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American Rescue Plan Opens Door for Summer Spending Spree, Child Poverty Reduction

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On Thursday, 11 March, President Biden signed the American Rescue Plan into law. Included in the massive, controversial law are a litany of tax and aid provisions that strive to dramatically shift the US economic landscape in 2021, and perhaps beyond.

Direct federal economic relief emerged in two separate laws in 2020. The first stimulus round included up to USD1,200 per eligible individual as well as USD500 for dependent children under 17, while a second round at the end of the year authorised up to USD600. Economic assistance under the new law takes a variety of new forms. Specifically, direct payments and tax credits are among the most widespread. The newest stimulus includes a direct payment of up to USD1,400 for eligible individuals, including for dependents.

Another notable inclusion is the expansion of the child tax credit from USD2,000 per child to a fully refundable amount between USD3,000 and USD3,600 per child. The law also provides an option to receive some of the credit back in advance in instalment payments.

Projecting Stimulus Impacts, Poverty Reduction

The US economy suffered significantly in 2020, with the foodservice and tourism industries particularly devastated. The spring and summer of 2021 offer a glimmer of hope however, as vaccination of adults continues to pick up speed, and improving weather leads to a dramatic increase in opportunities for outdoor activities and commerce to return. Direct aid payments are positioned to play an unprecedented role in the recovery during Q2 of 2021. Gradual returns to offices hint at a recovery of apparel spend, and 2021 is likely to see a significant tourism boom as families look to escape the confines of their homes. Barring setbacks, stimulus cheques should serve as a major catalyst for economic growth in 2021.

In addition to direct payments and tax code changes, the law extends expanded unemployment benefits and targets a variety of other cost burdens. The financial assistance in this initiative is particularly remarkable in its ability to dramatically impact poverty levels in the US, where 11.6% of the population is below the poverty line. An eligible family of four could see a USD5,600 cheque in the coming days - a tax-free sum of money equivalent to 18.6% of the household income for two parents earning the federal minimum wage. For many Americans, this could be the most cash in hand they have seen at one point in their lifetime, and that is before considering possible tax credits. Policymakers have high hopes that this influx of cash can lift millions of children out of poverty in 2021.

The long-term impact of the American Rescue Plan is unclear with tax changes in particular set to expire after 2021. Some Democrats in Congress have expressed an interest in extending tax provisions beyond this year. Success is far from guaranteed, but if these plans come to fruition, it could mark a dramatic shift in US poverty levels for years to come.

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