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New Mexico State University

New Mexico State University

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New Mexico to receive $740 million in tax rebates, but effect is unknown

Federal printing presses will soon hit high gear, churning out more than $114 billion in tax rebates for most people who collect a paycheck, Social Security benefits or veteran's disability payments. The rebates are supposed to help lift the sagging U.S. economy, but an economist at New Mexico State University says the rebates will only be big enough to make people feel better about the economy.

"It really is symbolic," said Jim Peach, an economics professor at NMSU. "It is not big enough to have the desired effect, except to boost the psychological mood of the country. This is $114 billion in a $14 trillion economy. That's a decimal point. Most people wouldn't even notice."

Peach said the overall health of the U.S. economy relies heavily on the psychological mood of consumers, who account for nearly 70 percent of spending. He said simply injecting a small percentage of money does not help a weak economy or one in recession. Instead, he said the rebates help by reassuring consumers that policymakers are aware of the problem and doing something about it.

Under the stimulus plan, most people will receive a rebate between $300 and $600. Married couples, filing a joint return, will receive a $1,200 rebate. Those eligible for rebates will receive an additional $300 for each dependent child. The package also has $51 billion in special allowances for businesses.

"The idea is to get the money out there," Peach said. "But if people sit on it, for fear of losing their job or use it to pay down debt, it doesn't do much to stimulate the economy."

While the nation's jobless rate has crept up over the past few months, the rate is still relatively low. Peach said the rate has stayed low only because many people have stopped looking for work.

Peach estimates New Mexicans will receive more than $740 million from the stimulus package. Households earning more than $150,000 a year do not qualify for the rebates, but less than 5 percent of households in the state earn that much money. New Mexico's households are also larger than the national average, indicating those in the state will receive a larger percentage of dependent child rebates. The business tax portion of the plan could send another $351 million to New Mexico, lifting the state's total haul to nearly $1.1 billion.

"Is the timing of this stimulus package right? Almost certainly not if we are already in a recession. But possibly yes, if we are not yet in a recession," he said. In recent history, most economic downturns in the U.S. last less than a year, and any kind of economic stimulus can take months to work its way through the economy. That means by the time help arrives, the economy might already be in the early stages of a recovery.

Peach said unlike other states, New Mexico's economy is heavily dependent on government spending, making it less volatile than the national economy, and less likely to see the effects of a recession. Also, even though the state's manufacturing employment has grown considerably in recent years, New Mexico's economy still has a smaller portion of manufacturing employment than many states, making it less sensitive to turbulence in that sector of the economy.