February 5, 2009

Congress Acting Quickly
On Economic Stimulus Bill

This month Congress is working with the new Obama Administration to address the nation’s economic crisis by swiftly approving a series of initiatives to stimulate our economy -- creating jobs and helping repair and rebuild roads, bridges, water systems and school buildings.  On Jan. 27th the House approved the American Recovery and Reinvestment Act (ARRA), which would provide about $819 billion for infrastructure projects, assistance to states and tax cuts for working-class Americans.

As passed by the House, this bill provides about $545 billion in new spending. The first part would be for infrastructure development, which would provide immediate stimulus to the economy. The package includes $43 billion for transportation projects, including roads, bridges and mass transit putting people to work and accomplishing critically-needed transportation improvements in rural and urban areas across our nation. Almost $60 billion is included for energy and science programs, including improving the efficiency and reliability of the electrical grid, improving the energy consumption of federal buildings, researching alternative forms of energy, and encouraging energy efficiency in homes and businesses. The bill contains $20 billion for the construction and modernization of schools and universities and additional monies for facilitating the use of technology in elementary and secondary schools. Funding is also included for a number of other programs that, like these, will create millions of jobs in the near-term while providing substantial benefits to the nation over the long-term.

Also included in this measure is funding to mitigate the immediate effects of the economic downturn. Virtually every state, including ours, is facing very serious budget shortfalls for which most would have to enforce deep cuts to state programs or raise taxes. Conservative and liberal economists alike recognize that such an action on the state and local level would almost certainly limit the effects of a federal stimulus package. To address this, $79 billion is included in a fund to offset state cuts to education, law enforcement and other key functions. The bill also will fully cover Medicaid and COBRA coverage for unemployed workers through 2010, saving states billions. In the wake of rising job losses, $36 billion is included to extend and increase unemployment benefits. Another $4 billion is added to help retrain people put out-of-work. And $20 billion is included to handle the expected rise in families eligible for food stamps due to the recession.

The final third of the ARRA consists of several personal and business tax breaks, tax provisions intended to assist state and local governments and energy-related tax incentives that would cost an estimated $275 billion through FY 2019. Accounting for more than half of the cost of the tax provisions -- $145.3 billion -- is a new refundable payroll tax credit in 2009 and 2010 of up to $500 for an individual or $1,000 for married couples filing jointly. The bill provides a temporary increase in the earned income tax credit for families with three or more children and it allows additional low-income families to receive the refundable child tax credit in 2009 and 2010. The measure also includes a partially-refundable tax credit for higher education expenses, including books, worth up to $2,500. And the legislation seeks to spur home sales by waiving a repayment requirement under a $7,500 tax credit for first-time homebuyers enacted last year.

The bill includes several tax provisions aimed at assisting business affected by the economy. The bill permits businesses to "carryback" their operating losses in 2008 and 2009 for up to five years, rather than the two permitted under current law. Companies that received funds under the TARP, as well as Fannie Mae and Freddie Mac, would not be eligible for the longer carryback period. The bill also extends through 2009 bonus depreciation rules from last year's stimulus act and it expands the work opportunity tax credit to include the hiring of certain unemployed veterans and "disconnected" youth.

The ARRA also includes $20 billion in tax incentives to spur investment in renewable and alternative energy. The largest provision is an extension, generally for three years, of a credit for producing energy from renewable sources. The measure extends and modifies a credit for energy efficiency improvements in homes, increasing the credit to offset 30%, rather than 10%, of the cost of such improvements in 2009 and 2010, but capped at $1,500 per home. The bill also provides a special credit for energy-related research expenses through 2010, and allows for the issuance of additional energy-related bonds, including $2.4 billion in energy conservation bonds and $1.6 billion in clean renewable energy bonds.

Obviously we are committing a very large amount of federal funding in this stimulus legislation at this time.  But we have not taken this step lightly or without consultation with the nation’s top economic advisers who believe that an amount of at least this size is absolutely necessary to have a substantive effect in reviving the national economy. In our judgment, this blend of investment in infrastructure, aid to states and those most hurt by the recession, and tax cuts represents a prudent and responsible plan for creating jobs and rejuvenating the American economy. If you would like to read an economic analysis of the impact of the bill approved by the House, [click here – link to Zandi analysis].

THE ROAD AHEAD:  The bill is now being considered by the Senate, where we expect significant changes to be proposed.  But with the country’s economic condition worsening, President Obama has urged the Senate to approve the bill quickly so that he can sign a House-Senate compromise version by mid-February.  

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