Congress Strikes $789 Billion Stimulus Deal

By GREG HITT and JONATHAN WEISMAN WASHINGTON -- Congress and the White House reached accord on a $789.5 billion economic-recovery package, moving swiftly toward compromise on a plan President Barack Obama says is needed to stem the decline in the U.S. economy. Final votes are expected late this week on Capitol Hill. The agreement came late Wednesday after last-minute dickering over education and school-construction funds that dramatized the intensity of negotiations. The House and Senate convened a conference committee to bless the legislation and clear the way for action beginning in the House as early as Thursday. Both chambers are expected to pass the compromise, though an earlier version passed the Senate with just one vote to spare. About 35% of the plan is dedicated to tax cuts for businesses and individuals. The rest is spending, including expanded unemployment benefits, food stamps and construction of highways and bridges, water-treatment facilities and high-speed Internet service, among other things. View Full Image European Pressphoto Agency Senate Majority Leader Harry Reid (center), speaks at a press conference with Republican Sen. Susan Collins (left), Democratic Sen. Max Baucus (second from left), and Republican Sen. Arlen Specter. The bill would give more aid for middle-class families and workers who lose their jobs, including fresh subsidies for health insurance. Businesses would get a range of incentives for new investments. Small businesses with revenue of under $5 million a year would be able to use current losses to reduce taxes paid over the past five years. But companies that haven't paid taxes during the past five years lost a tax break the Senate and the president wanted to give them. The Senate plan would have allowed them to use tax credits, such as the renewable-energy production credit, to claim tax refunds from past tax years even if they hadn't paid taxes. Certain middle-class households that currently aren't hit by the Alternative Minimum Tax -- designed decades ago to make sure the rich didn't escape taxation -- will remain shielded from that levy. The bill contains $70 billion to ensure that. But a separate tax break for the middle class and working poor is now less generous than the president wanted. Home buyers who hoped for a $15,000 tax credit to buy a new home, as promised by the Senate, will be disappointed. A $35 billion tax credit to support home sales was jettisoned in favor of a more modest $2 billion to $3 billion proposal, which would eliminate the repayment requirement in an existing $7,500 tax credit for first-time home buyers. Consumers who had hoped for a big tax break for buying a new car also will find little cheer in the final bill. An $11.5 billion tax break proposed by the Senate is now down to just $2 billion, with tighter limits on who qualifies. People who've lost their jobs in the recession would get assurance their jobless benefits will be extended at least an additional 20 weeks, and they could get an additional 13 weeks in states with high unemployment. They could also qualify for a new federal subsidy to buy into their former employer's health plan. Poor Americans, threatened by state cuts to Medicaid, would get an $87 billion lifeline from the plan. Some jobless Americans could find work building roads, bridges, and transit systems that will be financed by about $40 billion that is targeted for those kinds of projects. There will be billions more for water projects. The new stimulus plan is more tilted toward tax relief than Mr. Obama's original one. It's raising sharp questions about whether all the compromising to trim costs and hold onto a fragile coalition in the Senate could undermine Mr. Obama's main goal: saving or creating four million jobs over the next two years. "It's a good plan, but I don't think it's good enough," said Mark Zandi, chief economist at Moody's Economy.com, who crafted the economic models used by the White House and congressional Democrats to project the economic boost of the plan. "Three million additional jobs are doable and likely; four million I think will be a stretch." Alan Blinder, a Princeton University economist and former Federal Reserve vice chairman, lamented some of the changes, especially cuts to proposed health-insurance subsidies that were made to make room for the AMT provision and the business tax break for past payments. Mr. Blinder said the bill will undoubtedly be a boost to the economy, but not as big a boost had the negotiators not made so many compromises. In the final horse-trading, the White House agreed to trim a payroll-tax holiday and reduce proposed aid to ailing state governments, among other things President Obama, speaking at a construction site in Springfield, Ill., hailed progress on "this endeavor of enormous scope and scale." The proposed package includes less direct aid to states than Mr. Obama had proposed. An example is a "stabilization fund" intended to help cash-strapped states avoid budget cuts that might worsen joblessness. Funding for it would be set at $44 billion, under one version of the plan under discussion, according to people familiar with negotiation. That's somewhat higher than the Senate bill provided but more than $30 billion less than the figure approved by the House and endorsed by Mr. Obama. With a $87 billion federal infusion to help pay for Medicaid, states will get a boost. But with total budget shortfalls of at least $350 billion projected over the next two years, state governments will still have to cut deeply, according to economists at the Center for Budget and Policy Priorities. A dollar sent to a state government to stave off cuts in services or layoffs yields a $1.38 economic boost, according to models used by the White House and Congress to calculate economic benefit. By contrast, the bill's inclusion of a measure to slow the expansion of the Alternative Minimum Tax will yield only 50 cents of stimulus for every dollar of avoided tax, the models predict. At the same time, Congress and the White House have decided to preserve the measure -- supported by an influential group of moderate Republicans in the Senate -- that would shield millions of middle-income Americans from the AMT. For years, Congress has passed a one-year AMT "patch." As a result, consumers take it for granted that the tax will be held at bay, Mr. Zandi said. Lawmakers from both parties wanted to keep the patch measure in the stimulus package rather than pass it separately later in the year. Its inclusion crowded out other projects the White House and congressional Democratic leaders had pushed for. Among other things, Mr. Obama's "Making Work Pay" tax cut -- a payroll tax holiday for workers -- was scaled back, under the framework. The package would set the value of the benefit at $400 for individual workers, down from $500, and $800 for couples, down from $1,000. The package would also broaden the reach of the child tax credit, lowering the minimum income required for workers to qualify for the credit to $3,000. Under current law, the minimum income threshold was $8,500 for 2008 and is scheduled to rise to about $12,000 for 2009, congressional aides said. The compromise preserves $1.1 billion for a national "comparative effectiveness" study of health-care practices to try to determine the best treatments, devices and procedures for almost any ailment or disease. That information would then be disseminated to physicians nationally, perhaps on new medical computer systems also being funded. Breaking It Down: Some key elements in the package include: Tax cuts: $276.3 billion Payroll tax credit: $400 for low- and middle-income workers, $800 for couples First-time home buyers: No repayment requirement for a $7,500 credit New car purchases: Limited tax breaks on loan interest and sales taxes Health insurance: Extra assistance for the unemployed, subject to an income cap Health technology: Physicians would get bonuses of as much as $64,000 if they show they have computerized their medical-records systems. Medicare payment penalties for physicians and hospitals who aren't using electronic health records by 2014. Small businesses: Unprofitable firms with annual receipts of less than $5 million can recoup taxes paid in the past five years, up from two. Advocates of the study, including the president, say it will improve health care in all corners of the country and bring more uniformity to treatments. But conservative opponents have warned that it's the first step toward a government prescription to doctors of what they can and cannot do for their patients. Democratic aides are bracing for Republican attacks on the measure, but White House and House negotiators have stood by it. The president's proposal to subsidize private insurance for people who have been laid off, through the federal Cobra plan, survived after difficult negotiations on the issue. Under the roughly $20 billion plan, workers who lose their jobs could receive a subsidy equal to 60% of their insurance premiums, for nine months. But a proposal to allow states to expand Medicaid for the unemployed disappeared, according to people familiar with negotiations. Businesses would benefit from incentives intended to spur investment, and more generous proposal, pushed by Sen. Max Baucus (D., Mont.) that would create tax incentives to encourage businesses to shed debt. The proposal would allow companies to defer taxes for five years on transactions aimed at restructuring balance sheets; the taxes would have be repaid slowly over the following five years. The provision applies to a wide array of transactions, not just cash for debt, as was the case in the original Senate bill. The accord is a major win for the high-tech industry, which will receive billions of dollars in subsidies to expand broadband access to rural and other underserved areas and a huge infusion of funds to computerize health care records. In all, $19 billion is set aside for health information technology. Physicians would get bonuses of between $44,000 and $64,000 -- and hospitals would get as much as $11 million -- if they show they have computerized their medical-records systems. On the stick side of the equation, the measure includes Medicare payment penalties for physicians and hospitals who are not using electronic health records by 2014. White House efforts to restore other assistance to hard-hit state and local governments had only partial success. The size of the package accords closely with Mr. Obama's original $775 billion target and is significantly scaled back from the $930 billion package under consideration last week in the Senate. The package's overall size meets a condition set by a small group of Republican senators who broke with the Republican Senate leadership and voted for the upper chamber's bill late last week. Their support will be crucial when the compromise comes back for a vote in the Senate, where Democrats need the votes of all 58 senators from their own party, plus at least two Republicans. "Each and everyone of us wishes we weren't here," said Rep. David Obey (D., Wis.) at the start of the conference committee to bless the legislation and clear the way for action final passage. "Instead, we are confronted with reality. The reality is that this economy has been sending [signals] for a long time, that we are in dangerous territory." —Corey Boles contributed to this article. Write to Greg Hitt at greg.hitt@wsj.com and Jonathan Weisman at jonathan.weisman@wsj.com