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Thu, Mar 14, 2002 - Page 19 News List

Consumers spend their tax refunds on the necessities of life

Because the number of unemployed Americans rose by 2 million last year, many people are loath to use their tax rebates on anything resembling a luxury item

BLOOMBERG , ATLANTA

Brad Davis is getting US$1,850 back from the Internal Revenue Service, more than double his refund from the prior year. While computers, TVs and appliances may be had with that amount, Davis isn't buying.

"I'm just going to sit on it," the 35-year-old Atlanta resident said. Davis lost his job in January as a sales representative for a maker of commercial skin-care products. The refund and severance are enough to tide him through May, he says.

Income tax refunds are up 17 percent this year, and more recipients may be using the money to make ends meet. The number of unemployed Americans rose by 2 million between February last year and last month, an increase of one-third. Tax reductions may provide a cushion to an economy just climbing out of recession rather than boost spending beyond the necessities.

"Most of the tax rebate last year wasn't spent, but enough was to keep the economy going," said Christopher Low, chief economist at First Tennessee Bank in New York. "We're seeing the same thing this year." Taxpayers received advance refund checks of between US$300 and US$600 last year as the first benefit of legislation US President George W. Bush signed into law in June. Individual refunds are averaging US$2,091 so far this year, up 12 percent from US$1,872 last year. Less was being withheld from paychecks starting Jan. 1.

Married couples received tax breaks. The child tax credit rose.

The changes contributed to a 1.6 percent rise in January in disposable personal income, the largest monthly gain since August.

The legislation also created a new 10 percent tax bracket, retroactive to Jan. 1 of last year. The lowest rate had been 15 percent.

"This gives a boost to people who are forced by economic conditions to spend everything they make anyway," Low said. Sales rose 10 percent in February at Wal-Mart Stores Inc, compared with a year earlier, helping boost sales 6.2 percent at all US retail chain stores open at least a year. That increase was the largest in almost two years.

Some taxpayers couldn't wait to get their hands on the money.

People started coming into Jackson Hewitt Inc's tax service branch in the Atlanta suburb of East Point in the first weeks of the year, bringing only their pay stubs. A sign in the window of the strip-mall storefront reads "Superfast Refunds."

"Desperation is the best way to describe it," said manager Sherman Hardy, whose company is owned by Cendant Corp. Although the office couldn't complete returns until customers brought their W-2's, it did increase the number of refund-anticipation loans, granted within two days of applying. Most of the filers leaving Hardy's office on a recent Tuesday afternoon said they were planning to buy groceries and other necessities.

Kroger Co, the largest US grocery-store chain, said shoppers at its Fred Meyer stores spent less on flowers, jewelry and electronics during the fourth quarter, which ended Feb. 2.

Capital losses may also have played a role in boosting refunds, said Gary Schlossberg, an economist at Wells Capital Management in San Francisco. The Nasdaq Composite Index lost more than half its value between the end of 1999 and end of last year.

"People who don't have jobs don't have that much choice" about spending, Schlossberg said. "As for the others, there's still some caution out there." That spending restraint can be seen mostly among the top fifth of income earners, Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee last week. Moderate-income households have a larger proportion of their assets in homes.

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