Planning for the tax rebate retail event

A $40 billion dollar shot of potential consumer spending in the form of tax rebates is about to be injected into the U.S. economy. And even though the economically stimulating checks aren't due to begin mailing for another month; stores have been busy for weeks planning special sales, promotions and in-store check-cashing services.

A report by the National Retail Federation* predicts more than $105 billion in rebate checks (up to $600 per working individual and $1,200 per married couple, plus $300 per child for families with children) will go out during a 10-week period beginning in May.

Consumers are expected to spend 40.6% of that amount, providing an immediate $42.9 billion boost to the economy, making the stimulus the third-largest retail event this year behind Christmas and back-to-school spending. The NRF survey, conducted by BIGresearch, also found that $30 billion will be used to pay down debt, $19.8 billion will be saved, $4.4 billion will be invested, and $4.6 billion will be used to pay down medical bills.

Of those surveyed, 5.5% of respondents said they'd spend on home improvement projects and 1.8% will purchase furniture, with another 2% looking forward to a little impulse shopping.

How much the federal tax rebate plan may help the $13 trillion U.S. economy remains to be seen. But it does appear that many households will be in a position to make a few purchases during the next several months. In response, economists and marketing executives are predicting a flurry of advertising and promotions geared to the timing and receipt of the checks.

Lessons learned from the last round of tax rebates in 2001, when roughly two-thirds of the spending happened over a nine-month period rather than immediately, have also revealed a few useful observations about spending patterns.

In a November 2007 report in the University of Chicago's Journal of Political Economy, economists from the Federal Reserve Bank of Chicago, the University of Nevada and The Wharton School used data from 75,000 credit card accounts to analyze consumer response to the 2001 tax rebates. Among the findings of their two-year study, published as “The Reaction of Consumer Spending and Debt to Tax Rebates,” was that consumers initially saved some of the rebate by increasing their credit card payments and paying down debt. But soon afterward, especially in the nine months that followed, credit card spending picked up.

The economists say the randomness of the check distribution, which took place from July to September 2001, and was determined by the second-to-last digit of the recipients' social security numbers, separated the effects of the rebate from swings in the economy.

Also from the University of Chicago, Nicholas Epley and Ayelet Gneezy, in an article for the Journal of Socio-Economics titled “The Framing of Financial Windfalls and Implications for Public Policy,” speak to a psychological component. Their observations suggest it's in the wording — how unexpected windfalls such as an unexpected tax rebate are described to the consumer — that will impact whether they're saved or spent, and what items will be purchased. Epley and Gneezy say such lump sums that are described as a positive departure from the status quo, as a bonus for example, are more likely to be spent than income described as a return to the status quo, such as “a rebate.” In other words, inviting customers to spend a little of that “unexpected windfall” may produce better results than inviting customers to a “Tax Rebate Sale.”

Still, a quick search of the Internet reveals that lots of “Tax Rebate Sales” are already in full swing. Home service companies are promising to match all or a portion of tax rebate checks spent for new HVAC systems and window installations. Vacation vendors are offering “Tax Rebate Specials,” where guests can earn a one-night “rebate” when booking an extended stay. And while the big boxes are inevitably strategizing to gain their share of the stimulus bucks, some suggest that the larger chains, many of whom plan their advertising campaigns months in advance, may find it more difficult in the near term to put a lot of tax rebate advertising in place. For independent retailers, it means that a good promotion, stocked shelves and a few strategically placed big-ticket items and impulse buys could pay off in the coming months.

*The NRF 2008 Tax Rebates Consumer Intentions and Actions Survey polled 7,977 consumers and was conducted for NRF by BIGresearch from Feb. 5-12. The consumer poll has a margin of error of plus or minus 1%.

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