The American Recovery and Reinvestment Act of 2009

In February 2009, lawmakers enacted the American Recovery and Reinvestment Act (ARRA) in response to significant weakness in the economy.¹ The legislation contained numerous spending and revenue provisions that can be grouped in several categories:

■	Providing funds to states and localities—for example, by raising federal matching rates under Medicaid, providing aid for higher education, and increasing financial support for some transportation projects;

■	Supporting people in need—such as by extending and expanding unemployment benefits and increasing benefits under the Supplemental Nutrition Assistance Program (formerly the Food Stamp program);

■	Purchasing goods and services—for instance, by funding construction or investment activities that could take several years to complete; and

■	Providing temporary tax relief for individuals and businesses—such as by raising exemption amounts for the alternative minimum tax, adding a new Making Work Pay tax credit, and creating enhanced deductions for depreciation of business equipment.

When ARRA was being considered, the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) estimated that it would increase budget deficits by a total of $787 billion between fiscal years 2009 and 2019.² Of that amount, about $575 billion was projected to stem from increased outlays and $212 billion from reduced revenues. (A $24 billion provision to subsidize health insurance costs for unemployed people that CBO originally classified as outlays for the 2009–2019 period was later categorized by the Administration as a reduction in revenues.) About half of ARRA’s total budgetary impact through 2019, a deficit increase of about $399 billion, was estimated to occur in 2010.

Through last September (the end of fiscal year 2009), ARRA’s effects on spending and revenues appear to have been close to what CBO and JCT had anticipated. The law’s budgetary impact for 2010 is also expected to be near the original estimate. Looking ahead, it appears that ARRA will have larger effects in later years than originally estimated. All told, CBO now anticipates that the law will increase deficits by $862 billion between 2009 and 2019 (see Table A-1).

In its original cost estimate for ARRA, CBO projected that federal agencies would spend an additional $120 billion, on net, in the remaining months of 2009, including spending from the new ARRA authority and related reductions in spending from some regular appropriations. That outlay figure included nearly $14 billion in payments for the health insurance premiums of unemployed workers, which were ultimately recorded as a reduction to

The numbers shown here for outlays include only spending directly resulting from ARRA; the effect on spending from regular appropriations or other authorizations (which may have been supplanted in any given year by funding from ARRA) is not included in this table. CBO estimates that the effect on the deficit in 2009 and 2010 is less than the amounts shown here because additional spending from ARRA was partly offset by reduced spending from regular appropriations. (The opposite could be true from 2011 to 2019.)

federal revenues (because the payments were conveyed by reducing the amount of withholding taxes that businesses remit and requiring them to pass the savings on to their employees by charging lower premiums). With those payments excluded, CBO’s estimate of about $106 billion in outlays from ARRA in 2009 proved to be quite accurate: Preliminary data from the Treasury showed spending of $112 billion. In a few cases, agencies that received ARRA funding for certain programs spent less from their regular funding for those programs than they would have otherwise (perhaps between $5 billion and $10 billion less), so the net change in outlays attributable to ARRA was probably a bit smaller than CBO initially estimated.

Five programs accounted for more than 80 percent of the outlays from ARRA in 2009: Medicaid, unemployment compensation, Social Security, the State Fiscal Stabilization Fund (which makes grants to state and local governments, mostly to maintain funding levels for education), and student financial aid. Higher federal matching rates for Medicaid accounted for $32 billion; additional payments for unemployment benefits cost $27 billion; Social Security beneficiaries received payments of $13 billion; spending through the State Fiscal Stabilization Fund added $12 billion; and direct assistance to college students (mostly for Pell grants) added $7 billion.

Although total spending from ARRA in 2009 was roughly in line with CBO’s estimate, the cost of some individual components varied from the amounts initially anticipated. Most significantly, outlays for additional unemployment compensation were about $10 billion higher than CBO originally estimated, because the unemployment rate was higher than anticipated and people continued to collect benefits for a longer period of time.³ In addition, ARRA spending by the Department of Education for Pell grants was about $6 billion greater than CBO’s original estimate—but those higher-than-expected outlays were partly offset by lower-than-expected spending from funds provided through the annual appropriation process. In the opposite direction, spending for Medicaid was about $2 billion lower in 2009 than CBO had expected, and outlays for other programs of the Department of Health and Human Services (HHS), such as health research, were several billion dollars lower. Infrastructure-related spending from ARRA also fell short of CBO’s initial estimates. For example, such spending by the Departments of Transportation, Energy, and Commerce totaled just over $5 billion in 2009, compared with CBO’s original estimate of about $8 billion.

ARRA also included provisions that reduced taxes, which JCT estimated would lower revenues by about $65 billion in 2009 (or by $79 billion adjusted for the reclassification of payments for health insurance premiums). The provision in ARRA that had the greatest impact on revenues last year was the Making Work Pay tax credit, which offset the tax payments of people below certain income thresholds by as much as $400 per single filer or $800 per couple filing jointly. CBO estimates that the credit reduced revenues by $29 billion in 2009—about $9 billion more than anticipated—because it was implemented more quickly than expected. As a result, the revenue loss from the credit in 2010 is now expected to be smaller.

In addition, corporate taxes were reduced by provisions in ARRA that affect how businesses calculate depreciation. JCT estimated that such provisions would lower revenues by $24 billion in 2009. It is not possible, however, to determine how close the actual effects of those and other revenue provisions in ARRA were to initial estimates. A major reason is that estimates of the effects of revenue provisions in pending legislation often assume that taxpayers will adjust their behavior in some way in response to the provisions; such adjustments cannot be easily tracked. Consequently, although some information may become available in coming years that gives a general indication of the accuracy of past revenue estimates, it is usually not possible to fully assess the accuracy of such estimates—except in some instances when they involve new taxes, credits, or deductions.

CBO currently estimates that ARRA’s direct effect on the deficit (excluding some offsetting effects on other spending) will peak in 2010 at $404 billion. Outlays stemming from ARRA are expected to total $224 billion this year, and the law’s tax provisions are anticipated to reduce revenues by about $180 billion.

Nearly half of the outlays resulting from ARRA in 2010 will be for programs administered by HHS or the Department of Education. Most of the HHS outlays ($42 billion) will come from the enhanced matching rates for Medicaid. Various other HHS programs are expected to spend $12 billion. The majority of the Department of Education’s ARRA spending in 2010 ($31 billion) is projected to go for the State Fiscal Stabilization Fund, with another $19 billion expected to be spent on Pell grants and other education programs.

Other large sums resulting from ARRA this year will be disbursed by the Department of the Treasury for refundable tax credits⁴ and by the Department of Labor for unemployment compensation.⁵ In addition, highway programs and the Supplemental Nutrition Assistance Program (SNAP) are each expected to spend more than $10 billion this year as a result of ARRA.

The law’s largest effect on revenues in 2010 will come from the provision offering temporary relief from the individual alternative minimum tax. That provision reduced tax liabilities in calendar year 2009, and JCT estimates that it will reduce revenues in fiscal year 2010 by about $80 billion. Other provisions that are expected to decrease revenues this year include various tax credits for individuals and families (including the Making Work Pay credit) and tax incentives for businesses.

Spending from ARRA will begin to slow later this year, CBO estimates, but will remain significant for the next few years. In CBO’s baseline projections, outlays resulting from ARRA total $135 billion in 2011, $56 billion in 2012, and $100 billion over the 2013–2019 period.

ARRA’s net effect on revenues after 2011 will generally be to increase tax receipts, CBO and JCT project. Provisions affecting individual income tax payments will expire over time, and some tax savings incurred by businesses last year and this year will lead to additional tax payments in the future.

CBO’s current projection of ARRA’s budgetary impact over the 2009–2019 period—a total increase in deficits of $862 billion—is about $75 billion greater than the agency originally estimated. Most of that difference is on the outlay side of the budget (adjusted for the reclassification of the health insurance subsidy). Revenue estimates, in total, have not changed.

Almost two-thirds of the increase in CBO’s 2009–2019 projection involves income security programs. Outlays for unemployment compensation in 2009 and 2010 are now estimated to be $21 billion higher than initially expected. In addition, CBO has raised its estimate of the effect of ARRA on SNAP benefits by a total of $34 billion to reflect the lower projections of inflation in its current economic outlook. Normally, SNAP benefits are adjusted annually according to increases in the cost of a market basket of food served at home. Provisions in ARRA, however, set the maximum benefit for a family of four at $668 a month, 13.6 percent higher than the maximum benefit at the time the law was enacted. Under ARRA, the maximum benefit will remain at that higher amount until inflation causes the unadjusted benefit to exceed the ARRA-mandated one. CBO now estimates that the maximum SNAP benefit will stay at the amount stipulated by ARRA until 2019—whereas when the law was enacted, CBO’s inflation projections were higher, and CBO expected that the ARRA-stipulated benefit would be in effect only through 2013.

Most of the rest of the increase in projected outlays involves the Build America Bond program, which pays state and local governments for 35 percent of their interest costs on taxable government bonds issued in 2009 and 2010 to finance capital spending. Participation in the program has already risen to a level significantly higher than CBO’s and JCT’s original estimates—over $60 billion in new bonds have been issued since the program began in April. That higher-than-expected issuance prompted CBO to add $26 billion to its projection of outlays for the program between 2010 and 2019.

Some current projections of spending from ARRA are lower than CBO’s original estimates. For example, CBO now believes that outlays stemming from the enhanced matching rates for Medicaid, which expire at the end of 2010, will be a total of $3 billion lower than the agency estimated last year.

In terms of revenues, the only provisions in ARRA for which CBO has updated its estimates are the Making Work Pay credit and the subsidies for health insurance costs of unemployed workers. Because the tax credit was put in place sooner than anticipated, CBO reduced its estimate of revenue losses from the credit in 2010 by about $9 billion. (That change offset an increase of the same size in the credit’s estimated revenue effect in 2009.) Other than the reclassification of the $24 billion in health insurance subsidies, CBO does not have enough information on which to base updated estimates of ARRA’s remaining revenue provisions at this time.

ARRA (Public Law 111-5) was not the only legislation enacted in recent years in an effort to bolster the economy. Before ARRA, polices such as tax cuts in the Economic Stimulus Act of 2008 and two extensions of unemployment benefits tried to lessen the harm caused by the downturn. Legislative initiatives after ARRA included the Car Allowance Rebate System program (also known as Cash for Clunkers), an extension and expansion of the tax credit for first-time home buyers, and additional expansions and extensions of emergency unemployment benefits and health insurance subsidies for the unemployed. In addition to those legislative efforts, various actions have been taken by the Federal Reserve and other government agencies to support the financial, housing, and manufacturing sectors of the economy.

About $3 billion of the higher outlays for unemployment benefits stemmed from an intergovernmental transfer; CBO did not show that transaction as having an effect on outlays, but it was recorded that way by the Administration. It is likely that what ended up being recorded as outlays from ARRA were actually state benefits that would have occurred regardless of ARRA’s enactment.

The Worker, Homeownership, and Business Assistance Act of 2009 (Public Law 111-92) expanded the benefits available under the temporary program for emergency unemployment compensation; people who exhaust regular benefits can now receive as many as 53 weeks of additional benefits under the emergency program. Amendments to the Department of Defense Appropriations Act, 2010 (P.L. 111-118), extended that program for two months, through February 2010.