Stimulus debate turns on rebates

Lawmakers hope that a one-time tax rebate will spur consumers to spend - putting the money back into the economy.

NEW YORK (CNNMoney.com) -- As pressure builds on Washington to juice the economy, a one-time consumer rebate has emerged as the likely centerpiece of a $150 billion stimulus program.

President Bush met with congressional leaders Tuesday afternoon to discuss options, which include extended unemployment benefits and business tax breaks.

"I believe we can find common ground to get something done ... to make sure that this uncertainty doesn't translate into more economic woes for our workers and small business people," Bush said.

After the meeting, Senate Majority Leader Harry Reid, D-Nevada, said the goal is to get a deal through Congress in three weeks.

That's about half the time other Democratic leaders were predicting it would take before the global market selloff this week and the Federal Reserve on Tuesday slashing key interest rates.

"I think the price tag is going to be bigger rather than smaller, and the timing sooner rather than later," said Greg Valliere, chief political strategist for the Stanford Group, a Washington policy research firm.

But one issue that remains a sticking point: Democrats and Republicans still disagree on who should actually get rebates.

Bush has said he wants rebates for those who pay income taxes. It's believed the administration would want to generate the funds for the rebate by eliminating the 10 percent tax bracket. That would mean taxpayers could get rebates of up to $800 if single, or $1,600 if married.

Democrats contend such an approach would mean tens of millions of households would get only a partial rebate or none at all - the liberal Center for Budget and Policy Priorities estimates as many as 65 million. That group includes those whose tax bill is so low that their rebate would be much less than $800 or $1,600, as well as low-income households with no income tax liability because of credits and other tax breaks. It would also include households that do not have to file a tax return.

At the very least, Democrats say, every worker who pays Social Security taxes should get a rebate. The payroll tax - 6.2 percent of a worker's wages - is what's taken out of paychecks to fund Social Security, no matter a worker's annual income. The same family that may owe no income tax nevertheless has, in most cases, paid 6.2 percent of its income into Social Security.

Proponents of the rebate-for-all assert that more of lower- and middle-income households should be included in any rebate plan because they are more likely to spend a bigger chunk of their rebate than are higher-income households.

They point to two studies of the 2001 income tax rebate. Those studies found that low-income households and households that had maxed out their credit or had few liquid assets spent more of their rebates than anyone else.

The 2001 rebate, which was based on the 10 percent income tax bracket, excluded the tens of millions of households that Democrats and various economists would like to include in this go-round.

Congressional Budget Office Director Peter Orszag, testifying before the Senate Finance Committee on Tuesday, said the 2001 experience suggests that expanding the pool of lower-income households who get the rebate this time would lead to an "appreciable" economic boost.

"For any given pot of money, the more you target the lower-income, credit-constrained households, the bigger the bang for your buck," Orszag said.

One of the 2001 studies found that consumers spent two-thirds of their rebates within six months, boosting aggregate consumption by nearly 3 percent in the third quarter of 2001 and more than 2 percent in the fourth quarter.

But that finding also signals that even if this year's rebate goes only to those who pay income tax - roughly 60 percent of all tax filers - it has as good a chance of stimulating the economy as did the 2001 rebate.

Of course, as with any attempts by Washington to juice the economy, there are no guarantees that rebates or other measures will be successful.

"We are told that in order to stimulate the economy, all the government has to do is put money into the hands of consumers and they will spend us back into prosperity," said Sen. Charles Grassley, R-Iowa. "The problem is that the only way the government can put money in someone's hands is either [through] higher taxes or more borrowing."

Orszag noted, however, that if a fiscal stimulus package is designed well and targeted to people most likely to spend it quickly, every dollar spent on stimulus could generate a dollar in gross domestic product.