The American Recovery and Reinvestment Act

(note:  A lot more about the ARRA has come to light since this post.  Click here to see a list of all stories about the ARRA)

Well, it finally has a name.  Over the past two days, Obama has been in Washington preparing lawmakers for what to expect regarding his team’s economic recovery plan.  While they had hoped to have a detailed proposal ready for discussion and debate prior to today’s start of the 111th Congress, that didn’t happen.  The transition team has released some significant details of the plan, with more sure to follow in the coming days.  So what’s in it, and how much is it going to cost?

Uncle Sam Is One Heck of a Magician.

Tax Breaks, Tax Breaks, and More Tax Breaks

So far, that’s most of the detail that has been presented.  The ARRA calls for a two-pronged tax relief approach in an attempt to provide an immediate boost to our struggling economy.  Business would see its fair share of incentives, as would workers.

Businesses can expect relief in three major ways.  First, there would be changes (more like extensions) to the way businesses can recoup losses.  Under ‘normal’ tax law, businesses could reclaim taxes paid on profits during the last two years by applying 2008 losses to those incomes.  This plan would reinstate expired tax breaks signed into law by Bush, which extended the tax-reclamation period to five years.  You can bet many businesses will be taking advantage of that.  It’s unclear right now how much this might cost the government, but estimates are hovering around $100 billion.

A second way businesses can expect some tax relief involves depreciation of equipment.  Under normal circumstances, businesses can only depreciate an asset by 20% in the first tax year.  The ARRA would allow ‘bonus depreciation’ of an additional 30% for a specific asset, just like the 2008 stimulus package that included the tax reclamation benefits I mentioned above.

A third business benefit the ARRA would provide is to companies who hire workers.  Businesses can expect a $3000 tax credit for every job they create or preserve.  The details of this benefit are still a bit sketchy, and in fact they may be difficult to iron out.  Leonard Burman, director of the Tax Policy Center, made this clear: “When somebody lays off 10,000 people but hires back 1,000, should they get a tax credit? That doesn’t really seem fair. The problem with these things is defining what qualifies.”  That may be where the ‘preserve’ bit comes in.  Perhaps businesses who show a net increase in employees for 2009 could be granted the tax credit.

Finally, individuals can expect immediate tax relief in the form of tax credits.  This wouldn’t be like the 2008 stimulus package, where the government practically dropped checks from helicopters.  Rather, workers would see an immediate decrease in the amount of tax withheld from their paychecks.  Individuals could expect a $500 tax credit, while families could see as much as a $1000 credit.  This would translate into roughly $80 per month going right back into families’ pockets.

Obama Would Put This Piggy on a Diet

What About The Rest?

The incentives discussed above are expected to cost roughly $300 billion.  So where is the rest of the expected $775 billion to $1 trillion (yes, with a ‘T’) package going to go?  Roughly $77 billion is planned to extend unemployment benefits.  The rest will go to…..government spending.  Obama has been promising all along that the government will invest in infrastructure and alternative energy development in an attempt to foster job growth.  As we’ve seen all too often, government spending can be squandered on useless projects.  What’s worse is we just can’t afford waste at this point.  The Obama Administration is going to inherit a ONE TRILLION DOLLAR budget deficit.  That’s not total national debt.  That’s the NEW debt the government incurs in a single year of operation.  The ARRA, while seen by most as necessary, will only increase that.

In a rare and perhaps unprecedented effort to be transparent, Obama today announced the creation of an Economic Recovery Oversight Board.  Both administration officials and independent advisors will sit on this board.  Its purpose?  “To identify problems early,” says Obama, “and make sure we’re doing all that we can to solve them.”  In addition, information about where the money is going will be made available online, so that the public can see it, and whether or not the ARRA is hitting its goals.

The Obama team isn’t stopping, there, however.  “We are going to ban all earmarks,” Obama said.  He described earmarking as “the process by which individual members insert pet projects [into bills] without review.”  He’s also clearly keeping an eye on the long-term budget problems we face.  He indicated that some programs will have to be cut, and others made more efficient.  Woah, a Democrat talking about cutting federal programs?

I’ll admit I’m extremely curious about exactly how the $400-$500 billion will be allocated.  It would take far too long for congress to identify specific projects and issue grants.  I’m wondering if we’ll see something like the TARP fund, but for investment into infrastructure and private-sector projects.  If so, I hope we have the kind of transparency and oversight Obama is promising.  That’s a lot of money that could could end up disappearing.  It’s certainly happened before.

Update: Over the next few days I’ll be looking at past recessions and how they compare to this one in an effort to determine how effective (or harmful) the ARRA might be.  Take a look at the first one here.