Tax rebates, arriving soon, likely to boost economy

"Pay to the order of you, the taxpayer."

For many Americans, those sweet-sounding words are about to become reality.

Starting next week, Uncle Sam will mail the first batch of President George W. Bush's income-tax rebate checks - a stimulus that may represent the nation's best hope of economic revival.

The money by mail promises to boost consumer spending at a time when people are bombarded with troubling reports of layoffs and stalled assembly lines.

How well rebates work depends on what people do with them - people like Billy Buckley. The Louisianan says his $300 check will push him closer to buying what he dreams of while cooking catfish - a navy blue Dodge Neon. "I've been saving up for almost a year," he says, and this check will "definitely" help.

Many Americans, in fact, plan to spend, rather than save, their new money, which would be good for the economy.

According to a new Christian Science Monitor/TIPP poll, 40 percent of those surveyed plan on spending their rebate checks, which will be up to $300 for single taxpayers and up to $600 for those filing jointly.

"This is very significant, because this year the economy is on a high wire," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

But 44 percent of those surveyed plan on saving or investing their rebates.

That's what Ken Pringle and his wife plan on doing with their $600 refund check. "I don't want to be too old when I retire," says the northern Florida auto body worker.

Meanwhile, a magnanimous 7 percent of those surveyed plan to give it away. (Four percent will donate it to charity, and 3 percent will give it to a relative or friend.)

The poll results are only a rough guide. When people's plans run up against the realities of household budgets, the percentage of people who spend the money could well go higher, economists say.

But even the 40 percent figure will bring a better tone to the economy.

Retailers are salivating over the coming influx of ready money.

Some are already offering to cash the checks free of charge, and others are touting everything from tax refund pizzas to specials on chain saws.

Economists believe the potential for getting Americans back in the spending mode, coming at a time when earlier interest-rate cuts by the Federal Reserve are cranking in, will add at least half a percentage point, and perhaps a full point, to economic growth in the last half of the year.

Saving helps, too ... but later

While added saving is good for the economy over the long term, since it provides fuel for business investment, it won't do much to help beleaguered computer manufacturers hoping the refunds get a few dusty models off the shelves.

"The intent of the rebates is to induce households to go out and spend now to stimulate demand in the broader economy," says Mark Zandi, chief economist at Economy.com, an economic website.

"The irony is that economists have been asking people to save more money for a long time, but now we'd like to see them spend more over the next few months to get us through the downturn," he says.

Even if people decide to save, economists expect much of the money to eventually get spent - perhaps next year or during the holiday season. For example, in Bakersfield, Calif., Lorna Long and her husband are planning on saving their $600 rebate check for now until they decide how to spend it. "It will be spent before Christmas," she says, on either a new dryer or a car-TV for their five grandchildren.

This kind of spending has given the economy a pop in the past. In March of 1975, under President Gerald Ford, Congress sent out rebates of $100 to $200 per taxpayer. Although economists have studied that rebate extensively, they still disagree over whether it helped pull the economy out of a recession.

Still, Mr. Zandi observes that in the fourth quarter of 1974, real consumer spending was down 6 percent on an annualized basis, but jumped an annualized 7 percent immediately after the rebate checks went out.

The Monitor/TIPP survey of 911 adults found that even though 40 percent expect to spend their rebates, 6 percent expect no rebate at all (This can occur for people who pay no taxes.)

According to Raghavan Mayur, the president of TechnoMetrica, who conducts these polls for the Monitor, this means that the actual impact of the rebates will be higher on the economy, since 42.55 percent of those expecting rebates plan to spend them. This should boost overall spending by an extra $1.15 billion.

Despite the prospect of the tax cut, the Monitor/TIPP poll found overall economic optimism in the US dropped somewhat during the past month. This was particularly notable in the South, which is generally regarded as the most optimistic region of the US. In the South, the index dropped from 57 to 55.

Mr. Mayur says the overall decline nationwide (from 55 in June to 54 in July) stemmed primarily from a weakening of optimism about the six-month outlook.

This is not surprising, since much of the economic news recently has been about layoffs and bankruptcies.

Yesterday, the government reported that industrial production fell 0.7 percent, its ninth straight monthly decline.

Also pulling down the index was public skepticism about federal economic policies.

This is the case with Bruce Dalby, a music professor at the University of New Mexico in Albuquerque. "I think the tax cut will definitely stimulate the economy in the short term. But I'm concerned that the greatest benefit will be derived by the rich," he says, adding, "I'm afraid we're getting back to Reagan-era deficits."

And April Lark, a single mom with three children near West Palm Beach, Fla., says she is skeptical about the rebates. "They are trying to get on our good sides," she says, but adds that the check will help her move from a two-room apartment to a three-bedroom apartment.

In fact, there was something of a brouhaha this week in Washington over who should take credit for the rebates. The US Treasury will be sending out letters to all taxpayers informing them how much they will get. To some Democrats, the letters sound partisan, since it mentioned Mr. Bush and Congress in the first paragraph.

Eager retailers

Such policy issues, however, are not on the minds of those who need the money, especially the nation's retailers. The Kissing Bridge Corp., which operates a ski resort, is mailing out flyers advertising its annual season pass sale just after the bulk of the checks will go out. "Our pitch is, 'Why pay-off the credit cards? If this is mad money, why not do something fun?' " says Mark Halter, president of the Glenwood, N.Y., company.

To help consumers spend their money, Wal-Mart will cash the checks for free. To advertise the service, the Bentonville, Ark.-based company is putting up signs in its 3,085 stores, printing notices on the bottom of receipts, and advertising on its in-house radio station. If customers want, they can then convert the checks to Wal-Mart/Sam's Club Shopping Cards for future use.

The company says some 100 million Americans visit a Wal-Mart each week. "We are aware quite a number do not have banking accounts," says Rob Phillips, a spokesman, "so this way they don't have to pay a check-cashing service."

Sara B. Miller and Steven Savides contributed to this story.

(c) Copyright 2001. The Christian Science Monitor