The ARRA Stimulus Package and Its Effect on the Private Sector

The American Recovery and Reinvestment Act (ARRA), the ballyhooed stimulus plan by Barack Obama, was signed into law on Feb. 17, 2009. It commits some $787 billion in these categories: tax relief ($288 billion), state and local fiscal relief ($144 billion), infrastructure ($111 billion), protecting the vulnerable ($81 billion), health care ($59 billion), education and training ($53 billion), energy ($43 billion), and other ($8 billion). The official Recovery.gov site documenting the ARRA and its expenditures adds: “Tax relief includes $15 B for infrastructure and science, $61 B for protecting the vulnerable, $25 B for education and training and $22 B for energy, so total funds are $126 B for infrastructure and science, $142 B for protecting the vulnerable, $78 B for education and training, and $65 B for energy.”

What’s in it for those who own and operate businesses in the private sector?

Here there are some clear winners in areas in which Obama wants to take the nation, for instance in the construction of a smart electrical grid, the modernization of schools and federal buildings, the construction and retrofitting of mass transit systems, highways, bridges, waterways and the like, the extension of rural broadband access, the creation of electronic health records, and the training of people for green jobs. For the most part, though, the money seems headed to government programs and on the private side largely to unionized construction jobs—effectively rewarding those groups that did the most to help Obama get elected. It’s been estimated that less than 20 percent of the package actually goes to projects that create or sustain jobs outside of government, and the Congressional Budget Office (CBO) estimates that 30 percent of the funds won’t even be released until 2011 and later.

(The Washington Post created a wonderful and highly detailed graphic to break down the spending into its smallest targeted components.)

Programs and Tax Provisions for Business

For those in business in general, the ARRA contains some tax provisions and, most immediately, a new subsidy for laid-off workers eligible for COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) health coverage.

Under the COBRA subsidy program, workers who have been or will have been laid off between Sept. 1, 2008, and Dec. 31, 2009, are eligible for nine months of subsidized premium payments after layoff. The extension also includes a provision to allow those who previously decided against COBRA coverage to opt back in. The program, which took effect upon the signing of the ARRA, pays 65 percent of the terminated employees’ monthly premiums. Employers are to kick in the 65 percent only after receiving the monthly 35-percent portion from covered recipients. The employers then take a credit for the 65-percent portion on their payroll taxes. The subsidy is not retroactive, though the eligibility period is (those laid off at any time prior to Sept. 1, 2008, are not eligible).

The American Recovery and Reinvestment Act of 2009 also contains numerous tax provisions aimed at small businesses.

Bonus depreciation: IRC section 168(k) is amended to extend the 50-percent first-year bonus depreciation through 2009  and through 2010 for certain transportation property and aircraft.

Section 179 expensing: Increases in the section 179 expensing amount to $250,000 and in the phase-out threshold to $800,000 are both extended through 2009. This extends the temporary increases for 2008 contained in the Economic Stimulus Act of 2008.

Carryback of small business losses: Eligible small businesses will be allowed to carry their 2008 net operating losses (NOLs) back for five years. An eligible small business is one that has average gross receipts of $15 million or less.

Small business estimated taxes: Qualified individuals are allowed (for 2009 only) to make estimated tax payments equaling 90 percent of their preceding tax year liability instead of  the normal 100 percent. To be a qualified individual, the taxpayer must have adjusted gross income (AGI) of less than $500,000, and more than 50 percent of the individual’s gross income must come from a small business with an average of fewer than 500 employees.

Work opportunity tax credit: The act creates two new targeted groups for the work opportunity tax credit--“disconnected youth” and unemployed veterans. Employers who hire people from among these groups during 2009 or 2010 may be eligible to take the credit.

Discharge of business indebtedness: The act allows certain businesses to recognize cancellation of indebtedness income over five years, starting in 2014, if the business repurchases specific types of debt in 2009 or 2010.

Qualified small business stock: The section 1202 exclusion of gain from the sale of qualified small business stock is increased from 50 percent to 75 percent for stock acquired after the enactment date but before Jan. 1, 2011.

S corporations: The recognition period for assets subject to the built-in gains tax is reduced from 10 years to seven years for S corporation tax years beginning in 2009 and 2010.

New markets tax credit: The section 45D new markets tax credit investments limit is increased for 2008 and 2009 to $5 million.

Energy credits: The act also includes a number of energy incentives aimed at both individuals and businesses, including increases in the section 25C residential energy property credit, the section 25D residential energy efficiency property credit, and the section 48 energy investment credit.

Of course, these business tax breaks come in addition to the $80 billion Alternative Minimum Tax (AMT)  relief measure included in the ARRA and the $400-per-person and $800-per-joint-filer tax credit, which works out to be about $7 and $14 a week.

Long-Term Effects

The Congressional Budget Office in its assessment of the ARRA estimated that in the short term, the stimulus package would create or “save” the approximately 3.5 million jobs that the Obama team projected before passage. However, in the long term, the CBO estimated that the ARRA “would reduce output slightly.” This would be the fallout from the huge debt load being run up by the ARRA and other government recessionary initiatives. Called “crowding out,” the increased debt would “tend to reduce the stock of productive private capital” to the tune of 33 cents for every dollar in federal debt, according to the CBO. For a total national debt of $10 trillion (which we’ve already surpassed), the crowding out would represent more than $3 trillion siphoned from the private investment sector. On top of this, the huge and unheard-of sums being spent to fight the recession, not only in ARRA but also in TARP (Troubled Asset Relief Program), are sure to ignite inflation in the future, with some analysts warning of a possible repeat of the stagflation of the 1970s.

Critics on both the right and the left have assailed the ARRA as a hodgepodge of different initiatives upon which Obama campaigned rather than being a job-stimulus package of block grants or other less-targeted devices. And, of course, no one can seriously expect much of a stimulus from wage-earners’ having $7 more per week to spend after taxes. However, the ARRA will definitely have an impact on the economy, both positively and negatively, whether in economic recovery or in inflation-stagflation. It just remains to see if the unintended consequences manage to outweigh the intended consequences of propelling the nation into its greener, more equitable future. Only time will tell on the whole issue.

About the author:
Gary McCarty is a researcher and Web Content Manager for Personnel Concepts.

Note: The details in this white paper are provided for informational purposes solely. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.