Review of the American Recovery and Reinvestment Act of 2009 and Its Impact On California

The American Recovery and Reinvestment Act of 2009, ARRA has been passed. The bill is a combination of spending and tax provisions equaling $787 billion over 10 years. It is expected to create or save 3.5 million jobs over the next two years. The Act provides $311 billion in spending appropriation and $476 billion in tax provisions. From this federal stimulus package, California is expected to receive $78 billion.

The intent of ARRA is not only to provide a short-term impact on the economy, but also provides for long-term investments in the hope of dampening the negative impacts of the economic downtown. The majority of the funds will be delivered through existing programs; a very few new vehicles were created that will require new organizational systems for deployment. The investment priorities for the stimulus package are largely met in terms of infrastructure modernization; promoting clean, efficient energy; helping Americans hurt by the economy; supporting education and training; and transforming the economy through science and technology.

Nearly 40 percent of the act is devoted to tax cuts while 18 percent will go directly to state and local governments who are suffering from this economic downturn. 14 percent will be invested in infrastructure and science. Schools and health care accounts for about 14 percent in total. Only 10 percent will go directly towards social programs and the outlay for energy programs is about 5 percent of the Act.

The following chart illustrates where the money is to be allocated from the ARRA. The following table illustrates the total dollar amounts per category.

RELATED TO ECONOMIC DEVELOPMENT

Modernizing Infrastructure

Infrastructure investment is a key component of the recovery package, receiving approximately $114 billion for programs, or about one-third of available appropriations. The Department of Transportation, DOT will receive the largest departmental influx of funding from the bill - nearly $50 billion. Within this allocation, the Federal Highway Administration received $27.5 billion for highway infrastructure investment. Funds will be distributed by existing formulas, with a portion of the funds within each state to be sub-allocated by population. Priority will be given to projects that can be completed within three years and are in economically distressed areas.

Of significant importance as it relates to the above issue has been the term ‘Shovel Ready'. The Administration has identified that it wants only shovel ready projects. It has been identified that a project is only shovel ready if it meets National Environmental Protection Act, NEPA. However, in California, the California Environmental Quality Act typically is used for projects, whereby NEPA is used for programs. Thus, follow up or clean up legislation will be needed to be amend ARRA to include the California Environmental Quality Act, CEQA as meeting the need of the term ‘Shovel Ready'.

In addition to highway infrastructure, ARRA package also invests $8.4 billion in public transit, promoting more sustainable development. Intercity rail received $10.5 billion, showing federal support for rail as a mode of transportation for the 21st century.

Infrastructure investments also are allocated to:

• Broadband development, which will receive a total of $7.2 billion, including $4.7 billion to the Broadband Technologies Opportunities Program, housed within the National Telecommunications and Information Administration in the Department of Commerce, to help underserved areas enhance their competitiveness and position these area for long-term growth
• Electric grid modernization to boost the nation's power infrastructure, which will receive a $4.5 billion allocation through the Department of Energy
• Housing development, including $2.25 billion through HOME and the low-income housing tax credit at the Department of Housing and Urban Development to restart stalled housing projects; $2 billion to redevelop abandoned and foreclosed properties; and $2.25 billion for energy retrofit investments, including $250 million to upgrade HUD-sponsored low-income housing to improve energy efficiency
• Environmental clean-up, including $6 billion to clean-up former weapon productions and energy research sites, and $1.2 billion for the Environmental Protection Agency's clean-up programs, including Superfund

Clean, Efficient Energy

Energy was another big winner in the stimulus package, especially renewable energy and energy efficiency. The Department of Energy received over $30 billion, with $16.8 billion for the Energy Efficiency and Renewable Energy (EERE) Program, signaling the federal government's commitment to renewable energy investment. This includes the Energy Efficiency and Conservation Block Grant (EECBG), which received $3.2 billion; the Weatherization Assistance Program, which received $5 billion; and $2.5 billion for applied research, including biomass and geothermal projects. The new Innovative Technology Loan Guarantee Program received $6 billion. This program, which was designed to provide loans for projects focused on renewable energy, energy efficiency and pollution reduction, was legally enacted in 2005 but had problems getting off the ground due to lack of funding. The $6 billion allocated is expected to support $60 billion in loans.

The recovery package also includes tax provisions designed to stimulate private spending and investment. Clean Renewable Energy Bonds, CREBs received a $1.6 billion limit increase, and the related Qualified Energy Conservation Bonds received a $3.2 billion limit increase. CREBs are designed to finance certain renewable energy and clean coal facilities. Qualified Energy Conservation Bonds are to be used by state and local governments for energy improvement in public buildings and green community projects such as energy efficiency improvements in residential buildings.

In addition, the Act included money for non renewable energy: $3.4 billion was allocated for fossil energy research and development, including $800 million for clean coal.

Science and Technology

In the effort to maintain the long-term competitiveness of the U.S. the recovery package allocated approximately $6 billion to research and science, which are core components of innovation. Dollars will be allocated to NASA ($1 billion), National Science Foundation ($3 billion), Department of Energy ($2 billion) and the National Oceanic and Atmospheric Association, NOAA at the Department of Commerce ($830 million).

Helping Americans Hurt by the Economy

The Make Work Pay tax credit provides a $400 refundable tax credit for individuals earning under $75,000, and an $800 refundable tax credit for joint filers earning under $150,000. The goal behind the tax credit is to encourage consumer spending to spur economic activity. The package also provides $21 billion for COBRA (to help laid-off workers retain their health insurance) and $400 million for unemployment insurance.

The emergency unemployment compensation program (EUC08), which provides an additional 13 weeks of federally funded unemployment insurance to what states provide, was originally set to expire on March 31 of this year but is extended to December 31 in this legislation. The package also extends the maximum amount of time an unemployed worker can receive Trade Readjustment Assistance (TRA), which provides training and income assistance following the exhaustion of unemployment insurance.

Training and Education

The recovery package provides the Employment and Training Administration (ETA) with $3.95 billion for Workforce Investment Act Programs, including $2.95 billion in grants to states for training and employment services. The Department of Labor also received $1.25 billion for dislocated worker services and $750 million for competitive grants for worker training and placement in high-growth and emerging industry sectors. Within this amount, $500 million is allocated for jobs in renewable energy and energy efficiency. DOL received a total of $7.65 billion. That figure also includes $1.25 billion for youth employment programs and $250 million for the Office of Job Corps.

The package provides $15.64 billion for Pell Grants, which aid students attending post-secondary school. In addition, a total of $53.6 billion is allocated for the State Fiscal Stabilization Fund for education to help states facing budget shortfalls.

Economic Development

Economic developers will also see an increase in economic development funds being distributed through the traditional economic development vehicles. For example, the package includes:

• $150 million for the Economic Development Administration
• $1 billion for the Community Development Block Grant Program
• $636 million for SBA loans
  
• $150 million for the Rural Business Cooperative Services
  
• $5 billion for the New Market Tax Credits in both 2008 and 2009
  
• $100 million for the Community Development Financial Institutions
  
• $100 million for EPA's Brownfields Program

The bill also makes regulatory changes and creates several new tools, detailed below, to better promote economic recovery. In addition, economic developers can tap into many non-traditional programs to promote economic recovery such as the Department of Energy's Energy Efficiency and Conservation Block Grant, Department of Labor's funding for dislocated workers and competitive grants to for training and placement of workers in high growth and emerging industries, including green jobs and NTIA's Broadband Technology Opportunities Program. Therefore, economic recovery ultimately will be a function of tapping into the wider pool of resources and leveraging those, as well as accessing traditional economic development vehicles.

In addition to funding, the bill also includes some regulatory changes for SBA loans and Industrial Development Bonds. The SBA Administrator is instructed to eliminate or reduce fees for the 7(a) loan program as much as possible through September 30, 2010. The bill also instructs the SBA to eliminate fees for the 504 loan program for the same time period, and provide reimbursements for development companies in lieu of fee collection. Furthermore, the legislation contains a provision allowing the SBA to guarantee up to 90 percent for 7(a) loans issued within one year of enactment.

Other provisions include the authorization of an SBA Secondary Market Guarantee Authority to guarantee pools of first lien 504 loans that are sold to third-party investors, as well as allowing the SBA to refinance community development loans. The SBA is given the authority to provide small businesses facing economic hardship with loans up to $35,000. The legislation also establishes a secondary market lending authority within the SBA and increases the surety bond maximum amount. The regulatory changes may make it easier for small business to gain access to capital and keep their operations functioning through the recession.

Industrial development bonds are expanded in the recovery package to include the manufacturing of intangible as well as tangible property. This includes, for example, computer software and "intellectual property associated bio-tech and pharmaceuticals." Ideally, the broadening of eligible projects will enable the IDBs to be more potent economic development instruments.

Economic development did receive two new financing tools - Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds. A "Recovery Zone" is defined as an area having significant poverty, unemployment, home foreclosures or general distress, and includes empowerment zones and renewal communities. Areas that are economically distressed due to the Base Realignment and Closure (BRAC) process also are eligible. The limit on the Recovery Zone Economic Bonds is $10 billion, and the bond can be used for capital expenditures, public infrastructure or public facility construction, or for training and education programs. The limit on Recovery Zone Facility Bonds is $15 billion. The Recovery Zone bonds will be allocated among the states according to the decline in employment during 2008.

Tax Benefits for Small Business

Businesses will enjoy new tax breaks. The act provides some new breaks that will benefit many businesses:

Reduced estimated tax payment requirements. For 2009, ARRA reduces the estimated tax payment requirements for many small business owners. Owners generally will qualify for the reduced payments if their adjusted gross income (AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross income is generated from a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008.

Deferral of income from cancellation of debt. Taxpayers generally must recognize cancellation-of-debt income (CODI) when they cancel - or repurchase - debt for an amount less than its adjusted issue price. In certain situations, ARRA allows businesses to defer CODI generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014 and then report the income ratably over the 2014 through 2018 tax years.

Shortening of S corporation built-in gains period. Although a C corporation conversion to an S corporation isn't a taxable event, the S corporation normally must hold on to its assets for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. For conversions occurring in 2009 and 2010, however, ARRA reduces this holding period to seven years.

The ARRA expands some important tax breaks for businesses:

Net operating loss carry back. Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA extends the maximum NOL carry back to five years for small businesses with gross receipts of $15 million or less.

Employers can claim a credit equal to 40% of the first $6,000 of wages paid to employees in certain target groups, such as ex-felons, food stamp recipients and disabled veterans. ARRA expands the eligible target groups to include unemployed veterans and disconnected youth. This expanded benefit applies to such workers hired in 2009 and 2010.

To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business's fiscal year that begins in 2009.

Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. For passenger automobiles that are eligible property under the 50% bonus depreciation rules, the $8,000 increase for the first-year limit on depreciation also is extended to new vehicles placed in service in 2009.

Last year, corporate taxpayers were also allowed to accelerate their alternative minimum tax (AMT) and research and development (R&D) credits in lieu of taking the 50% bonus depreciation. That break has now been extended through 2009.

ARRA also provides some new tax breaks for individuals:

The ARRA provides new relief for most workers, retirees and other Social Security recipients. For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year's "recovery rebate," which was distributed via checks mailed to taxpayers, the new credit will generally be "paid" through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren't eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.

New sales tax deduction for vehicle purchases. ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. The deduction is available for vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009.

The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction also phases out based on AGI, but the limits are higher than those for the Making Work Pay credit: The phase-out begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Other individual breaks expanded

The bulk of the tax relief for individuals involves expanding existing breaks. The following are some of the key identified changes:

Credit for first-time homebuyers
Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000. Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 - except in situations where a home is sold within three years of purchase.

American Opportunity education credit (previously called the Hope credit).
For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans
529 plan distributions used to pay qualified education expenses - tuition, room, board, mandatory fees and books - are generally tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

Qualified small business stock gain exclusion
Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude 50% of their gain as long as they've held the stock for at least five years. ARRA increases the exclusion to 75% if the stock is issued after Feb. 17, 2009, and before Jan. 1, 2011.

Alternative Minimum Tax relief
One tax provision affecting individuals that many thought wouldn't be enacted until later in the year is the extension of Alternative Minimum Tax (AMT) relief. ARRA provides a one-year "patch" that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it's $46,700, and for married filing separately, it's $35,475.The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phase-out ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range. Additionally, ARRA extends a provision through 2009 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. The act also excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 refunding of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

Energy Efficiency for Homeowners
The ARRA also benefits consumers through tax breaks for purchasing and installing certain sustainable products, giving them an incentive to make their homes energy efficient.
Homeowners will receive a 30% tax credit (a $1,500 limit) for the installation of qualified energy efficient water heaters, furnaces, boilers, air source heat pumps and central air conditioners in 2009 and 2010. Ninety-five percent AFUE gas furnaces; 90% AFUE oil and gas furnaces and gas, propane, or oil-fired boilers; 16 SEER/13 EER and greater central air conditioners; 15 SEER/12.5 EER/8.5 HSPF split heat pumps; and 0.82 energy factor/90% thermal efficiency gas, propane, or oil water heaters will qualify for this tax credit. Homeowners will also receive a 30% tax credit on installation costs of residential wind, and geothermal and residential solar thermal property.

The federal government has established a website, www.Recovery.gov which is designed to allow for transparency and accountability in the stimulus package. Every grant and funding opportunity made available through the recovery package must be posted to the Recovery.gov website. In addition, a Recovery Act Accountability and Transparency Board within the Treasury Department will provide oversight for spending and implementation of the recovery package.

As the President admits, the stimulus package is not perfect. All of the funds allocated in the economic recovery package are considered as an emergency supplemental, and do not impact the regular appropriations process. Programs or departments that were left out of the recovery package still have the opportunity to receive funding in fiscal 2009 appropriations, which Congress intends to address in an omnibus bill later this

NOTE: The California Business Minute provides this as background information only and recommends that all items mentioned be fully reviewed to determine availability and requirement criteria to be used by communities, businesses and individuals within the context of their own individual situations.

By: Tim Johnson of the California Business Minute