Money worries may hinder tax rebate spending

Allison Linn Senior writer • Profile • E-mail

Over the past year and a half, Shane Gledhill has seen the value of his home drop as his family’s gas budget and grocery tabs have risen. Meanwhile, the construction industry he works in has slowed.

So when the government announced a plan to offer Americans a tax rebate check, the 42-year-old father of two knew exactly what he would do with his money.

“We’ve got to stick that in savings because who knows what’s going to happen? “ Gledhill said. “The last thing I want to do is go out and spend it on something.”

Aiming to help stimulate an ailing U.S. economy, the government is planning to hand out tax rebates to millions of Americans, with the hope that the taxpayers' windfall will go straight into a nearby cash register. But with economic woes mounting, some Americans are feeling nervous about going on a shopping spree.

Instead of splurging on a big-screen TV or other indulgence, many say they plan to use the money to pay off debt, pay other tax bills or budget for higher expenses like food or gasoline. Others say they’d rather stash the money away in case things go from bad to worse.

That’s a gloomy scenario for those who are hoping a burst of consumer spending will help stave off a sharp economic downturn.  But some economists believe that, despite their good intentions, many will change their minds once they actually have that check in their hands.

“Americans have an amazing ability for self-deception, and I have full confidence that they’re going to end up spending the money regardless of what they say they’re going to do with it,” said David Wyss, chief economist with Standard and Poor’s.

Of course, the American economy would benefit in the long term if more people actually did save the money, given that Americans at notoriously poor at saving for a rainy day. But spending the money is expected to provide some immediate relief.

“It’s not a long-term solution; it’s a short-term solution,” Wyss said.

About 117 million families are expected to get the tax rebate beginning in May. It will provide up to $600 per taxpayer, or $1200 per working couple, plus another $300 per dependent child, for Americans who meet certain income requirements.

Mark Zandi, chief economist with Moody’s Economy.com, is expecting that two-thirds of that money will be spent within six months, based on the spending habits he saw the last time Americans got a tax rebate, in 2001. He said spending could be slower this around because the rebate isn’t coming along with other tax cuts, and people also may be grappling with more mortgage debt. On the other hand, the checks will go to more lower-income families this time, and Zandi believes those families are more likely to spend the money.

“They might take the opportunity to go to the dentist and get a check-up – things that they put off because they just don’t have the cash,” he said.

For many Americans, the added cash could end up being sucked right into the gas tank, especially if gas prices drift as high as $4 per gallon this summer. The tax rebate won’t benefit the economy as much if it is spent at the pump, Zandi said, because a large chunk of the profits will go to producers overseas. But the fact that Americans have that money to spend on gas could still help because it eases people’s overall financial burdens.

“We’re just sort of cushioning the blow,” he said.

On the other hand, Zandi said the economy will be helped if people put the extra cash toward growing grocery bills. Also, those that use the money to pay down credit card debt may also inadvertently help the economy, he said, because they’ll feel more freedom to run up debt again.

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