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Stimulus: Secret sequel in the budget

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- They're not calling it Stimulus 2, but the Obama administration wants to extend the life of several Recovery Act provisions by building them into the federal budget.

The president's $3.8 trillion budget for fiscal 2011, unveiled Monday, calls for giving states more money for Medicaid and infrastructure projects, as well as renewing tax breaks for workers, small businesses and municipalities issuing bonds. It also requests additional funding for Obama's educational reform initiative, Race to the Top.

All these were key provisions in the $862 billion American Recovery and Reinvestment Act, a massive two-year stimulus program enacted last February. Many of its measures are set to run out this year.

But none of Obama's budget measures will take effect unless Congress incorporates them into legislation. And, at the moment, "stimulus" is not the most popular word on Capitol Hill.

By including the provisions in the federal spending plan, the administration is able to keep the Recovery Act alive without having to pass a separate measure, which will likely spark a lot of controversy. As long as they make it into the fiscal 2011 budget, they will be allowed to continue in the future despite a promised cap in federal spending.

"These are all things that had expiration dates and now they have new life," said Deniece Peterson, manager at Input, a market research firm focusing on government contractors. "It's not surprising, since these are areas Obama has said over and over are his priorities."

Extending stimulus

Much of the budget calls for providing more help to the states. This money is desperately needed since state officials are contemplating massive spending cuts to close yawning budget gaps.

The federal budget measures involve propping up state budgets by covering additional Medicaid costs, while spurring the economy through infrastructure spending.

"It's very critical that state and local governments receive assistance from the federal government," said Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments. "If you don't, you run the risk of states being a drag on the national economy."

--Medicaid assistance for the states: The budget calls for giving states $25.5 billion to help states maintain their Medicaid programs, adding to the $87 billion allocated in the Recovery Act.

Medicaid has been a source of major concern for state officials. The national economic downturn has swollen the pricey health program's rolls, forcing states to contemplate scaling it back or slashing spending elsewhere.

--Infrastructure: The administration wants to build on the stimulus-fueled spending for infrastructure, which it believes is a great way to create jobs.

Among the measures the budget calls for is making permanent the Build America Bonds initiative, which subsidizes state and municipal bond issuances for capital construction projects such as schools and roads. The subsidy on the taxable bonds would be reduced to 28% from 35%.

Also, the budget would add $418 million to the $7.2 billion in the Recovery Act to expand broadband services to rural communities. And it would add $1 billion to the $8 billion being spent on high-speed rail.

--Tax breaks: Obama's budget proposes extending for another year the Making Work Pay tax credit, which will increase the deficit by $61.2 billion. The refundable credit provides up to $400 per person and up to $800 for couples who file jointly.

The administration also wants to extend the deadline to apply for the 65% subsidy for COBRA health insurance benefits by 10 months, and send another $250 to Social Security recipients.

Small businesses, which are the focus of the administration's latest job creation push, would also see a tax break continue. The budget calls for extending through 2010 a Recovery Act provision that allows these firms to immediately expense up to $250,000 of qualified investments.

--Education reform: Schools would see an additional $1.35 billion to continue the president's $4 billion Race to the Top challenge and allow school districts to apply directly. The initiative calls for states to submit applications outlining how they would improve student performance, reward and retain teachers, and turn around low-performing schools.

While Republicans say that another year of stimulus won't help create jobs, supporters contend that it's crucial to maintain these initiatives as long as the economy is on the rocks.

"We should be continuing the Recovery Act measures because we still have high unemployment and growth is uncertain," said Michael Ettlinger, vice president for economic policy at the Center for American Progress. "We shouldn't take our foot off the pedal." To top of page

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