Home General Government COVID-19 Pandemic COVID-19 Pandemic: Federal Government Response. 4. Coronavirus Aid, Relief and Economic Recovery Act (“CARES Act”)

COVID-19 Pandemic: Federal Government Response. 4. Coronavirus Aid, Relief and Economic Recovery Act (“CARES Act”)

COVID-19 Pandemic:  Federal Government Response.  4.  Coronavirus Aid, Relief and Economic Recovery Act (“CARES Act”)

In 2009, Congress and President Obama passed the American Recovery and Reinvestment Act to pump $831 billion into the economy to mitigate the devastating affect of the the Great Recession.   

This was a highly partisan episode in our history.  No Republicans in the House and only three Republican Senators voted for the bill.  Indeed, the Tea Party began partly as a response to this legislation.

How things have changed!  On March 27, the largest economic stimulus measure in US history was put in place with complete bipartisan support, including all 100 members of the Republican held Senate and a Republican President.  The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) will pump over $1.7 trillion into the economy to mitigate the devastating effect of the COVID-19 recession.

The next four articles in The Informed Vermonter will attempt to review and explain the CARES Act, which is a bit of a monster.  This article will try to outline in broad terms what the Act sets out to do and the related cost parameters. The next article will address the amount of CARES Act money flowing into Vermont.  The third article will focus on corporate and individual tax code changes and the last will address potential abuses of some of the stimulus programs included in the Act.  The CARES Act is not all “motherhood and apple pie”!


The Cares Act does seven basic things.  First, it fixes issues and provides much more money to the healthcare and social programs included in the first two phases of COVID-19 legislation.  Second, it arms FEMA with resources.  Next, it creates a series of massive loan programs for businesses large and small.  Fourth, it provides huge tax cuts for businesses and individuals, particularly rich individuals.  Fifth, it greatly increases federal government payments into the Unemployment Insurance Program.  It also addresses COVID-19 issues in our student loan programs and expands access to retirement plan funds.  Each of these elements will be summarized below.

Much More Funding for Healthcare and Social Services

In the two prior articles, The Informed Vermonter described the Coronavirus Preparedness and Response Supplemental Appropriations Act and the Families First Coronavirus Response Act.  These were the first two phases of the federal government’s response to the COVID-19 crisis and they were put in place in a hurry.  The CARES Act included a number of clarifying amendments for these prior Acts and a boatload more money.

The largest new provision was an additional $127 billion appropriation for Public Health and Social Services, with $100 billion earmarked for reimbursement of hospital and other healthcare entities responding to the COVID-19 emergency for expenses and/or lost revenues.  The CARES Act also provided an additional $17 billion for Veterans Affairs medical support, an additional $25 billion for domestic food programs and a further $4.3 billion to the Center for Disease Control.


The Federal Emergency Management Agency (“FEMA”) has been put in charge of the federal government’s emergency response to COVID-19.  The CARES Act provided FEMA with $45 billion to do the job.

Economic Stimulus Loan Programs

 The Cares Act funded three large federal loan programs for businesses, as outlined below.

The first was the $500 billion Economic Stabilization Fund, designed to make loans to businesses, states and municipalities adversely affected by the health crisis.  $25 billion was carved-out for the airline industry, $4 billion of cargo carriers and $17 billion for businesses “critical to national security”.  The balance of $454 billion is being used by the Federal Reserve Bank to purchase publically traded securities and make direct loans.  The Secretary of the Treasury has been given broad authority to negotiate the terms of loans subject to the limitations in the Act.

With respect to any direct loans, there are strings attached to avoid fraud and abuse of the program.  Executive pay levels are capped, dividends are not permitted and stock buy-backs are prohibited.  Also, the loans must have appropriate compensation and equity warrants have been a feature of some of the loans made.  All of these “strings” are making companies think long and hard about taking a government loan.

The Federal Reserve has used much of this money to buy corporate bonds, municipal bonds and mortgage bonds in the public secondary markets.  These Fed purchases helped the markets to recover rapidly in April, thus permitting many US corporations to tap the capital markets for their needs instead of the taxpayers.  For example, Boeing was able to sell $25 billion of bonds and Ford Motor $8 billion.  Both companies operations have been severely hurt by the COVID-19 pandemic.

The second major “loan” program was the $349 billion Paycheck Protection Program. The intent of this program was to provide two months of cash flow protection to small businesses so they could keep employees on the payroll.  The amount of a loan under this program is the monthly average payroll in 2019 times 2.5, up to $10 million.

Any borrowers must certify that the money is needed to survive.  The loan is forgiven and converted to a grant if 1) 75% of the funds are applied to payroll expenses, and 2) the remaining 25% is applied to mortgage interest, rent or utilities. Basically, if the borrower uses the money the way the government intends, it’s a free grant.  If not, it’s a loan that needs to be repaid.

As of April 16, 2020, the Small Business Administration (“SBA”) reported that 1.66 million loans had been made totaling $342 billion.  Loans of $1 million or less accounted for 56% of the total funds and loans exceeding $5 million just 9%. With all the money going out the door in about two weeks, Congress approved a further $320 billion appropriation in late April.

The SBA data seems to indicate that most of the loans are indeed going to small businesses.  There have been some abuses, which will be discussed in a future article.

The final loan program covered by the CARES Act is the SBA’s Economic Injury Disaster Loan Program.  This program has been around for many years and is designed to provide loans to homeowners, small businesses and non-profits to recover in declared disaster zones.   COVID-19 is the first time the entire country has been declared a disaster area, so this program has had to grow rapidly.  According to the SBA, 775,476 loans totaling some $4 billion had been approved as of April 20, 2020.

Tax Code Provisions

There are a number of important tax code changes included in the CARES Act. Some of these changes are clearly intended to provide short-term stimulus and mitigate the economic impact of the pandemic.  However, some of the changes are simply designed to benefit the top 1% of the population.  Only one of the changes will be discussed here.  All the other tax code adjustments (particularly the ones for rich people) will be reviewed in a subsequent article.

The CARES Act provides for a 2020 individual tax credit for all federal taxpayers (the “individual Recovery Rebate” program).  The tax credit is $1,200 for single filers and $2,400 for joint filers plus $500 for every dependent.  It’s a one time only credit and eligibility is tied to income.  The amount of the credit declines to zero as income go from $150,000 to $198,000 for joint filers.  According to the Congressional Joint Committee on Taxation, the cost of this program will be $292 billion, representing 49% of the total CARES Act tax cuts.

Student Loans

With schools and universities shut down across the country, there is a great deal of distress among students.  The CARES Act created a $14 billion emergency fund for grants to students to cover the cost of course materials, technology, food, housing and childcare.  Student loan payments being made by an employer to an employee (or the student loan provider) are now tax-free from March 27,2020 until the end of the year.  Interest payments on federal student loans have been temporarily suspended, as have any enforcement actions.

Expansion of Unemployment Benefits

The Act provides an additional $600/week from the federal government on top of the amount being paid by any state’s Unemployment Insurance program.  It also expanded eligibility.  The expected cost of these measures is $250 billion.

Expanded Access to Retirement Plans

The 10% tax penalty for early withdrawal from IRA’s has been waived for individuals whose health or income has been adversely affected by COVID-19.  It also suspended the requirement for minimal distributions from IRA’s for 2020.  Normally, there is a requirement to begin withdrawing IRA money from age 72.

I’m not sure why this latter provision was included.  By suspending the provision, individuals can now defer any IRA related taxes otherwise occurring 2020. With stock markets down over 30%, perhaps the lawmakers didn’t want to force people to take losses on their withdrawals.   Anyway, this all seems a bit generous to the author.


The Congressional Budget Office initially estimated that the CARES Act would increase the federal budget deficit by $1.7 trillion, with the vast bulk of the damage occurring in 2020 and 2021.  As indicated above, the further $320 billion was added to the Payroll Protection Program in late April, bringing the total above $2.0 trillion.

The chart below provides an estimated breakdown of the costs of the CARES Act, all of which will be added to an already very large federal government deficit.

Cares Act Cost by Category ($ billions)

CARES Act Program Cost ($ billions)
Tax Code Changes 591
Economic Stabilization Fund/Corporate Loans 454
Loans for Airlines and Specified Industries 46
Paycheck Protection Program 349
Paycheck Protection Program Phase 2 320
Expanded Unemployment Benefits 250
Healthcare and Social Services 173
Total 2,228


The next article in The Informed Vermonter will focus on the CARES Act money flowing into Vermont.  It’s a big number.




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