up to this year already-approved income tax rate cuts scheduled to take effect in 2004 for all but top income earners, despite the fact that White House economists believe reducing the top rate would have the biggest effect in boosting the economy.

“If they accelerate that [2004] rate reduction, it could have a fairly immediate stimulative effect,” said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

According to sources, administration officials have said the price of the rate cut speedup is $13 billion, which is what independent analysts say is the cost of a speedup without the top rate.

The proposal would result in the current 35%, 30% and 27% rates falling by 1 percentage point this year instead of next. But it would leave the top rate at its current 38.6% until next year.

On unemployment compensation, sources said the president is expected to back a proposal similar to one hammered out in the Senate last month, which would have extended benefits for 13 weeks beyond their Dec. 28 expiration at a cost of $4.9 billion, rather than a more meager House measure.

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Gosselin reported from Washington and Chen from Crawford. Times staff writers Kathy M. Kristof and Terril Yue Jones contributed to this report.

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Bush’s economic stimulus plan

* Eliminates tax on corporate dividends paid by individuals. 10-year cost: $300 billion.

* Aids financially strapped states with funds designed to encourage local job creation. 10-year cost: $100 billion or more.

* Moves to this year already-approved income tax rate cuts scheduled to take effect in 2004 for all but the highest earners. Cost: $13 billion.

* Extends for 13 weeks unemployment compensation benefits that expired last week. Cost: $5 billion or more.

* Speeds up an already-approved increase in the child tax credit, from $600 to $1,000. Cost: unknown.

* Expands “expensing” of corporate capital spending to encourage business to invest now. Cost: unknown.