The American Rescue Plan’s likely cost is way more than $1.9 trillion

By Alex Brill

The Senate is poised to consider President Biden’s American Rescue Plan, an elaborate bill recently passed by the House of Representatives through the budget reconciliation process at an estimated cost of $1.9 trillion over the coming decade.

However, as lawmakers know well, there is a deep well of
budget tactics that can “leverage” any budget reconciliation instructions into
a much larger set of tax and/or spending policies. For example, Democrats cried
foul in 2017 when Republican-led tax reform, also enacted through the budget
reconciliation process, included temporary changes (through 2025) to fit within
the requirements of that year’s governing budget resolution.

United States President Joe Biden addresses the nation after the U.S. House passed the American Rescue Plan and sent it to the U.S. Senate for consideration from the Roosevelt Room of the White House in Washington. Via REUTERS/Sam Corum/POOLCNP/InStar/Cover Images

The current Democrat-led effort leverages these tactics tenfold. Expansions of the child tax credit (CTC), earned income tax credit (EITC), and the child and dependent care credit would be enacted for just a single year under the guise of promoting economic security during the pandemic. However, the Wall Street Journal recently reported on Democrats’ desire to make permanent the CTC expansion. In addition, the House passed a permanent version of their expansion of the child and dependent care credit last year, and it is unfathomable to imagine Congress letting the one-year EITC expansion lapse post-2021.

Therefore, a better estimate of the cost of the House-passed
American Rescue Plan is a permanent extension of the increased tax benefits. The
benefits related to children would alone raise the total cost by roughly 75
percent from $1.9 trillion to $3.3 trillion over 10 years.

Some of the other temporary provisions will likely (hopefully!) lapse after 2021, including the $1400-per-person rebate check. Others, such as increased premium assistance for individuals with incomes between 100 and 400 percent of the federal poverty level who purchase qualified health insurance, are on Democrats’ wish list for a permanent extension. Extending these provisions would further boost the total cost of this bill by hundreds of billions.

The table below presents an estimate of the 10-year cost of
the child-related tax provisions if they were made permanent compared to the one-year
cost of the temporary policy.

Child-Related
Tax Provisions in American Rescue Plan
1-Year
Cost ($ millions)
10-Year
Cost

($
millions)
Child Tax Credit expansion -100,800 -1,302,300
Child and Dependent Care Tax Credit
expansion
-8,600 -91,900
Earned Income Tax Credit expansion* -13,400 -138,000
Total revenue effect -122,700 -1,532,100

* I consider only the temporary EITC provisions not including the proposal to allow taxpayers to rely on 2019 income instead of 2020 income for tax year 2021.

** Author’s calculations based on estimates derived from AEI’s OSPC Tax-Calculator 3.0.0. Baseline is the law currently in place as of March 3, 2021 and provisions are assumed effective 01/01/2021.

The merits of these policies can all be fairly debated (see here for one in-depth review of the tax benefits of parenthood and here for an important explanation of the CDCTC), but the likely fiscal impact needs to be rightly recognized. While many policy experts and politicians debate if $1.9 trillion is too much or just right, the reality is enacting this legislation will lead to an annual increase in the federal deficit of near $200 billion annually by the end of the decade. It should not surprise us that Democrats are leveraging the gamesmanship opportunities of budget reconciliation, and we should remember that they learned some of these strategies from Republicans!