The stimulus plan scheduled for debate in the Senate should include:

• An extension of the 2001 and 2003 tax reductions; and
• A reduction of tax rates for individuals, small businesses, and corporations through 2013.

According to a recent Heritage Foundation analysis,[1] including these elements in the stimulus plan would soften the current recession in 2009 while speeding economic recovery, increasing employment, and reducing federal tax receipts. The spending included in the current stimulus plan would have little positive effect on the economy. Instead, Congress should reduce spending and lower tax rates.

Taken together, these two elements--extending the 2001 and 2003 tax cuts and reducing taxes for individuals, small businesses, and corporations--would increase family disposable personal income and increase jobs in every state. Tax reductions would allow families to plan and grow in the near future, since they would not have to worry about tax increases. In addition, people would be more secure in their jobs or business, since taxes on business establishments would also be reduced, leaving business owners with more money for hiring new employees and other operational expenses.

As a result of this plan, families of four could expect to gain over $1,300, on average, in disposable personal income in 2009. This amount would quickly rise to over $4,500 in additional personal income in 2013. (Family income and jobs estimates for each state can be found in Table 1.) Furthermore, by 2013, four-person families could also expect a tax rate three percentage points lower under this plan than without it. Without the pro-growth elements of this plan, these families could expect their tax rates to rise four percentage points, from an effective rate of 12 percent to an effective rate of 16 percent. This plan would keep the rate just under 13 percent. Larger families would see an even greater benefit from the low rates.[2]

State Estimates of Job and Income Growth

Arizona. If the stimulus plan includes the pro-growth elements described above, Arizona could expect to gain an additional 10,080 jobs in 2009 and 40,954 jobs in 2013.[3] Due to tax deductions, improved employment prospects, and strengthened economies, four-person families could expect their personal income to increase by $1,166 in 2009 and by $3,908 in 2013. Based on current average expenditures for four-person families, this increase would cover the cost of meats, poultry, fish, and eggs (an average annual expenditure of $1,146) and in 2013 would cover a large portion of the average annual cost of utilities, fuels, and public services ($4,481).[4]

California. California could expect to gain an additional 59,379 jobs in 2009 and 241,250 jobs in 2013. Families could expect their personal income to increase by $1,485 in 2009 and by $4,975 in 2013. This increase in personal income would cover families' average annual expenditures on education ($1,483) and in 2013 would cover their cost of food at home ($4,967).

Kentucky. Kentucky could expect to gain an additional 6,526 jobs in 2009 and 26,512 jobs in 2013. Families could expect their personal income to increase by $1,134 in 2009 and by $3,798 in 2013. This increase in personal income would cover almost all of families' average annual expenditures on dairy, cereals, and bakery products ($1,216) and in 2013 would cover their entertainment budget for one year ($3,785).

Maine. Maine could expect to gain an additional 2,263 jobs in 2009 and 9,194 jobs in 2013. Families could expect their personal income to increase by $1,211 in 2009 and by $4,056 in 2013. This increase in personal income would cover families' average annual expenditures on vehicle insurance ($1,211) and in 2013 would cover a vast majority of their cost of food at home ($4,967).

Missouri. Missouri could expect to gain an additional 9,592 jobs in 2009 and 38,969 jobs in 2013. Families could expect their personal income to increase by $1,225 in 2009 and by $4,104 in 2013. This increase in personal income would cover families' average annual expenditures on eggs, dairy products, fresh fruits, and vegetables ($1,147) and in 2013 would cover almost their entire entertainment budget ($3,785).

New York. New York could expect to gain an additional 30,680 jobs in 2009 and 124,649 jobs in 2013. Families could expect their personal income to increase by $1,677 in 2009 and by $5,617 in 2013. This increase in personal income would cover families' average annual expenditures on electricity ($1,670) and in 2013 would cover almost all of their annual expenditures on apparel and services as well as vehicle and health insurance ($5,754).

Tennessee. Tennessee could expect to gain an additional 9,687 jobs in 2009 and 39,357 jobs in 2013. Families could expect their personal income to increase by $1,229 in 2009 and by $4,118 in 2013. This increase in personal income would cover families' average annual expenditures on meats, poultry, fish, and eggs ($1,146) and in 2013 would cover almost all of their utilities, fuels, and public services ($4,481).

Texas. Texas could expect to gain an additional 37,744 jobs in 2009 and 153,349 jobs in 2013. Families could expect their personal income to increase by $1,384 in 2009 and by $4,638 in 2013. This increase in personal income would cover families' average annual expenditures on health insurance ($1,684) and in 2013 would cover their cost of health care and education ($4,630).

The Bottom Line

In order to be successful, the stimulus bill should extend the 2001 and 2003 tax cuts and should reduce taxes for individuals, corporations, and small businesses. Doing so would increase employment and family income, shorten the recession, and speed economic recovery. All families and businesses would benefit from these policy changes, seeing an immediate but modest increase in income in 2009. As a result of these policies, however, families could expect their incomes to increase by an average of more than $4,500 and their taxes to decrease by three percentage points in 2013.

Shanea J. Watkins, Ph.D., is Policy Analyst in Empirical Studies and Guinevere Nell is Research Programmer in the Center for Data Analysis at The Heritage Foundation.