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Home Columns Money & Taxes Stimulus You Can Use
Stimulus You Can Use Print E-mail
By Greg Mermel, CPA | Money & Taxes   
6:00 PM, Feb 26, 2009
The recent economic stimulus package really has two parts. The first is direct stimulus: spend money on infrastructure, education, medical research, aid to state government, and so on. None relates to the arts, except for some increased funding for the National Endowment for the Arts.

The second part involves tax cuts. “Trickle down economics,” this was called during the Reagan years, and, yes, we all made the obvious urinary and STD jokes about the phrase back then. It mostly involves the usual Republican nostrums of increased depreciation deductions for business (yawn), credits for hiring the unemployable (wrapped in procedural red tape) and a complex provision that will let Chrysler and General Motors do debt-for-equity swaps without creating a tax liability.

Buried in there, however, are a few interesting ideas that are not overtly arts oriented, but which may affect people in the arts this year.

Unemployment Compensation

Once upon a time, unemployment compensation was not subject to income tax. The theory held that the money was coming from government, anyway, so taxing it would merely move money from one part of government to another. Eminently reasonable, I thought.

In the late 1970s, unemployment compensation was made partially taxable, but only for those recipients who otherwise had a middle-class income that year. Economically, it was a tax increase labeled as something else.

Then Reagan took office, and the idea that “people were getting paid for doing nothing” led to all unemployment compensation being made taxable. Call it what it was: a way of cutting unemployment benefits without starting riots.

Now the old concept is beginning to creep back. For 2009, the first $2,400 of unemployment compensation received by a taxpayer is not taxable.

Call It Progressive

A bedrock concept of U.S. income tax policy has always been progressive tax rates: currently 10 percent on the first $X of taxable income, then 15 percent on the next $Y, 28 percent on the $Z following that, and so on up to a top nominal rate of 35 percent. That is the theory.

Reality is a bit different. The U.S. government extracts not one but three taxes from your paycheck that are based on income: federal income tax, Medicare tax and Social Security tax. Federal income tax is progressive. Medicare tax is a flat tax (1.45 percent of your entire income) so it is neutral. But Social Security tax is regressive: 6.2 percent on the first $106,800 during 2009, then nothing.

If you combine the three taxes, the effective tax rate is progressive only up to the Social Security maximum. It then takes a sharp tick downwards before creeping back up to a maximum rate only a smidgen higher than the first peak.

Fixing this tick was a pet proposal of Sen. Daniel Moynihan (deceased gadfly, NY) in the early 1990s. This, along with his advocacy of bipartisanship, seem to have finally sunk in with some folks in government. The new law nibbles away at the progressive problem by giving most taxpayers an income tax credit for the first $400 of Social Security tax paid.

Selling What People Aren’t Buying

Cars and homes are not selling right now, so the stimulus bill contains tax-based incentives, trying to induce people to buy.

Last year, the Bush administration put through a credit of $7,500 for first-time home buyers—only it was not really a credit. The money had to be repaid, without interest, over 15 years. This was apparently not enough to tip the balance for many on the edge of buying or not. That’s perhaps just as well: subsidizing marginal buyers with a payment that will increase in a couple of years is eerily like making sub-prime loans.

The new bill raises the amount to $8,000 and eliminates the need for repayment if you stay in that home for at least three years. That is somewhat better, but I think it misses the real problem. Anybody for whom $8,000 is make-or-break on a home purchase probably cannot qualify for a mortgage right now, especially as the money will come back in April 2010, and not in time to be part of the down payment.

The car industry long ago swept past the cash-back rebate phase into deep desperation. The stimulus bill provides the wild and wacky idea of subsidizing car sales by making the sales tax deductible “off the top,” that is, without needing to otherwise itemize deductions. Let’s do the math: $20,000 car, 11 percent sales tax if you live in Chicago, 15 percent tax bracket equals $330 tax savings. Oh, yeah—that’ll sell cars.

Best for Last

One of the plan’s best features starts to address the paradox inherent in COBRA: we make health insurance available to those between jobs, but they are the people least likely to be able to afford the premiums. Under the new bill, the government will reimburse employers for 65 percent of the cost of the first nine months of COBRA coverage for those “involuntarily terminated” from their jobs after Sept. 1, 2008.

That doesn’t just cover auto workers or Washington Mutual branch managers. “Involuntarily terminated” can equally mean “my show closed and I don’t have a day job.” If you did not elect COBRA at the time because you couldn’t afford it, you now have until April 17, 2009 to reverse that decision.

There is some paperwork involved, and the details are a little vague as I write. But if you are eligible and interested, contact your former employer or the union health plan now.

Be A Bit Patient

None of these changes will be reflected in the 2008 income tax returns which you will soon (or maybe not so soon) file. Most of the stimulus features apply only to 2009, or to 2009 and 2010, though I think some of them will be expanded, extended and made permanent over the next few years.

Free for the Asking

If you want a free copy of my “Checklist of Potentially Deductible Items...” for those in the arts, just call my office, or send an email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area) or e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Greg Mermel (www.gregmermel.com) is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.
 

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