Congress Passes the $1.9 Trillion American Rescue Plan Act

On Thursday, President Biden signed the nearly $1.9 trillion American Rescue Plan (ARP) Act into law. The relief package contains additional direct payments to households, enhanced unemployment insurance benefits, tax relief for households, $350 billion in state and local government aid, and $170 billion to schools and universities.

The ARP Act expands on the recent $908 billion relief package, passed in December, and the $1.8 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March. The ARP Act passed through Congress on a party-line vote using the budget reconciliation process.

Major Provisions	Estimated Cost over Ten Year Period
Direct Payments to Individuals	$410 billion
State and Local Aid	$350 billion
Enhanced Unemployment Insurance Benefits	$206 billion
Education	$170 billion
Fully Refundable Child Tax Credit	$110 billion
Housing Assistance	$27 billion
Earned Income Tax Credit	$25 billion
Federal Transit Administration	$30 billion
Aid for Restaurants and Bars	$25 billion
Payroll Support Program	$15 billion
Agricultural Assistance	$10 billion

Source: Congressional Budget Office and Joint Committee on Taxation

The Organisation for Economic Co-operation and Development (OECD) estimates that the ARP Act will increase GDP by 3-4% in the first year after passage, increasing its projected growth rate to 6.5% from the  3.2% included in its November report. Additionally, the ARP Act is expected to raise employment by nearly three million jobs by the end of 2021, while increasing inflation by just under one percent in the next two years. Internationally, the ARP Act is estimated to increase GDP by 1% in Canada and Mexico, and 0.5% in the euro zone and China. In total, the OECD estimates that the ARP Act will increase global GDP by 1% in 2021.

The Tax Policy Center estimates that the ARP Act will increase the after-tax income of the lowest 20% of households by 20%. The top 20% of households in the income distribution will receive an increase in after-tax income of 0.7%, with the top 1% actually seeing a marginal decrease in income. In total, low-to-moderate income households (those with incomes below $91,000) will receive 75% of the tax benefits in the ARP Act. The Urban Institute estimates that the ARP Act will reduce poverty by over 33%, from 13.7% to 8.7%, as well as lessen the racial poverty gap. 

Source: Tax Policy Center

Benefits for Individuals and Families 

Direct Payments

The ARP Act provides a third round of direct payments - at $1,400 per person - to both adults and dependents at an aggregate cost of $410 billion, according to the Joint Committee on Taxation. Single filers with adjusted gross income (AGI) of up to $75,000, head-of-household filers with an AGI of up to $112,500,  and joint filers with AGI of up to $150,000 will receive the full amount of the direct payments for each adult filer and each dependent claimed. Adult dependents, those over 16, were excluded in the previous rounds of direct payments, but are included in this round. Only individuals with a Social Security number are considered eligible for payments. Mixed-status families (those with some household members not having Social Security numbers) would receive payments with respect to those individuals who have social security numbers. Such families were not eligible for direct payments under the CARES Act, but became eligible after the December relief package.

The ARP Act changes the AGI-phase-out structure used with the first two stimulus payments. Payments now phase out over the $75,000-$80,000 range for single filers, the $112,500-$120,000 range for heads of households, and $150,000-$160,000 for married couples. The Joint Committee on Taxation calculated that this faster phase-out design will save approximately $12 billion from the overall cost of the direct payments while the Institute on Taxation and Economic Policy estimated that 17 million people who would have been eligible under the earlier rounds would not receive checks as a result of this design change. The direct payments should begin arriving within two weeks after the legislation is signed into law by President Biden.

Unemployment Insurance 

The Bureau of Labor Statistics estimated the unemployment rate in February at 6.2 percent, with 41.5 percent of the unemployed having a duration longer than 27 weeks between employment. Over 1.2 million workers filed initial claims for UI benefits during the week of March 6, marking the 51st week that total initial claims have been higher than the worst week of the Great Recession. About 20 million individuals filed continued unemployment insurance (UI) claims in the week ending on February 20. 

The ARP Act extends the enhanced unemployment insurance benefits included in the December relief bill, which are set to lapse beginning on March 14. Individuals receiving UI benefits will receive an extra $300 per week until September 6 through the Federal Pandemic Unemployment Compensation program. Similarly, the Pandemic Unemployment Assistance (PUA) program (for individuals not eligible for regular UI benefits, such as self-employed or gig workers) and the Pandemic Emergency Unemployment Compensation (PEUC) program (for individuals that have exhausted their weeks of regular UI benefits) will be extended until September 6. Some Senate Democrats requested that the deadline be extended until October in order to avoid a UI benefit cliff occurring during the August congressional recess period. However, this did not achieve the full support of the caucus, so the extended UI benefits will expire during the recess period. 

Different from most government cash transfers, UI benefits are currently considered taxable income. Federal law requires states to give beneficiaries the option of withholding 10% of UI benefits for federal income taxes, but some states did not offer that option to workers receiving CARES Act benefits. Also, some unemployed workers simply cannot afford to have 10% withheld from their benefits, according to a report by the Century Foundation, a progressive think tank. Overall, the Century Foundation estimated that almost 40% of UI payments have not had taxes withheld, possibly creating strains for beneficiaries when such taxes become due. However, the ARP Act will exempt up to $10,200 in unemployment benefits received in 2020 for families that make up to $150,000, which will help prevent surprise tax bills for almost 40 million Americans. At a tax rate of 10%, this would provide up to an additional $1,020 to unemployed workers. 

The Internal Revenue Service (IRS) will need to reprogram its software in order to account for this new unemployment benefit exemption. This retroactive change could require a pause in tax filings, with the April 15 tax deadline quickly approaching. As a result of the COVID-19 pandemic, the IRS extended the tax filing deadline to July 15 in 2020, but it has not made a similar extension in 2021, despite congressional requests.

Temporary Child Tax Benefit Expansion

The ARP Act introduces an improvement to the Child Tax Credit (CTC), making it fully refundable for the vast majority of children for 2021. The Joint Committee on Taxation estimates that this provision will cost $110 billion over the next 10 years. Currently, 27 million children do not receive the full $2,000 CTC because their parents do not make enough to qualify for the full benefit, which is known as the “trapezoid problem;” this includes half of all Black, Latino, and rural children.  

The ARP Act eliminates the trapezoid problem by removing a lower phase-in for the CTC credit. The ARP Act raises the income phase-out to start at $112,500 for single filers and $150,000 for married couples. The act also increases the CTC benefit to $3,000 per child and $3,600 for children under six years of age, and includes 17- year old dependent children in the benefit.

The ARP Act also directs that half of the CTC be paid out in advance payments on a “periodic” basis to eligible families from July to December 2021. Originally, this provision meant to read “monthly” basis, but arcane budget reconciliation requirements led to the change to “periodic.” The other half of the CTC benefit can be claimed by families when they file 2021 taxes.

Since the advance payments are disbursed based on the previous year’s tax filing status, some households could receive payments even though they are technically ineligible to receive the payments. This can occur if a child lived with one parent in 2019, but moved in with the other parent in 2020. This could result in the first parent receiving the advance CTC payments (rightfully due to the latter parent), but they would be required to repay the IRS for the benefits received when filing their 2021 taxes. This could affect up to three million children. The ARP Act fixes this potential issue by implementing a “safe harbor,” which exempts advance repayments for single filers with an AGI below $40,000 and joint filers with an AGI below $60,000. Above those thresholds, the safe harbor protection phases-out. 

The Committee on Budget and Policy Priorities (CBPP) estimates these provisions will result in 4.1 million children raised out of poverty, a decline in child poverty of 40%, and 66 million children  receiving a larger CTC benefit. Researchers at the Center on Poverty and Social Policy at Columbia University found that the fully refundable CTC would provide $800 billion in benefits to society, eight times the cost of the credit. However, this estimate assumes that the expanded CTC benefit would not be temporary, as currently planned, but become a permanent feature of the American social welfare system.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) largely excludes childless adults from receiving benefits, which taxes 5.8 million childless workers into poverty every year, according to the Center on Budget and Policy Priorities. The ARP Act expands the maximum EITC for childless adults from $530 to $1,500, and raises the income cap from $15,000 to $21,000. It also expands the age eligibility to include 19-24 year olds that are not full-time students, as well as people over 65. These changes are temporary and do not extend beyond 2021. This would benefit an estimated 17 million adults and cost approximately $25 billion. 

Housing Assistance

The ARP Act allocates $27 billion towards emergency rental assistance and housing vouchers. This comes on the heels of a Consumer Financial Protection Bureau report that found that 8.8 million tenants were behind on their rent as of December 2020, with more than a quarter of tenants with incomes below $25,000 behind on rent. The outstanding payments on rent and utilities by the end of the 2020 totalled over $44 billion. The December relief package provided $25 billion towards rental assistance.

The funds in the ARP Act will be disbursed to state and local governments using the same methodology as the December relief package. Every state will receive a minimum of $152 million; the remaining funds will be distributed across states based on population. This formula resulted in less populous states receiving a much higher ratio of rental assistance to tenant size. For example, Wyoming received the largest amount of aid relative to the tenant population at $3,000 per tenant, while New York received under $400 per tenant, according to one analysis. 

The ARP Act includes $10 billion for the establishment of the Homeowner Assistance Fund in the Treasury Department. The Homeowner Assistance Fund will provide states with funds that eligible single-family homeowners can use for mortgage payment assistance, principal and interest rate reductions, utilities payment assistance, and housing stability assistance. The purpose of the program is to limit delinquency, foreclosure and eviction. At least 60% of the funds allocated to states must be disbursed to homeowners with incomes lower than the median of their area or the United States, whichever is greater. Each state will receive at least $50 million, with the remaining funds allocated in proportion to each state’s unemployment rate and number of delinquent and foreclosed mortgages.

Multiemployer Pensions 

Multiemployer pension plans provide retirement benefits according to a collective bargaining agreement between an employer and a union, across a single industry. Typically, these plans are found in the transportation, construction, and hospitality industries. Currently, over 10 million people are covered by multiemployer plans. Multiemployer plans were considered inherently more stable than single employer plans, due to the lesser risk that one failing employer could bankrupt the entire pension fund. As a result, multiemployer pensions have historically been underfunded compared to single employer plans. 

The Pension Benefit Guaranty Corporation (PBGC), a government entity that backs multiemployer pensions, estimates that it will be insolvent by 2026, leaving retirees with little to no benefits from the pension fund. While the vast majority of the 1,400 multiemployer plans are healthy, there are 130 plans in significantly poor financial health, with 1.3 million individuals covered by these plans. The ARP Act would provide grants from the Treasury Department’s general fund to insolvent plans in return for a mandated reduction in benefits for participants. The CBO estimates that the relief to multiemployer pension plans will cost $83 billion over the next ten years, while keeping the PBGC solvent until the mid-2040s.

ACA subsidies  

Under current law, subsidies are provided to individuals for health insurance plans purchased through the Affordable Care Act (ACA) marketplaces if the person has an AGI between 100%-400% of the federal poverty line (up to $51,500 for a single person). The ARP Act removes the upper income limit for subsidy eligibility and sets a cap on health insurance premiums at 8.5% of AGI for individuals in the newly expanded category. For a 64-year-old individual making $58,000, or 450% of the federal poverty line, her monthly premium would decrease from $1,075 to $412, saving her nearly $8,000 a year. These changes will allow 1.3 million uninsured people to access health insurance through the ACA marketplaces. These new requirements will last through the end of 2022 and will cost $34 billion.

Additionally, the ARP Act will increase federal medical assistance to states by $15.5 billion, in order to incentivize states to expand Medicaid. Thirty-seven states and the District of Columbia have already expanded Medicaid, with the ARP Act estimated to speed up expansion in holdout states by a full year.

State and Local Government Aid 

The December stimulus package did not include aid to states and municipalities. The ARP Act provides $350 billion in such aid. Every state and Washington D.C. will receive at least $500 million with a further $169.8 billion split proportionally between the states and Washington, D.C., depending on each state’s level of unemployed workers relative to the national unemployment level. This calculation will use the three-month period from October to December 2020. Under the CARES Act, Washington, D.C., was classified as a territory and did not receive the same level of aid as states, but the ARP Act makes it whole by providing an estimated extra $755 million. The funds received by states can only be used to respond to the pandemic and its negative economic impacts, in essence disallowing funds from being used to finance tax cuts. 

Municipalities and counties will receive $130 billion in aid, with half being disbursed to cities through a modified Community Development Block Grant formula and the other half provided to counties based on population levels. 

The total size of state and local government aid caused debate. The Committee for a Responsible Federal Budget noted that catastrophic revenue declines expected at the start of the pandemic never materialized, with some states even seeing a rise in revenue. On the other hand, the Center for Budget and Policy Priorities (CBPP) estimates that total state revenues are six percent below the pre-pandemic trend, with unexpected costs to fight the pandemic added to budgets. The CBPP evaluates the current total state and local government shortfall at $300 billion. 

The CBPP also notes that state and local government employment has not recovered, with a current shortfall of 1.3 million jobs. The most recent Bureau of Labor Statistics jobs report on March 5 found a continued decline in state and local government employment in February, with most of the drop centered in education.

Source: Bureau of Labor Statistics

Agriculture

The ARP Act will provide approximately $10.4 billion in assistance to the agricultural sector. The Farm Bureau, an industry organization, estimates that about half of that aid will go to disadvantaged farmers, of which a quarter are Black. Four billion dollars of that aid will be disbursed as direct payments to disadvantaged farmers at 120% of their current outstanding debt in order to facilitate debt forgiveness. 

This program addresses questions of equity in agricultural transfers. Under the Coronavirus Food Assistance Program (CFAP) initiated by the Trump Administration at the start of the pandemic, white farmers received 97%, or $6.7 billion, of the transfers. The average white farmer received $3,398 in assistance while the average Black farmer only received $422. Similarly, 99% of transfers through the Market Facilitation Plan, created to offset the impact of President Trump’s trade war with China, went to white farmers, who received an average transfer 10 times the benefit allocated to Black farmers.  

Education

The legislation provides $170 billion to the Department of Education to disburse in grants to states, local education agencies, and postsecondary institutions. Added to the earlier COVID relief packages, this brings the total education funding to almost $285 billion, with the majority of the previously allocated funds unspent. The ARP Act also makes any student loan forgiveness granted in the next five years tax-exempt, setting up a potential executive order from President Biden to complete his promise to forgive $10,000 in student debt. 

Miscellaneous

The ARP Act includes a further $15 billion for the Payroll Support Program, which provides grants to air carriers to cover wages in return for halting all furloughs and pay cuts until September 30, 2021. 

The bill allocates $25 billion to restaurants and bars that have suffered as a result of Covid-19, as well as $6 billion towards nutrition assistance programs. 

The Federal Transit Administration will receive $30 billion to distribute as grants to local transit authorities.