Deal on stimulus reached

WASHINGTON —  Hoping to jolt the ailing economy -- and counter criticism that Washington is too divided to come to Americans’ aid -- House leaders and the Bush administration reached a deal Thursday on a package of tax breaks and mortgage rules designed to put more money in consumers’ hands and stimulate business investment.

The centerpiece of the plan is a rebate of as much as $1,200 per household -- even more for families with children -- that could be mailed to most taxpayers as soon as late spring. The package also includes temporary tax breaks to encourage businesses to expand and create more jobs this year.

And in a provision crucial to high-housing-cost states such as California, there would be a significant one-year increase in the size of mortgages that could be backed by the government. That would make it far easier for homeowners to refinance into more affordable mortgages.

Economists said the package, meant to forestall or soften a feared economic recession, should provide a significant psychological boost to the economy. But it still might not be enough to prevent a slowdown.

“It is a nice shot in the arm,” said Peter Morici, a professor at the University of Maryland. “It reduces the likelihood of a recession, but doesn’t eliminate it. Overall, the slowdown will be less severe, but that doesn’t mean that the economy won’t still slow down.”

The move comes at a time when Americans are growing increasingly worried about the economic outlook. A Los Angeles Times/Bloomberg poll released today shows that 79% of respondents are convinced there will be a recession this year.

The cost of the economic stimulus package, some details of which remain murky, would be roughly $140 billion -- $100 billion for the rebates and $40 billion for the business tax incentives. Leaders have set a deadline of Feb. 15 for passing the legislation, although it remained to be seen whether the Senate would leave the deal intact.

Still, all sides hailed Thursday’s action as a stunning compromise between parties and branches of government that have been rendered largely dysfunctional by partisan differences.

“I can’t say that I’m totally pleased with the package, but I do know that it will help stimulate the economy,” House Speaker Nancy Pelosi (D-San Francisco) said. “And if it does not, then there will be more to come.”

At the White House, President Bush called the agreement “an effective, robust and temporary set of incentives.”

The stock market rose on the news, with the Dow Jones industrial average climbing 108.44 points, or nearly 1%. It was the second day of solid gains spurred by rising optimism about the effect that the stimulus plan and lower interest rates would have on the economy.

The deal was the second major initiative by the federal government this week to forestall a major downturn in the stock market and in the economy as a whole. On Tuesday, the Federal Reserve, which controls the government’s monetary policy, cut a key lending rate by three-quarters of a point in a surprise move designed to bolster the economy.

Congress and the administration control the other main lever of economic policy -- government spending and taxes.

The government’s plan fell into place after Pelosi decided to give up Democratic demands that the package include expanded spending on unemployment benefits and food stamps, which Republicans opposed. In turn, House Republican Leader John A. Boehner of Ohio agreed that even workers who earned too little to pay taxes would receive a check, a key Democratic demand.

“Democrats gave something, Republicans gave something,” Boehner said. “The beauty of this package is that it is simple, it is clean and it is neat.”

Key Senate leaders, while giving general approval to the deal, also signaled that they intended to reintroduce at least some unemployment and food stamp benefits and were weighing proposals to spend at least some stimulus funds on infrastructure investment.

“Working families should be assured that this agreement is not the final word,” said Sen. Edward M. Kennedy (D-Mass.), chairman of the labor committee. “Families are in crisis, and it’s not enough just to help with their taxes. I intend to offer amendments in the Senate to strengthen this package -- to provide unemployment insurance to workers looking for jobs and to help families coping with high heating costs and skyrocketing food prices.”

At a news conference Thursday, flanked by Boehner and Treasury Secretary Henry M. Paulson Jr., Pelosi said: “This is the beginning of the legislative process. I think the strength of our bipartisanship in this announcement today will mean a lot to [the Senate]. But far be it from me to ever predict what the Senate may produce.”

“There’s more to do,” Paulson said. “I’m looking forward to working with the Senate.”

At the heart of the plan are tax-rebate checks that will go out to about 117 million middle- and lower-income households.

The rebates will reflect a new 0% tax bracket that will apply to the first $6,000 in adjusted-gross income for singles and $12,000 in adjusted-gross income for married couples filing jointly.

Adjusted-gross income is the amount of income that’s taxable after accounting for contributions to retirement and employee benefit plans.

The benefit would phase out for single filers earning more than $75,000 in adjusted-gross income, until evaporating completely at $87,000. The phase-out for married couples would start at $150,000, and end at different points depending on the number of children in the family.

The plan also would provide rebates to people who earn at least $3,000 in annual income but don’t earn enough to pay taxes. Single filers in this category would get a standard check of $300, and married couples would qualify for $600. Taxpayers eligible for rebates would get an additional $300 for each child under the age of 17.

“This package is aimed where it should be -- bull’s-eye on the middle class,” said Sen. Charles E. Schumer (D-N.Y.).

Republicans hailed the business tax incentives as the most important part of the package, arguing that job creation is the key to halting a slide into recession.

Under the proposal, all businesses would be allowed to write off 50% of the money they spend on capital expansion in 2008 -- a deduction that would normally be spread out over many years. And it would double the amount small businesses could write off their taxes for new investments made in 2008 to $250,000 from $125,000.

The plan also would include a significant increase in the maximum loan limits for the Federal Housing Administration and quasi-governmental secondary mortgage operations best known as Fannie Mae and Freddie Mac.

The precise hike in loan limits was still being debated late Thursday. House Republicans said they had agreed to temporarily raise the limit for Fannie Mae and Freddie Mac loans to $625,500, although Democrats were proclaiming that the deal would hike limits to $729,750.

Either way, the increased limit on loans guaranteed by Fannie Mae and Freddie Mac would be temporary, expiring Dec. 31 of this year.

It was not immediately clear whether the higher FHA limit would be temporary or permanent.

Economists said the boosted loan limits would prove highly beneficial in California, where the median home price is $597,640, according to the California Assn. of Realtors. With the credit markets tightening because of the sub-prime mortgage crisis, loans in excess of the current Fannie and Freddie limit of $417,000 have become scarce and costly. FHA loans, which are offered to some higher-risk borrowers, currently top out at $367,000.

Boosting those limits to at least cover the median home price in the state would make mortgage loans more widely available and could provide a boost to the otherwise moribund real estate market, said Gary Schlossberg, senior economist with Wells Capital Markets in San Francisco.

The plan “increases the chance that the economy doesn’t unravel,” he said.

“But tight lending standards can still weigh on the economy. Will this, coupled with lowered interest rates, loosen credit enough? That’s the $64,000 question,” Schlossberg said.

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maura.reynolds@latimes.com

kathy.kristof@latimes.com

nicole.gaouette@latimes.com

Reynolds and Gaouette reported from Washington; Kristof reported from Los Angeles.

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(BEGIN TEXT OF INFOBOX)

Relief package

Here are highlights of an agreement reached Thursday by House leaders and the Bush administration on a $140-billion stimulus package:

* Tax rebates this year of as much as $1,200 for 117 million lower- and middle-income households -- more for families with children. Cost: $100 billion.

* Temporary tax incentives for businesses to create jobs. Cost: $40 billion.

* Higher limits on mortgages that can be bought by Fannie Mae and Freddie Mac.

* Higher limits on mortgages that can be guaranteed by the Federal Housing Administration.

Source: Times research