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Tax rebate choice: Buy up, pay down

The Baltimore Sun

Workers at Dorman's Lighting & Design in Timonium began the year with the belief that business had to get better.

So far, signs of a turnaround are bleak. Traffic is down 30 percent this month, continuing a slowdown brought on by the slumping housing market. Even worse, more customers are window shopping instead of spending.

But manager Susan Dickinson sees a sliver of hope in plans for an economic stimulus package that would send tax rebate checks of at least $300 to low-wage and middle-income families. And even if the money doesn't translate into brisk sales at Dorman's, she said, the plan could reverse consumers' gloomy outlook.

"It's a perception that things could be brighter," Dickinson said.

At least that's what lawmakers are hoping. And while local merchants and consumers say they welcome the income boost, the question is whether Americans will spend the money for purchases like electronics and home furnishings or just use it to pay off bills.

"Anything I get back, I'll appreciate it," said Dwayne London, 40, of West Baltimore, who, along with his wife, was shopping at Lexington Market on Friday. "But I'd probably just pay some bills. Everybody's got bills."

Natalie Reilly, who lives in Jessup, plans to put half of her rebate into savings and use the balance to attend her brother's wedding in Cambodia, which he'll soon schedule for sometime before August.

"With gas prices and with BGE prices, a lot of people have had to give things up," said Reilly, a controller at a floor company who is married and has two children. "With this extra money, they'll be able to go get things they wanted but just couldn't afford."

Under the $150 billion proposal announced last week by federal lawmakers, most Americans who earned a paycheck last year would receive at least $300. An estimated 117 million families would receive some kind of rebate - it's unclear how many of them are Maryland residents. The stimulus package also includes business tax incentives.

Most taxpayers - those who paid at least $600 in federal taxes for 2007 - would receive rebates of $600 if they filed individually and $1,200 if they filed a joint return. Some families would receive an additional $300 for each dependent child.

Rebates would be phased out for individuals with more than $75,000 in taxable income, and joint filers with more than $150,000.

Lawmakers say the move will help stoke a slumping economy still grappling with credit woes and a volatile stock market.

But there's still debate about the usefulness of the $300 to $600 rebate checks sent to most Americans in the middle of the recession of 2001. And economic challenges are different from those seven years ago, when concerns focused on rebuilding the travel and tourism industry after the terrorist attacks.

One study about the 2001 package, written by Nicholas S. Souleles of the University of Pennsylvania and two other economists, found that Americans spent about two-thirds of the rebates within six months. Spending was focused on clothes, food and health-related goods and services, said Souleles, an associate professor of finance at the Wharton School.

Paying debts

Meanwhile, Matthew Shapiro, an economics professor at the University of Michigan and co-author of another study of the tax rebates, said the majority of consumers surveyed in 2001 and 2002 said they saved the money or put it toward debt.

"It just means the stimulus effect is not as great," he said.

Don Cook, owner of Joseph's Refinishing and Upholstery in Columbia, which restores furniture, says he doesn't believe that money from the last economic stimulus plan reached his registers. He says he doesn't think it will happen this time, either.

The bleak economic outlook has forced Cook to put off buying a new phone system and a vehicle for his business.

"When you're faced with increases in power, gas and electric, it's unbelievable what that's doing," he said. "You get hammered with that stuff."

Nationwide, the holiday sales were the weakest in five years, and retailers blamed the housing downturn. Soaring prices during the housing boom had encouraged people to spend - some because they felt wealthier and others because they tapped their equity.

But now that price growth has stalled locally and fallen elsewhere, consumers are pulling back, said Michael Niemira, chief economist for the International Council of Shopping Centers.

"By the end of the year, I think every retailer was touched by the housing-related slowdown," he said. "And it continues."

Stores that benefit from strong home sales - such as furniture and furnishings businesses - have been especially hit hard. Rockville furniture retailer Scan International Inc., which filed for bankruptcy protection last month, blamed "the decline in the housing market and loss of business as a result of other furniture retailers ceasing operations and liquidating inventories at deep discounts." The company reported that revenue dropped 20 percent in the past year.

Weak sales

Nicholas Johnson, owner of Su Casa, a furniture store in Fells Point, said 2007 sales were flat compared with the previous year. But Johnson saw a 6 percent increase in December, which he attributes to development at Harbor East.

He remains upbeat about the proposed tax rebates.

"I think they will go out and spend that $300," Johnson said. "It's not enough to go out and start saving or pay off credit cards, but it's a nice bump to buy that TV that they've waited to buy or in my case, that sofa or chair."

Sluggish consumer spending hasn't been limited to lower-income homeowners and discount stores.

"We're starting to increasingly see upper-income households affected and upscale retailers affected," said Frank Badillo, senior economist at TNS Retail Forward, a market research firm.

That's what Zubair Mohamed, owner of Senneh Knot Fine Rugs in Timonium, fears. So far, he has not seen his upscale customers curtail purchases.

"Most of our clientele are not in the same boat as people who can't pay mortgages and credit card bills," said Mohamed, who has had his business since 1987. "At the same time, if there is too much of a slowdown in the economy and the stock market [weakens] - these people have money invested in the stock market - that could affect them also in the end."

There's no guarantee that the stimulus checks will make a difference to business owners, said Niemira of the International Council of Shopping Centers. He suspects that the country's increasingly pinched consumers will want to pay down debt, not go on spending sprees.

"The full impact will be - in a sense - diluted if the intent was to spur consumption," he said. "If you're going to put money in the hands of consumers without strings, they'll direct it in areas that they think they need to. And in this current situation, debt is more of a problem."

Autumn Vets, 32, a flight attendant who was at Lexington Market on a layover late last week, said she recently overheard two employees at Starbucks talking about taking a vacation with their rebate money.

"That's exactly what they want you to do!" Vets said, shaking her head.

Vets has other plans: "My Christmas bill. I'm going to pay it off."

Dickinson, who has worked at Dorman's for the past 25 years, said she'll do her part to help stimulate business when her rebate check arrives.

"I'll go out and have a fabulous dinner and take my kids out to a fancy dinner," she said. "Treat myself to something special. And help the economy a little bit."

Sun reporter June Arney contributed to this article.

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