For Many, Tax Cut Windfall Will Be Socked Away

SEATTLE -- Kathy Melvin is the kind of taxpayer who will soon get a windfall from the $350-billion tax package that Congress just passed. A mother of two, Melvin should receive a U.S. Treasury check for of $800 this summer -- thanks to the bill’s increase in tax credits for families with children.

But she has no plans for a spending spree.

“I’ll probably just use it to pay down some of my credit cards,” said Melvin, a 42-year-old interior designer in Seattle. “Things are so tight right now, I can’t imagine doing anything extravagant with it.”

That’s not exactly what President Bush has in mind. He and other tax cut proponents have been hoping people will take the extra cash and promptly spend it to give new juice to the sagging economy and pump up businesses that will in turn create jobs.

“When people have extra take-home pay, there’s greater demand for goods and services,” Bush said in his weekend radio address hailing passage of the tax cut. “And employers will need more workers to meet that demand.”

Cash will flow quickly to millions of households because income tax rate cuts and an increase -- from $600 to $1,000 -- in the per child tax credit take effect immediately.

Families who qualify for the full child credit -- couples earning less than $110,000 -- will receive rebate checks this summer of $400 per child. Workers’ paychecks will be larger as soon as employers adjust tax withholding to reflect the rate cuts.

Many taxpayers may well go shopping with the money. But in the past, economists say, more have used tax windfalls to pay off debt or increase savings.

A study by two economists at the University of Michigan, Matthew D. Shapiro and Joel Slemrod, found that about 25% of those surveyed said they spent the rebate they received under Bush’s 2001 tax cut.

Slemrod said he expected a similar reaction this summer because, in the weak economy, people are not likely to be in a free-spending mood.

“Consumers are feeling like their finances are out of whack,” Slemrod said. “Either someone in their family is out of work or they are worried about being out of work or their stock market holdings are down.”

Part of the tax bill’s effect will have nothing to do with consumer spending. It includes about $10 billion in business tax breaks, which are designed to spur investment and create jobs. So, for example, increased deductions for small-business equipment purchases may help Donald Cadogan, a trucking company owner in Stone Mountain, Ga., hire another employee.

“Right now I have a need for a driver,” Cadogan said. “I have a truck sitting empty.”

But most of the tax cuts in the bill are for individuals -- including tax breaks for married couples, reduced taxes on investment income, as well as the rate cuts and child credit increase.

“Real money will go to middle-class taxpayers,” said House Speaker J. Dennis Hastert (R-Ill.) as Congress passed the bill last week. “This helps families pay for home improvements, college education or anything else they want.”

The money may be especially welcome in Washington state, which has one of the highest unemployment rates in the country.

Alison Gault, a West Seattle resident with one child, expects the $400 check she gets this summer won’t last long.

“We’ll probably use that for school clothes, incidentals,” said Gault, 36, as she shopped at an upscale mall. “The money always just seems to go as fast as it comes in.”

Derrick Coles, a 24-year-old Seattle delivery driver, thinks he won’t be saving any tax windfall for a rainy day.

“It sounds irresponsible, but the truth is I’d probably just spend it,” said Coles as he drank iced coffee in a park while waiting for his girlfriend. “I haven’t really started saving for real yet. I buy CDs, I go out.”

Around the country, many people are ambivalent about whether they should save or spend the money. “I’ll probably just put the $800 in the bank,” said Dan Goodwin, a real estate investor and father of two in Augusta, Ga. “Or maybe buy new tennis rackets for my kid.”

John Baal, an auto mechanic in Houston, and his wife, Kathleen, said they probably will save some of their tax cut proceeds and use the rest for a vacation in Florida. But Baal said enactment of the tax cut did not give him more confidence in the economy. He’s concerned about its effect on the federal deficit.

“I’m all for getting money back,” said Baal, a 53-year-old with no children, “but it does seem shortsighted.”

For many taxpayers, there are other concerns more pressing than tennis rackets and Florida vacations -- concerns like dwindling retirement accounts and skyrocketing college costs that impel them to save rather than spend any extra money the government leaves to them.

Melvin, the interior designer in Seattle, said the volatile stock market left her feeling too financially insecure to spend any tax refund. “I think I’d have to see my husband’s 401(k) rebound before I’d feel good about spending money lightly,” she said.

Financial insecurity also preyed on Felisha Branford, a single mother in Houston, as she prowled around a garage sale Saturday. “Every little penny, anything I get extra will go into savings because you never know what’s going to happen,” said Branford, a 31-year-old education consultant. “Right now, I’m scared to overspend.”

Maria Morales, 33, also of Houston, said she had hoped to put the money into an education fund but will put it into home improvements instead. “It’s a special situation because I recently bought a house,” she said. The tax cut amounts to the government giving money away, and that makes her feel good about the future, she said.

For Doug Livesay, a systems engineer from the Atlanta suburbs, the $800 check he expects this summer will help get his finances back on track after a bout of unemployment. He plans to use any refund to catch up on bills. “We’re not going to Hawaii on it, let’s put it that way,” said Livesay, a father of two children.

Rich Mascolo, a 47-year-old plant manager from New Jersey who was visiting Washington, D.C., with his family over the weekend, said he would put his refund away for his daughter’s college education.

“I’ll probably just put it in the bank and save it for her,” Mascolo said. He has no investment income, so he does not expect any benefits from the single largest element of the tax bill -- a deep cut in tax rates on capital gains and dividends, which was a Bush priority. Still, he gives Bush credit for delivering tax relief to his family.

Chuck Wooderson, a teacher from Woodstock, Ill., said he and his wife had “pre-spent” their expected tax break by retiring their biggest debt: They paid off the mortgage on their house.

His wife, Judy, an account manager for a petrochemical company, said she was glad the bill reduced the so-called marriage penalty -- the quirk in the tax code that makes many married couples pay more in taxes than they would if they had filed as individuals. “We don’t have to get divorced now,” she joked.

Times staff writers Lianne Hart and Rennie Sloan contributed to this report. Hook reported from Washington, D.C., Marshall from Seattle, Hart from Houston and Sloan from Atlanta.