Congressional negotiators yesterday completed their efforts to develop a compromise bill to cut taxes and increase spending, sending the agreement back to the House and Senate for final debate and approval over the next several days. President Obama is expected to promptly sign the legislation.
Overall, the agreement contains more than $789 billion in new spending initiatives and temporary tax cuts. Of this amount, some $463 billion is in the form of increased spending, while $326 billion were reserved for tax breaks. On the spending side, the single largest item is an $87 billion infusion of federal funds into the states’ Medicaid programs, designed to respond to increased caseloads and to ease the pressure these programs place on state budgets. Among the tax changes, the largest break is a new tax credit based on earned income, at $116 billion.
Negotiators clearly had several objectives in mind in crafting the final compromise, beyond securing the necessary votes in the Senate to ensure final passage. The bill includes incentives for business investment, increased funds for unemployment assistance, provisions to increase the availability of health insurance to laid-off workers, and increased support for job training programs. The legislation increases funds for programs that will generate new construction jobs, such as $29 billion for road and bridge construction programs. Funds were also provided to increase research and development of new energy technologies and for energy efficiency programs.
Education was a priority for Congressional leaders crafting this legislation. While the House and Senate legislation differed in their priorities (which is not unusual), the compromise agreement provides significant support to education at all levels.
State Support of Education
Beyond the $87 billion in increased funds for state Medicaid programs, which will help close state budget gaps, the bill creates a $53.6 billion "State Fiscal Stabilization Fund" within the U.S. Department of Education--primarily to help states reverse cuts made to education budgets in 2008 and 2009. The states are given fairly broad authority to allocate more than $40 billion of these funds among different educational programs. To the extent these funds are dedicated to higher education, however, states must use the new resources for financial aid programs, as well as for operating costs and repair and modernization expenses at public institutions. $5 billion of this new fund is reserved for incentive payments for certain K-12 initiatives. An additional $8 billion is reserved to help states meet high priority needs outside of education, such as public safety programs, although states are allowed to allocate a portion of these funds to public and private higher education institutions for renovation and repairs that are "consistent with recognized green building rating systems."
The compromise would provide $17.1 billion to increase the maximum Pell grant award for the 2009-2010 academic year from $4,850 to $5,350. In addition, funding for the Federal Work-Study program will increase by $200 million. Neither a Senate provision to provide $61 million in new capital contributions for the Perkins Loan program, or a House proposal to increase the annual limit on unsubsidized Stafford loans by $2,000 were included in the final agreement.
Tax Breaks for Students
Both the House and Senate legislation included similar and significant changes to the Hope tax credit for tax years 2009 and 2010. Under the agreement, the Hope credit would be renamed the American Opportunity Tax Credit, and would be expanded to cover four years of college expenses, rather than the current two years. The maximum credit would increase by more than a third, from $1,800 to $2,500 per year, and the income ceilings that limit eligibility for the credit would be raised. The bill would expand the types of expenses that qualify for the credit by including textbook costs. Finally, for families that do not have income tax liability, up to 40 percent of the credit could be refunded to the taxpayer. The cost of these changes is more than $13.9 billion. In a separate change, families with Section 529 savings plans would become eligible to use these funds to purchase computers needed for college.
The final compromise also includes significant increases, totaling some $16 billion, to various federal agencies for research grants and facilities over the next two years. Of this amount, $8.5 billion was allocated to the National Institutes of Health for additional research grants, and $1.5 billion is intended to support the renovation of university research facilities. The National Science Foundation would receive an additional $3 billion, while research programs at the Energy Department would receive a $2 billion boost.
The bill would delay for one year, to January 1, 2012, the application of a new requirement for state and local governments to withhold 3 percent on purchases of goods and services. In an attempt to broaden and strengthen the market for bonds issued by state and local governments, the final agreement would also authorize new tax credit bonds for state and local projects, including public higher education. Investors in these taxable bonds would be eligible for a tax credit equal to 35 percent of the interest they receive as bondholders, rather than an income tax exclusion.
The tax credit provided to individuals on a portion of their earned income will be delivered through revised payroll tax withholding schedules, expected to be released by the Treasury in March. Employers, including colleges and universities, will need to help their employees understand the impact of these changes on their take-home wages.