The Bush Administration and House leaders Democrat Nancy Pelosi and Republican John Boehner reached an agreement on January 24, 2008 regarding a stimulus package. This stimulus package includes tax relief targeted at both businesses and individuals. As discussed below, the Senate may well have additional individual and business provisions before legislation is passed.

Business Incentives

The package will provide for bonus depreciation equal to 50% of the cost of new equipment placed in service in 2008. Additionally, for 2008, the limit on Section 179 expensing will be increased from $125,000 to $250,000. It appears that Section 179 expensing would continue to phase out dollar for dollar by the amount by which the cost of Section 179 property placed in service during 2008 exceeds $500,000. Thus, for example, if a business places $500,000 worth of purchased depreciable equipment in service in 2008, it would be eligible to expense $250,000 in 2008 as a Section 179 expense and take a $125,000 bonus depreciation expense (50% of the remaining $250,000), resulting in a 75% write-off of the cost of the equipment in one year. These business provisions have an estimated federal cost of $150 billion.

For those businesses active in Tennessee, this package could have Tennessee excise tax implications as well. While Tennessee's excise tax is generally based on federal taxable income, with certain adjustments, the Tennessee Legislature has routinely elected not to adopt bonus depreciation and has instead decoupled from the federal statutes, only allowing standard depreciation and not the bonus depreciation. With respect to Section 179 equipment expensing, Tennessee has typically mirrored federal treatment. The Center on Budget and Policy Priorities estimates that the proposed bonus depreciation would cost the State of Tennessee approximately $124,000,000 and that the Section 179 amendment would also likely result in an undetermined amount of lost revenues to the state. The Tennessee Legislature is currently in session, but tax legislation is generally not proposed until later in the session. Thus, it remains to be seen how Tennessee will react to the proposed economic stimulus package.

Individual Benefits

The package will cut the 2008 rate of tax from 10% to 0% on the first $6,000 of taxable income for individual tax payers and the first $12,000 of taxable income for couples. This will result in rebates of up to $600 for individuals and $1,200 for couples. Additionally, individuals with no taxable income would be entitled to a minimum of $300 if they earn at least $3,000 of income. The cash rebates begin to phase out with respect to individuals with taxable income in excess of $75,000 and for married couples with taxable income in excess of $150,000. Everyone eligible for the cash rebates would receive an additional $300 per child. The rebate provisions have an estimated cost of $100 billion.

In order to bring additional liquidity into the home mortgage market, the House package will increase the maximum loan eligibility for Fannie Mae and Freddie Mac from $417,000 to up to $625,000 and for 2008 the Federal Housing Administration from $362,000 to up to $725,000 in expensive areas of the country. This will enable certain jumbo mortgages to be refinanced on much more favorable terms as well as inject liquidity into this segment of the mortgage market.

Senate Stimulus Package

The Senate Finance Committee has started hearings on a stimulus package and may to have additional provisions in its package, including increasing unemployment insurance and food stamp benefits as well as additional business incentives. The Senate Majority Leader, Harry Reid, has indicated state relief and infrastructure investment may also be part of the Senate package. Legislation is expected to be finalized and enacted by mid-February.

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