"The damage from Hurricane Katrina raises at least four issues that might be addressed by tax policy. The first issue is that the effect of the disaster, particularly given the potential impact on energy prices, might contract the overall economy, suggesting some need for a fiscal stimulus. The Administration has indicated that it will not propose a tax cut, but supports making the existing tax cuts permanent. Preliminary indications are that the effect of the hurricane on the national economy will be limited. Even if a stimulus were needed, there are many problems with relying on tax cuts (rather than spending or a monetary stimulus), given the difficulties in delivery of a tax cut. The Administration proposal is unlikely to have an effect, since the tax cuts do not, in general, expire until 2011 and there will be no immediate effect on disposable income. A related nationwide fiscal policy concern is that the loss of income (and the taxes on that income) and the increased spending will worsen pressures on the budget. A tax cut would exacerbate that effect. A second issue is whether the rise in energy prices should be addressed by some redistribution from energy producers to consumers, or some general relief. One proposal that has been made, to suspend the gasoline tax, would not be expected to have an effect on prices in the short run, but would rather increase profits of producers. Income tax rebates could be used to target poor people, but this approach, as with a stimulative tax cut, faces administrative difficulties. Proposals have been made for a windfall profits tax, which has some historical precedents, but the tax is difficult to administer." This report details all considerations for energy prices and other areas under the tax plan, as well as potential future impacts.
CRS Report for Congress, RL33088
Federation of American Scientists: http://www.fas.org/