Tax Rebates: Psychological Boost or Momentous Force?

Perhaps it is just a drop in the bucket, but the tax rebates that the U.S. Treasury will send out to more than 130 million American families and individuals beginning in May couldn't have come at a better time, particularly for retailers. As part of the Economic Stimulus Act of 2008 signed into law by President Bush in February, eligible persons will receive up to $600 — $1,200 for married couples — and parents will receive an additional $300 for each eligible child under 17. The package is valued at more than $150 billion.

Consumers could certainly use a psychological boost after a recent string of bad news. Non-farm payrolls were a negative 22,000 in January and negative 63,000 in February. Housing prices in January were down 10.7% over the same period a year ago in the nation's 20 largest metropolitan markets. At least one leading economist now projects financial losses tied to subprime mortgages will reach at least $400 billion globally, $250 billion of which has already been realized.

Incredibly, venerable investment banking firm Bear Stearns became a casualty of the ever-widening subprime mortgage crisis. As of press time, the 85-year-old firm was expected to be purchased by JPMorgan Chase & Co. at a fire sale price as part of deal orchestrated with the help of the Federal Reserve.

Bold stroke of cooperation?

The passage of the stimulus package was well timed, says James Smith, chief economist with Parsec Financial Management in Asheville, N.C. “It's conclusive proof that all of the Washington experts who had been proclaiming this the most dysfunctional Congress and administration ever were wrong.”

But will it have the desired effect? Smith says that the deal hammered out by the Democrats and Republicans provides some much-needed stimulus in the short term and shouldn't damage the economy too much in the long run. “You put $150 billion into people's hands. That's about one and a quarter percent of GDP, but it's in a concentrated period of time so it should have a measurable effect.”

Critics of the tax rebates say that Americans have already taken on too much debt, and they question why the federal government is encouraging Americans to make more purchases and assume more debt. Well, that's our economic engine. More than two-thirds of our GDP comes from consumer spending.

Households earning up to $150,000 will be the primary recipients of the tax rebates, says chief economist Diane Swonk of Mesirow Financial in Chicago. “The largest beneficiaries, however, are expected to be those at the lowest end of the income strata — earning less than $75,000 per household. These households are the most likely to spend instead of save the checks, as they are living closest to the edge of their budgets,” wrote Swonk in her March 13 newsletter.

About 40% of the tax rebate money will be spent, with discount retailers benefiting the most, Swonk adds. The remaining 60% will either be used to pay down existing debt or invest. The downside is that the rebates will create a larger deficit for future taxpayers. But this is America, where our motto seems to always be that we live for today. Another element of the stimulus package is the accelerated depreciation schedule for small- and medium-sized businesses, which will give a boost to investment on everything from trucks and light machinery to computers.

Assessing the impact on real estate

While the stimulus package could help jump start retail spending, Grubb & Ellis chief economist Bob Bach doesn't foresee the tax rebates having a major impact on commercial real estate. “Other economic factors like whether the economy continues to shed jobs or whether it can turn around and start to generate jobs again have a greater impact on the drivers of demand for real estate.”

Smith of Parsec Financial is calling for GDP growth of 4.2% in the third quarter and 3.7% in the fourth quarter due to a combination of the tax rebates and the series of rate cuts by the Federal Reserve. Bach, however, does not envision a V-shaped economic recovery in the second half of the year.

In fact, Bach believes that there is still a lot of bad news that has to be digested by the economy. “Until housing prices find a bottom, it just strikes me that there are going to be more foreclosures, more losses on Wall Street,” says Bach. “You can always be hopeful, but the preponderance of evidence suggests that we have a ways to go before we hit the bottom.”

Matt Valley can be reached at [email protected].

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