Tags: US | Obama | Tax | Breaks | Impact

Obama's Tax-Break Plan Is Seen As No Quick Cure

Wednesday, 08 September 2010 08:14 AM

Even if they were enacted soon, President Barack Obama's proposed tax breaks for businesses would hardly be a quick fix to rejuvenate hiring or the economy, analysts say.

And what little benefit they might provide wouldn't likely emerge until next year at the earliest.

Until businesses feel more confident about their own sales and the durability of the recovery, they won't be inclined to expand operations or add to their payrolls, economists note. Big companies can already borrow at low rates, and they generally aren't doing so.

"If you are a company and you are unsure whether you should go ahead and make a big investment, the tax benefit isn't going to make you more likely to spend in the next six months," said James O'Sullivan, global chief economist at MF Global.

Pat Hemlepp, a spokesman for American Electric Power, one of the nation's largest utilities, suggested that the tax incentives wouldn't deliver much of a boost to major utilities. Power plants and transmission lines take years to develop and approve, Hemlepp said.

"Anything that we'd be investing in for 2011 was approved years ago," Hemlepp said. "It's not like we're going to be able to round up some projects at the last minute because of the tax credit."

At the heart of Obama's plan: accelerating write-offs of investments in plants and equipment and expanding a tax credit for research and development. In a speech Wednesday in Cleveland, Obama plans to call for an additional $50 billion in government spending to bolster roads, railways and runways.

All told, the provisions are modest compared with the $814 billion stimulus package of tax cuts and increased government spending that Obama signed into law last year. At most, economists said the tax breaks, if enacted, might create tens of thousands of jobs late next year. That would do little to recoup the 7.6 million net jobs lost since the recession started in December 2007.

Barring further relief, the jobless rate, now at 9.6 percent, could creep back up to 10 percent or slightly higher by the end of this year or early next year, economists said. Even with the business tax breaks, the jobless rate is likely to stay high, they said.

And even in 2011, the tax breaks would boost economic growth only negligibly, some economists say. The Federal Reserve expects the economy to grow between 3.5 percent to 4.2 percent next year. Coming out of a severe recession, growth must be far stronger — at least 5 percent annualized — to sharply drive down unemployment.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, thinks the tax breaks could add up to half a percentage point to growth in 2011. If borrowing costs remain ultra-low, the boost from the tax breaks would be slight, he said. That's because companies can finance additional capital spending with cheap loans.

"The tax breaks won't be a game-changer," said Mark Zandi, chief economist at Moody's Analytics. "They won't turn the economy around or the jobs situation around in the next six months. But they should provide some help to the economy, especially in the second half of 2011."

Under one tax break, businesses could write off the full amounts of their investments in plants and equipment in the first year they are made. Current law requires that such deductions take place over three to 20 years. The tax break would be retroactive to Sept. 8 of this year and extend through 2011.

At companies that make machinery, machine tools, high-tech goods and other capital equipment, the tax breaks might provide modest help. That, in turn, could lead to hiring. Companies already intending to build a plant or modernize an existing one might be encouraged to do so.

Richard Hastings, a strategist with Global Hunter Securities, said tax breaks for capital improvements might encourage retailers to intensify their focus on technological efficiencies, a trend that's grown since the Great Recession began.

Retailers have invested in technology and software to help decipher consumer spending data and more efficiently mark down merchandise and tailor price reductions to local markets. Tax breaks could encourage merchants to upgrade their stores, Hastings says.

Still, Hastings doesn't foresee the kind of big-scale expansion or remodeling that would trigger substantial hiring, so long as shoppers restrain their spending.

"Will it be a national game-changer to change the job situation?" Hastings said. "Marginally, yes, but substantially, no."

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Even if they were enacted soon, President Barack Obama's proposed tax breaks for businesses would hardly be a quick fix to rejuvenate hiring or the economy, analysts say.And what little benefit they might provide wouldn't likely emerge until next year at the earliest.Until...
Wednesday, 08 September 2010 08:14 AM
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