Redeeming Their Rebates

Author: John Reinan

Published: August 2, 2003

Susan Dunn wants a new oven, but the Bloomington mother of eight knows where her tax rebate will be going.

"I posed that question to my husband, and he said we're going to get our house painted," Dunn said.

Government checks are starting to arrive at the homes of 470,000 Minnesota families, part of the new federal tax law passed earlier this year. The law provides for a $400 per child credit to most taxpaying families with children under age 17.

And now that the checks are in the mail, there seems to be a shift in consumer attitudes.

Ten days ago, most consumers questioned by the Star Tribune said they would save the rebate or use it to pay bills. As the money becomes real, however, people appear increasingly ready to spend it on a special purchase.

"We bought a new patio set, and we did count on the money," said Shelly Lessard of Bloomington. Lessard, the mother of two girls, got her $800 rebate earlier this week.

Tina Brown of Minneapolis, mother of a 10-year-old daughter, plans to buy appliances with her $400 check.

"I just moved, and I need to buy a washer/dryer and a freezer," Brown said. "There are too many things I need."

Those words will be music to the ears of local retailers, many of whom say they haven't yet seen a burst of business from the rebate checks.

"The general consensus here, after talking to about a dozen salespeople, is that we feel it's a little too early for us to see the checks," Scott Araskog, manager of the HOM Furniture store in Coon Rapids, said Friday. "We've been talking about them, though, and we did have one client today who mentioned them."

Ryan Wood, a business solutions adviser at the Gateway computer store in Bloomington, said people often buy computers when they get their regular tax refunds in the spring. But so far, he said, there's been no surge in sales from the child tax credit rebates.

And at 2nd Wind Exercise Equipment in Maple Grove, salesman Jason Sundeen reported no above-normal activity.

"We haven't had one person say anything about their check," he said. "We are really, really busy, but I haven't seen anything about the tax rebate."

The new tax law also cuts tax rates on income, dividends and capital gains. Over the course of a year, the average family could gain hundreds of dollars from the new tax rates, but that money won't come in the form of a one-time check like the rebate.

Married couples with two children under 17, with an income of $63,000, could see as much as $1,100 a year more in their pockets under the new tax law. A single person with an income of $41,000 could see tax savings of $551.

Many parents still say they plan to save their rebates, often for education.

"It will go right toward school," said Cheryl Howell of Minnetonka, who has two sons in private school.

Jean Johnson of Bloomington said she'll put her $400 in the college savings account of her daughter, and Claudia Botler of Minneapolis plans to do the same for her three children.

If consumers do go out and spend the rebates, it could stimulate the sluggish economy. That's the theory the Bush administration promoted in getting the tax bill through Congress.

But it's possible that the long-term effects of the tax cuts will outweigh any short-term gains. Toby Madden, a regional economist with the Federal Reserve Bank in Minneapolis, said the tradeoff for tax cuts now is higher government interest payments in the future.

"They reduced the amount of taxes they're collecting, and increased government spending, so there is a budget shortfall," Madden said. "And they are financing the shortfall with debt. The cost of that is interest payments over time."

And if the government wanted to boost the economy, there were more efficient ways to go about it, said William Gale, a senior fellow and co-director of the Tax Policy Center at the Brookings Institution in Washington, D.C.

"Looking at the larger picture, if what we wanted to do is stimulate the economy, we could have done it much more effectively and at a lower cost if we had pursued different policies," Gale said.

"For example, money could have gone to the states, and that would have had a much bigger bang for the buck than tax changes."

Still, few consumers are complaining about the tax refunds, even though some economists say their children may wind up footing the bill someday.

"We're going to Colorado for a family vacation," said Sarah Melsness of Minneapolis, who just got a check for $800. "We were worried -- things were a little tight.

"But now we're going to have some fun."