The American Recovery and Reinvestment Act Becomes Law

SUMMARY AUTHORED BY KARLA L. REYERSON

February 17, 2009

In an effort to combat the length and severity of the already painful recession the United States is experiencing, President Obama, on February 17, 2009, signed into law the American Recovery and Reinvestment Act (the Stimulus Act). At a cost of $787 billion, the Stimulus Act is aimed at creating or saving 3.5 million jobs, improving the nation’s infrastructure, promoting energy efficiencies, helping struggling states and workers, and generally turning the economy toward growth.

The Stimulus Act is a mix of government spending and tax cuts that touch a broad array of the nation’s industries and services. This article provides a summary of some of the Stimulus Act’s major provisions.

Infrastructure Improvements

One of the most visible intended outcomes of the Stimulus Act is the rehabilitation and modernization of the nation’s transportation systems, ports, school facilities, and government buildings. For example, the Stimulus Act devotes $27.5 billion to modernizing roads and bridges and $8 billion for investment in high-speed rail. The Stimulus Act also provides funding for various low-income housing projects and for the redevelopment of abandoned and foreclosed homes.

The Department of Defense will receive $4.2 billion to update its facilities, including troop housing. In addition, $4.5 billion will be directed to making federal office buildings more energy efficient. Funds will also be used to invest in projects to provide rural communities with clean drinking water and new waste disposal facilities.

All public works and public building projects funded under the Stimulus Act are subject to the “Buy American” provision of the new law. Generally, any manufactured goods, iron or steel used in these projects must be produced in the U.S., except where the needed materials are unavailable, where using such materials would cause the cost of the overall project to increase by more than 25%, or where compliance with the requirements of the provision would be inconsistent with U.S. obligations under international agreements.

Energy

One of the most prominent themes of the Stimulus Act is investment in efficient forms of energy and green technologies. Many of the provisions providing for improvements in the country’s infrastructure give priority and incentives for updates that result in energy efficiencies. The Stimulus Act provides $4.5 billion to modernize the nation’s electricity grid using “smart grid” technology, $3.4 billion for fossil energy research and development, and $2 billion for development of advanced batteries and related components. The development and use of renewable energy is also promoted by authorization of $1.6 billion in Clean Energy Renewable Bonds and the allowance of certain tax credits.

Individuals and businesses have several opportunities to benefit from investment in green technologies. For example, the Stimulus Act increases the tax credit for purchasing a qualified plug-in hybrid vehicle to $2,500 and provides a greater tax credit if the vehicle’s battery meets certain capacity thresholds. In addition, the federal government will use $300 million to acquire vehicles for its fleet that have higher fuel efficiency. The Stimulus Act also modifies and expands the tax credit for owners of energy efficient homes and other facilities.

Education

A main focus of the education provisions of the Stimulus Act is to prevent teacher layoffs and other cutbacks due to state budget deficits. The Stimulus Act provides $39.5 billion for grants to local school districts to prevent such cutbacks and to make other improvements. States that meet certain education performance thresholds also may receive bonus grants.

In addition, the government is expanding the Head Start and Early Head Start programs, which provide early development services to infants and preschool children of low-income families. Two billion dollars is available in grants for providing child care services to low-income families.

College students may also be eligible for increased benefits. The allowable higher education tuition tax credit has been increased to $2,500, and the Pell Grant has been increased to $5,350 in 2009 and $5,550 in 2010.

Health

A major initiative of the Stimulus Act is to advance the use of electronic medical records. Through monetary incentives within the Medicare and Medicaid programs, medical practitioners and facilities are encouraged to use electronic medical records. In total, the Stimulus Act devotes $19 billion to fund the conversion to electronic medical records.

The National Institutes of Health (NIH) will receive $10 billion to underwrite medical research, including cancer, Alzheimer’s disease, heart disease, and stem cell research, as well as to improve NIH facilities. Prevention and wellness programs will receive $1 billion toward fighting preventable diseases and conditions. In addition, $1.1 billion will be dedicated to research into the comparative effectiveness of different health care services and treatment options.

Science and Technology

Funding for science and technology is not confined to medicine. NASA, for example, will receive $400 million for climate research, $150 million for aeronautics research and development, and $400 million for general exploration. The Stimulus Act gives the National Science Foundation $3 billion for basic research in fundamental science and engineering. In addition, $7 billion is dedicated to the extension of broadband services to underserved communities.

Aid to Unemployed Workers

Several provisions of the Stimulus Act are aimed at assisting workers who have lost their jobs. Unemployment benefits are extended up to 33 weeks and increased by $25 per week through 2009. In addition, if a worker is laid off between September 1, 2008 and December 31, 2009 and must pay COBRA premiums to maintain group health insurance coverage, the government will cover 65% of the premium for up to nine months.

The Stimulus Act expands the reach of Trade Adjustment Assistance benefits for workers who lose their jobs due to increased imports or the outsourcing of jobs to foreign countries. The Act also funds $3.95 billion for job placement and training, with emphasis on those workers who have lost their jobs or are in danger of losing their jobs due to trade influences on their current industry.

The Stimulus Act increases funding for the Supplemental Nutrition Assistance Program (formerly known as food stamp benefits) by $19.9 billion. Other food assistance programs, such as the Supplemental Nutrition Program for Women, Infants, and Children (known as the WIC program) and the Emergency Food Assistance Program, which supports food banks, will also receive funding.

Tax Relief for Individuals and Families

Unlike under the 2008 economic stimulus measure, most Americans will not receive a tax rebate check under the Stimulus Act. However, the measure does provide several forms of tax relief. Most individuals will be able to claim a “Making Work Pay” credit, which will be administered via a reduction in payroll tax withholdings. Individuals may receive a credit of up to $400, and couples filing a joint return may receive up to $800 in 2009 and 2010. The credit phases out for individuals with gross income over $75,000 and for joint filers with gross income over $150,000.

First-time homebuyers will benefit from changes to the homebuyer credit created in 2008. Qualifying first-time homebuyers who purchase their homes between January 1, 2009 and November 30, 2009 will receive an $8,000 tax credit that does not need to be repaid so long as the buyer keeps the home for at least 36 months.

Not all of the incentives for vehicle purchases that had been discussed were included in the Stimulus Act, but car buyers will be able deduct the state and local sales or excise taxes imposed on the purchase of a new vehicle. The deduction is available for purchases made between February 17, 2009 and December 31, 2009 and applies to the first $49,500 of the purchase price of the vehicle. The deduction is phased out for individuals with adjusted gross incomes of $125,000 or more ($250,000 or more for couples filing jointly). As discussed above, purchasers of certain plug-in hybrid vehicles may be eligible for additional tax credits.

Other tax benefits include an expansion of the child tax credit, which now applies to amounts earned over $3,000, and an increase in the earned income tax credit for families with three or more children. The Stimulus Act also reduces the marriage penalty and increases the exemption from the alternative minimum tax. Retirees, disabled individuals, and those receiving supplemental security income will also receive a one-time payment of $250.

Tax Relief for Businesses

Businesses will receive some tax relief, though less than some had hoped. For example, certain businesses will be able to defer recognition of cancellation of indebtedness income realized in 2009 or 2010 until 2014, after which the income will be recognized ratably over a five-year period. Businesses will also be able to take a “bonus” depreciation deduction in 2009 equal to half of the cost of investments in plants and equipment that are also placed into service in 2009.

The Stimulus Act provides $630 million to the Small Business Administration to allow fee reductions and to fund new loan guarantee programs, as well as $6 million to cover direct loans under the Microloan Program.

New Markets Tax Credits available to taxpayers who make qualified equity investments in community development entities (CDEs) are increased from $3.5 billion to $5 billion in 2008 and 2009. Generally, a CDE is a domestic corporation or partnership with a primary mission to serve or provide investment capital for low-income communities and low-income persons.

Businesses with gross receipts of $15 million or less will be able to take advantage of a temporary change to the net operating loss (NOL) carryback provision, allowing such businesses to carry 2008 NOLs back to offset past taxable income for up to five years rather than two years as under the prior law.

Aid to States

Many states are experiencing budget deficits prompting difficult decisions as to where to cut services. The Stimulus Act provides funding to help states avoid cuts in education, health care for low-income residents, and other essential state functions. The federal government will also increase the portion of Medicaid expenditures it covers. The total amount of direct aid to states is $53.6 billion.

Oversight

Oversight and transparency are common themes running through the Stimulus Act, as well as efficient, timely use of funds. Most recipients of funds will be required to file public reports on how such funds are used. In some cases, if funds are not used by established deadlines, the government will redistribute the money. The public will be able to monitor the use of stimulus funds via a special website.

Conclusion

This summary of the Stimulus Act highlights just some of the appropriations and tax relief provided under the legislation. In the coming days, Fredrikson & Byron will provide more in-depth information regarding specific areas of the Stimulus Act that may interest and affect our clients in various industries. Only time will tell whether the Stimulus Act will have the desired effect of pulling the country out of this recession quickly. In any event, all individuals and businesses will want to identify and pursue the benefits available to them under this new and expansive spending and tax relief package.

If you have questions regarding the economic stimulus summary, please contact your Fredrikson & Byron attorney.