Tax bill passes; rate cuts, depreciation, state grants may aid construction
This morning Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003. The President is expected to sign it promptly. The bill contains immediate reductions in individual tax rates, depreciation, dividends and capital gains, and also sends $10 billion to states and local governments that can be used for infrastructure or other spending, plus $10 billion for medicaid. Unlike the Senate version, the final bill contains no revenue raisers. Of specific benefit to construction, the bill cuts individual tax rates retroactive to January 1, 2003; reduces the tax on both dividends and capital gains to a maximum of 15% starting in 2003; expands the 30% bonus depreciation to an immediate write-off (expensing) of 50% of the cost of new equipment bought after May 5, 2003 and before January 1, 2005; and permits firms that buy up to $400,000 of equipment to expense $100,000 in 2003-2005 (vs. limits of $200,000 and $25,000 under current law). To fit within the Senates cap of $350 billion of relief, the bill sunsets many of these provisions after a few years.
The bill should have a substantial impact on personal, corporate and state budgets in the remaining 7 months of 2003 and in 2004. The IRS will post new withholding tables on its website the day the President signs the bill and will send checks totaling $14 billion to approximately 25 million families over a period of three weeks beginning in mid-July, the Treasury announced yesterday. Treasury estimates the calendar 2003 effect of the bonus depreciation and small-business expensing provisions at $23 billion and the entire 2003 impact of tax changes alone at $109 billion, plus the state and local grants. The Congressional Joint Committee on Taxation staff estimates the bill will result in tax and spending changes of $210 billion through September 2004 and $82 billion the following fiscal year. Thus, the short-run impact of the bill could be even bigger than the President had proposed. A separate bill that should reach his desk for signing within the week will provide $6 billion this year in extended unemployment benefits.
The impact on states will be mixed. The $20 billion in medicaid and other relief over 18 months will offset a portion of the combined $85 billion estimated shortfall states are facing in the coming fiscal year. But states that follow federal definitions of income will find their revenue hurt by the depreciation and expensing changes as they were in 2001. As a result an increasing number of states have decoupled from federal rules.
State and federal deficit estimates keep growing. Todays Wall Street Journal reports, Harley Duncan, executive director of the Federation of Tax Administrators, says states personal income-tax collections for the pivotal month of April were well below projections in all 41 states with income taxes, except for Michigan where the forecast was low to begin with. The monthly Treasury budget statement for the 7 months of fiscal 2003 through April, released last Monday, showed the federal budget heading toward a record even without the tax and unemployment bills.
But there has been no impact on interest rates so far. Yesterday Freddie Mac announced that its weekly averages for 30-year, 15-year and 1-year adjustable mortgages again set record lows. Mortgage refinance applications neared a record high last week, the Mortgage Bankers Assn. of America announced Wednesday.
In corporate news relevant to retail construction, Lowes and Home Depot confirmed this week that they still intend to open 130 and 200 new stores, respectively, in 2003. Federated Department Stores said yesterday that it will spend $100 million on renovations. But Gap Inc., which expanded its square footage under Gap, Old Navy and Banana Republic signs by 1% last quarter compared to a year ago, plans to shrink square footage by 2% in the next year, closing 80-90 of its 4,241 stores.
Federal Reserve Board Chairman Alan Greenspan warned in testimony to the Joint Economic Committee Wednesday that the shortage of natural gas supplies and long-term problems related to gas production have led to "a very serious problem" for the economy. Last Friday Energy Secretary Spencer Abraham told the National Petroleum Council that officials "cannot wait until the late fall to take action" regarding the "looming challenges we face with respect to natural gas." An increasing percentage of electricity is generated by natural gas and a hot summer would push up demand for power in the south and west. Such demand, in turn, would reduce the supply available to northern and eastern utilities to rebuilding inventories for next winters heating season. Natural-gas contracts for June delivery closed at $6.21 yesterday, roughly double the year-ago level. In contrast, crude oil closed at $28.85, up 10% from a year ago. The Energy Information Administration reported Monday that the average on-highway diesel fuel price fell 0.1 cent this week to $1.443 per gallon, while the average gasoline price rose for the first time since March, to $1.498, up 0.7 cents from last week.
Copyright © 2002 Mike Holt Enterprises,Inc.