Stimulating Discussion

Tax rebates to be part of economic stimulus plan

By Kaye A. Thomas
Posted January 18, 2008

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Echoes of 2001.

Investors and politicians alike have spent the last few months hoping the economy will shake off problems caused by the collapse of the housing bubble. The hard realities have suddenly hit home, as evidenced by the stock market selloff and a strong bipartisan interest in economic stimulus. The package has yet to take shape — Democrats want to include benefits for people who are struggling, such as enhanced unemployment insurance and food stamp payments, while Republicans are interested in adding business tax breaks — but it appears there is general agreement on some form of tax rebate, probably at least $250 per taxpayer and perhaps as much as $800.

That raises the question of who will get the money and how they'll get it. We don't have details yet, but it might work something like the 2001 rebate. Remember that? Checks for up to $300 went out to millions of taxpayers. Here's how it worked.

The rebate was actually a reduction in taxpayers' 2001 income tax. President Bush and the Congress wanted to get this money into taxpayers' hands as quickly as possible, so they didn't wait until people filed their 2001 tax returns, which would have happened in 2002. Instead, they sent checks ahead of time, reflecting the reduction in income tax. Some people called it a prebate, because in effect it refunded a tax that hadn't yet been paid.

Prebate checks went out to everyone who filed a 2000 income tax return by April 15, 2001. The amount of the prebate was the amount your 2001 tax would be reduced by the creation of a new 10% tax bracket if you had the same income in 2000 as in 2001, up to $300. We ended up with three categories of taxpayers:

  • Most people received a prebate check equal to the amount of the tax break they were supposed to get on their 2001 tax return. There was some confusion about how to handle this when we filed 2001 tax returns (you weren't allowed to claim the same again on your tax return if you already received it in the form of a prebate check), but we muddled through.
  • Some people didn't receive prebate checks because they didn't file their tax returns by April 15 or for some other reason. They were able to claim their benefit when they filed their 2001 tax returns.
  • Some people received prebate checks based on their 2000 income tax returns even though they didn't have enough income to qualify for the benefit in 2001. No problem! They were allowed to keep the checks.

To achieve a similar result, Congress might turn the 10% bracket into a 5% bracket, just for 2008. To pump more money out, they could make it a 0% bracket. Note that this bracket applies only to a relatively small amount of income (for 2008, $8,025 when filing single, twice that amount when married filing jointly).

We can't promise the new program will be passed by Congress much less that it will work this way. There's a lot of momentum behind this legislation, though, and it seems likely that Congress will look to the 2001 prebate as a model for action in 2008.

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