Senate launches economic stimulus debate

WASHINGTON —  With the economy still spiraling downward and the political landscape in flux, the Senate on Monday opened debate on an $885-billion stimulus plan that faces bipartisan questions about whether it spends too little on housing and infrastructure and too much on other things.

President Obama’s ambitious plan is headed for more than a week of robust debate in the Senate, where it faces a stronger possibility than it did in the House of winning at least some bipartisan support. Not a single Republican voted for the House version last week.

Senate Republicans will propose a panoply of amendments to make the bill more palatable -- including moves to strip out spending they consider inappropriate in an economic stimulus bill. One target: $75 million to help people quit smoking. Such changes, if accepted, could win support for the plan from conservative Democrats such as Sen. Ben Nelson of Nebraska, as well as Republicans. Both groups want to keep the program focused on short-term job creation.

Senate Minority Leader Mitch McConnell (R-Ky.) suggested that Obama also believes the bill could be focused more sharply -- or that the president is at least open to compromise. “Republicans agree with President Obama that we should trim things out that don’t put people back to work,” McConnell said as he opened debate.

To increase the bill’s focus on problems in the housing market, members of both parties are considering liberalizing and expanding a tax credit for first-time home buyers that was approved last year in other legislation but had little immediate impact.

Under the reformulation being discussed, the credit would be doubled, to $15,000, and it would not have to be repaid, as the earlier measure required.

The home-buyer provision reflects a seeming paradox: While Republicans and conservative Democrats complain that the bill’s price tag is too high, the Senate is likely to produce a bill significantly more expensive than the House’s $819-billion version.

The Obama administration is keen on getting the bill passed as soon as possible, not only to speed relief to the economy but to avoid having the stimulus plan become entangled in another, far more difficult and divisive issue: new action to shore up the still-unstable financial system.

The possibility that at least two of the nation’s biggest banks may be in danger of collapse could force the administration to ask Congress for another eye-popping bailout -- running to at least hundreds of billions of dollars.

Tactically, the White House wants to have the stimulus plan approved and out of the way before any such proposal is made. Given the widespread anger over Wall Street bonuses and what are seen as other excesses, proposing to shell out more tax dollars could trigger extreme sticker shock in both parties.

Treasury Secretary Timothy F. Geithner is expected to lay out the framework of the administration’s financial sector plan early next week.

Obama met with top Democratic congressional leaders Monday to discuss the stimulus bill and other upcoming legislation. A Democratic source familiar with the meeting said there was a consensus that when all possible additions or changes to the bill have been decided, the total cost should not exceed $900 billion. That means some spending items would have to be jettisoned.

Congressional Democrats indicated that they would be willing to drop some business tax breaks but that the administration wanted to keep them in hopes of attracting Republican support.

The Senate measure includes $325 billion in tax breaks and $560 billion in direct spending to spur the economy by putting more money in the hands of consumers, encouraging businesses to save or create jobs, and funding infrastructure projects to boost employment.

It follows the same broad outlines as the bill passed last week by the House. But in the Senate, Republicans have more leverage to reshape the package.

McConnell said that the bill should do more to shore up the housing market, and that Republicans favored lowering the 30-year mortgage rate to 4%.

As approved by the House and the Senate Finance Committee, the bill tries to bolster the housing market by providing a $7,500 tax credit for first-time home buyers. In addition to proposals for doubling the amount, Sen. Kent Conrad (D-N.D.) wants to expand the eligibility to purchases of all home buyers’ primary residences.

“One of our problems is collapsing home prices, and most economists are saying, until that’s arrested you’re going to have a hard time having economic recovery,” said Conrad, who is drafting an amendment to shift $50 billion from other programs into housing.

One reason the credit has had little effect is that as home prices continue to fall, buyers have been reluctant to buy because they don’t want their new home to immediately lose value.

But with the housing market apparently bottoming out in some regions, economists say that the credit may help get some buyers off the fence.

Republicans also plan to propose additional income tax cuts for middle-class workers, McConnell said. That may be hard to pass in the Democratic-controlled Senate, but the GOP may garner more support for efforts to strip out spending that they do not believe will generate jobs quickly.

Nelson, the Nebraska Democrat, is a fiscal conservative working with Republican Susan Collins of Maine and other senators to identify spending that could be removed -- such as the smoking-cessation funding or $400 million for testing and prevention of sexually transmitted diseases.

“I’d have a great deal of difficulty voting for the bill as written,” Nelson said, “but I am looking for a way to say yes.”

Once the Senate passes the bill, which is expected early next week, negotiators will have to iron out differences with the House version.

The biggest is the price tag: The Senate has added $70 billion for a provision protecting middle-income people from becoming subject this year to the alternative minimum tax, which would substantially raise their taxes.

The alternative system had been designed to keep the wealthy from escaping all taxes, but it increasingly has applied to middle-class families.

Members of both parties have complained that both the House and Senate bills give short shrift to highway construction and repair, the traditional cornerstone of efforts to spur job creation. Only $27 billion was included in the Senate bill for road projects.

Sen. Dianne Feinstein (D-Calif.) plans to propose an additional $25 billion for highway, transit and water projects.

In providing aid to workers who have lost their jobs, the House bill is more generous. It provides more far-reaching expansions of health insurance coverage. It would provide a 65% subsidy of premiums for laid-off workers to continue being covered by their former employers’ health plans.

Continuing coverage is allowed now but without a government subsidy. That means the premium costs are so high that many laid-off workers cannot afford it.

For others, the House bill allows unemployed workers to sign up for Medicaid -- a state-federal program that now includes only poor families and children.

Conservative critics say those changes amount to a back-door effort to expand federal health coverage.

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janet.hook@latimes.com

maura.reynolds@latimes.com