What will consumers do with tax rebates?


A customer checks out at a Target store in Lombard, Ill., in this Dec. 6 file photo.

The Associated Press
Published: Saturday, January 26, 2008 at 6:01 a.m.
Last Modified: Friday, January 25, 2008 at 9:14 p.m.

The success of the federal $150 billion emergency economic stimulus plan will hinge on whether American consumers do what they do best - spend, spend, spend.

The stimulus has been debated in Washington for more than a week as the economic outlook worsened, and now Americans are armed with specifics: Individuals will get up to $600, working couples $1,200 and those with children $300 more per child.

President Bush and leaders in Congress hope people will spend those rebates - a flat-screen television, maybe, or a trip to Disneyland - to help revive an economy sagging from bad mortgage lending and a lack of confidence in the stock market.

One problem: The spending habits of Americans, many of whom used the rising value of their homes during the real-estate boom like a piggy bank, may be changing as housing prices tumble and credit dries up.

So many consumers, like Jennifer Galligos of St. Louis, may put the money into savings or use it to pay down debt instead. The 24-year-old accountant is married and has a 5-year-old son, so she and her husband could get up to $1,500 in rebate money.

"I'd probably put something like that in a CD or another investment,'' Galligos said during her lunch break Friday. "It's not often that I get a chance to save something.''

The National Foundation for Credit Counseling urged consumers Friday to use the money to pay down debt and past-due bills. But the group also recommended spending the money on home repairs or remodeling that might cut down on future energy bills.

The stimulus package isn't a done deal yet. While approved by Bush and leaders in the House, it goes to the House floor for full approval next week, and later to the Senate.

Democrats there are already promising to try to amend it.

Consumer spending accounts for roughly 70 percent of the U.S. economy, so putting money in the hands of shoppers is an easy way to boost economic output - at least in the short run.

"I think it will have a positive effect - I think it's a good package. But I don't think it's going to be enough to avoid a recession,'' said Steve Fazzari, a professor of economics at Washington University in St. Louis.

The rebate isn't likely to create the kind of broad economic resurgence that happened after the recession of 2001, Fazzari said. Historically low interest rates then created a boom in home refinancing.

That put more money in consumers' pockets and lowered mortgage payments. But most home owners have already refinanced, and tightening credit markets make another mortgage bonanza unlikely, he said.

"I expect that there'll be some spending out of this rebate. But it's true that households are going to be facing a tougher financial position at any time since the early 1980s,'' Fazzari said.

There's evidence that much of the rebate could find its way into cash registers, even if it's not immediate.

When similar rebates of about $300 per person were paid out in 2001, two-thirds of the cash was spent within six months, according to one paper published by the National Bureau of Economic Research, a private research group that serves as the national arbiter on such matters.

Tom Wirtz, an information technology manager from Pewaukee, Wis., has five kids between the ages of 5 and 16 as well as a 19-year-old. Describing his current financial situation as "comfortable,'' he said he plans to save half of his $2,700 check and use the rest for home improvements.

"I support it,'' Wirtz said of the rebate plan.

"It's a good way to stimulate the economy and return money to the people who earned it.''

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