The pandemic has raged on for over a year now. But there’s a light at the end of this seemingly endless tunnel of pandemic hardship, and for many Americans, it just got a whole lot brighter.
President Joe Biden recently signed into law the American Rescue Plan, a $1.9 trillion Covid-19 relief bill aimed at shining a light on America’s darkened economic prospects in the wake of the pandemic, which has stolen millions of jobs, businesses, and lives.
The bill passed along entirely partisan lines—with no Republicans voting for the stimulus package. Republicans have balked at the bill’s cost, calling it a liberal wish list. Even some center-left economists have voiced concerns that the bill’s large dollar value could lead to inflation. Such comments came, most notably, from Larry Summers, former director of the National Economic Council, and Olivier Blanchard, former chief economist of the International Monetary Fund.
The Rescue Plan comes on the tails of two other stimulus packages passed under President Donald Trump: the CARES Act, which totaled $2.2 trillion, and the Covid-19 Economic Relief Bill, $900 billion.
Despite some partisan and institutional concerns, the bill has been met with enthusiastic support from the American people. A survey from the Pew Research Center conducted between March 1-7, finds that 70% of American adults support the aid package, including 41% of Republicans and 94% of Democrats.
IPPSR’s most recent episode of the State of the State podcast discusses the stimulus package and examines its impact on the economy, childhood poverty, and Michigan local governments.
So, what’s in the bill? What does it mean for Michigan? And who will benefit most from the plan?
As commentators have pointed out, Biden’s relief plan takes a bottom-up approach, putting the keys to jumpstart the economy in the hands of the poor. In that same vein, we will examine the bill’s beneficiaries from the bottom up.
Low-Income and Unemployed Workers
The pandemic has hurt low-income workers harder than most. According to Michigan’s economic outlook, prepared by several University of Michigan economists, by the end of 2020, low-wage industry job losses totaled 14.6%, compared to middle-wage industry job losses which reached 6.7%, and high-wage losses, 4.2%. Though the University of Michigan forecast does not specify what constitutes a low, middle, or high-wage job, the Internal Revenue Service’s tax bracket guide sheds light on how the federal government groups wages.
Data from the US Census Bureau, reported by the Center on Budget and Policy Priorities, a left-leaning, nonpartisan Washington D.C. think tank, illustrates the severe ramifications of these job losses. According to the data, which was collected from February to March 2021, 30% of Michiganders have had difficulty paying for household expenses, 18% were behind on rent, 10% did not have sufficient food, and 13% could not afford to adequately feed their children.
The dark trend stretches nationwide. According the Pew Research Center, 33% of low-income earners report that they or someone in their household lost their job during the pandemic; only 14% of upper-income and 26% of middle income people said the same. What’s more, according to the same survey, low-income individuals who lost their job early in the pandemic are 15% more likely to still be unemployed than middle and upper-income workers.
Biden’s plan, though, seeks to provide respite for those made most vulnerable by the pandemic in the form of financial aid.
Direct payments of $1,400 are designed to go to those earning less than $75,000 per year, and low-income earners are likely to spend that money immediately on essentials. This spending helps them and the economy broadly by pumping new money into circulation.
The bill extends a $300 supplement to weekly unemployment insurance payments designed to help unemployed workers afford necessities. As of March 1, 859,313 people claimed unemployment insurance in Michigan. And such boosted unemployment payments have proved monumental in buoying state revenues nationwide: when unemployed people can buy essentials with the help of a federal supplement, states that collect sales tax can continue earning revenue.
The stimulus provides $27.4 million in rental assistance nationwide. It extends a 15% increase to SNAP benefits (more commonly known as food stamps) which was set to end June 30 but, with the stimulus, will now last until September 30. According to the aforementioned Census data, between February and August 2020, almost 8,000 new people began participating in SNAP in Michigan, a 30% increase.
The bill will increase a tax credit for low-income workers without children from $530 to $1,500. Restrictions regarding who is eligible for the tax credit will also loosen. The age requirement is now 19 rather than 25, and the maximum income was raised from $16,000 to $21,000 per year.
Finally, when a person loses their job, they can pay a hefty premium to remain on their former employer’s health plan. A piece of the relief bill known as COBRA (Consolidated Omnibus Budget Reconciliation Act) will allow the federal government to cover that cost until Sept. 30.
The Tax Policy Center, a Washington D.C. think-tank, estimates that because of Biden’s stimulus plan, the lowest quintile of earners will see a 20.4% increase in after-tax income in 2021. Those in the second lowest quintile too will see a 9.3% after-tax income increase. The bill’s strength and far-reaching effectiveness comes not only from its immediacy but also its longevity.
Children and Families
The financial rout of Covid-19 is not limited to individual low-income earners but extends to those with families and their children. In Michigan, according to U-M data, 19% of children under the age of 18 are impoverished. The American Rescue Plan attempts to combat such high levels of childhood poverty with unprecedented levels of investment.
The most notable change in the bill for families is an increase in the tax credit for parents from $2,000 to $3,600 per child under 6 years of age, and from $2,000 to $3,000 per child ages 6 to 17.
The stimulus also provides $24 billion nationally for child-care facilities to reopen safely by covering costs incurred due to the pandemic such as rent, personnel, personal protective equipment (PPE), and cleaning supplies. When child-care facilities are operational, more parents are able to work and boost their family income.
Although an extra thousand or so dollars in tax credits for parents may seem innocuous, it will have a profound effect. According to a report from the Center on Budget and Policy Priorities, 249,000 children under 18 would be lifted above or closer to the poverty line as a result of the tax credit expansion. Ultimately, the report finds that 92% of Michigan children will benefit from the tax credit expansion, and nationwide, child poverty will decline by 40%, lifting 4.1 million children above the poverty line.
Michigan K-12 schools will receive $3.8 billion from the aid package. These funds are meant to help schools reopen classrooms safely after months of remote and hybrid learning. For example, the money can be used to improve technology for remote work, purchase personal protection equipment like masks, and retrofit facilities for better ventilation.
Twenty percent of the $3.8 billion allocation must be put toward offsetting learning loss caused by the pandemic. Recovering learning loss can be achieved a variety of ways—for example, more summer school offerings, longer school days, a longer school year, and hiring more teachers to create more opportunities for one-on-one or small-group instruction. School districts will choose which option best suits their district and students.
Local and State Governments
Biden’s relief bill allocates $350 billion to local and state governments across the country to shore up revenue losses due to the pandemic.
According to data from the U.S. House Oversight Committee, Michigan will receive a total of $10.3 billion statewide, including funds for local governments and the state. The state will be given $5.7 billion; metro cities, $1.8 billion; counties, $1.9 billion; and townships, $700 million. The first half of the money will be distributed to states and localities within 60 days of the bill’s passing, and the second half will be sent out one year later.
Starting with localities, unsurprisingly, Detroit will earn the most aid of metro cities, totaling $880 million; Flint is a distant second, receiving $99 million.
The most populous counties were allocated the most aid, with Wayne County earning $339 million, followed by Oakland and Macomb, receiving $243 million and $170 million, respectively.
The bill sets wide parameters for how local governments can spend the money. The funds can go to aid households, small businesses, industries like tourism and hospitality. It could go toward paying essential local government workers, or investing in water, sewer systems, and broadband infrastructure. The bill makes clear, however, that state and local governments cannot employ the federal aid to fund previously unfunded pensions or extend tax cuts.
The local aid has been largely applauded on both sides of the aisle. Many cities’ finances have been battered by the pandemic. Cities rely heavily on property tax revenue which has plummeted with fewer office buildings occupied as many companies moved toward remote work for the foreseeable future. An analysis by the credit rating agency Moody’s Investors Services, summarized by the New York Times, finds that three-quarters of state and local government job losses have occurred locally.
Mayors across the country celebrate the provision. Even Republican mayors have lauded the plan, despite their party’s disapproval of the bill. Bryan Barnett, the Republican mayor of Rochester Hills, praised the cash allocation to local governments while speaking to USA Today: “The need is real.” Prior to the enactment of the stimulus, Barnett and 425 other mayors, including 32 Republicans, signed a letter urging Congress to approve Biden’s bill.
The popularity of local government funding among mayors is unsurprising given its enormous economic impact. A recent study by MSU economists finds that aid to local Michigan governments will lead to $4.4 billion in direct government spending. This spending will circulate through the economy—if one person receives more money, they will spend some, which leads to another person receiving more money, some of which they spend, and so on.
The study calculates that the stimulus money to local governments will lead to a $7.35 billion increase in transactions; this, in turn, will support 43,000 jobs in Michigan. In all, because of the stimulus bill, Michigan’s gross state product will increase by $6.7 billion.
Aid to state governments is far murkier and more hotly contested than aid to localities. Many states are reporting revenues better than expected early on in the pandemic. In fact, some, including Michigan, are reporting slight increases in tax revenue during 2020 versus 2019 due to greater-than-expected online and unemployment spending.
Republican lawmakers have pointed to these improved revenues as evidence against further aid to states, which they believe unnecessarily drives up an already large price tag. However, these claims do not paint a full portrait.
At the latest Michigan revenue outlook conference in January, when financial analysts forecast state revenue in upcoming fiscal years, the state projected School Aid Fund revenue will rise by 3.3% in fiscal year 2020, which ended on September 30. However, General Fund revenue is expected to dip by an almost equal amount: 3.10%.
The state also estimates that revenue in FY21, which began October 1, 2020, will be even worse, as total revenue is projected to decline by 2% and General Fund revenue by almost 5%. Michigan’s General Fund pays for general government operations and state spending not covered by federal funds or “restricted” revenues. Restricted revenues are sources of income that state law mandates must be used for a specific purpose—for example, gasoline and fuel taxes must go toward roads, highways, and public transit.
What’s more, in my opinion, the ultimate goal of Biden’s stimulus bill transcends mere revenue crisis control. Rather, it seeks to boost the economy from any and all angles, whether that’s through low-wage workers buying groceries or local governments investing in an infrastructure project they’ve kicked down the road.
Biden’s stimulus package will have widespread ramifications for the United States economy. A University of Pennsylvania analysis forecasts the bill will increase GDP by 0.6% and boost tax revenue by 1.3% in 2021. Another projection from the Brookings Institute, a think-tank in Washington D.C., puts the figure as high as a 4% increase in real GDP.
As aforementioned, the relief bill will decrease childhood poverty by leaps and bounds. And according to the previously discussed Tax Policy Center analysis, while the lowest quintile of workers are projected to see the greatest increase in after-tax income (20.4%), the remaining four quintiles will experience income increases as well.
The American Rescue Plan seeks not just to rescue America but to improve it. By investing in the nation’s poor, it uses the coronavirus as a launching pad for change that will make the American economy stronger and more equitable.
This pandemic has been devastating for so many people for so many reasons. But vaccines are rolling out, death rates are declining, and employment rates are rising. However, as Covid-19 cases rise once again in Michigan, we are reminded that we are not yet out of the darkness, that our battle with Covid is not yet complete. But there is a light at the end of this tunnel, no matter how dim it may seem, and perhaps when we reach it, it will shine brighter than ever before.
We are looking forward to seeing IPPSR Undergraduate Policy Fellow Michael Breslin back on campus this coming fall. He’s a junior at MSU studying political science, international development, and history. His primary research interest is economic policy. He previously worked as a communications intern for Mayor Lori Lightfoot of Chicago.