How big a bounce from tax rebates?

By The Wall Street Journal

With food and energy prices soaring and declines in home prices accelerating, consumers are under even more financial pressure than they were in January, when the economic-stimulus plan was developed. As a result, more of the $110 billion in rebates is likely to be spent on basics like gasoline, groceries and paying down debt -- and less on gadgets or fancy vacations -- than was expected a few months ago.

Even as retailers like Sears and RadioShack have come up with new marketing initiatives to get a piece of the rebates, some potential customers are backing off.

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"I would love to go buy a flat-screen TV, but there are things you have to take care of first," said Jennifer Loza, a 37-year-old receptionist in Riverside County, Calif. She said she plans to use most of her family's rebate to pay off some of the $12,000 in credit-card debt she and her husband owe. Loza was unemployed for about eight months before getting her current job. Her husband, who operates heavy equipment, has had only six months of work over the past year.

Raquel Jacobo, 47, a Chicago hairstylist and mother, expects to use almost all of her $900 rebate check to pay overdue energy bills. "It's going directly to the light bill and gas company," she said, adding that her electric and heating bills have jumped 50% in the past 18 months. "There's no money left for me."

The rebate program provides for payments of as much as $600 for individual filers and $1,200 for married couples who file jointly, plus $300 for each eligible child younger than 17. The amount of the payment begins to phase out for those with adjusted gross incomes of more than $75,000, or $150,000 for joint filers. The government began depositing rebates electronically in people's bank accounts on Monday. Paper checks will start going out May 9.

Much of the money will go straight into consumers' fuel tanks. "Half of it is literally going to go to gas," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. LaVorgna estimates consumers' gasoline expenses have shot up $64 billion since the stimulus bill passed in mid-February.

For a typical motorist -- someone who drives 15,000 miles a year and gets 25 miles to the gallon -- the cost of gasoline has gone up $600 in the past year -- the exact amount of the individual rebate. Of course, without the stimulus, people would have squeezed spending elsewhere to pay for gas.

Overall, economists said, the rebates are likely to help the ailing economy -- but they don't agree on how much.

To the extent that people go shopping with their stimulus checks, rather than using them to pay down debt or build savings, consumer spending will be higher than it would have been.

But by spending the windfall on things the U.S. imports, like gasoline or imported apparel, the economic oomph will also be shared by overseas economies.

Continued: An insurance policy

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