Tax rebates encourage taxpayers to make certain types of purchases or to stimulate a flagging economy quickly by getting cash into consumers' hands.
What is a tax rebate?
Observers sometimes refer to a "tax rebate" as a refund of taxpayer money after a retroactive tax decrease. These measures are more immediate than tax refunds because governments can enact them at any time during the year. A recent example is the Recovery Rebate Credit of 2008, which the federal government passed to help jump-start the U.S. economy amidst a severe economic slowdown. Congress anticipated that taxpayers would immediately spend their checks, thereby stimulating the economy.
The 2001 federal tax rebate
As the economy was reeling from the collapse of the dot-com bubble in the summer of 2001, Congress sought to stimulate consumer spending by issuing a mid-year tax rebate. Just like the 2008 rebate, the government believed that issuing checks would have a more immediate positive effect on the economy than reducing tax rates, which would not be realized until the following year. The National Bureau of Economic Research credited this tax rebate with helping to counteract the recession by increasing aggregate consumption by 2.9 percent in the third quarter of 2001 and 2 percent in the fourth quarter.
Alternative energy tax rebates
Some state and local governments also provide incentives in the form of rebates for the purchase of solar or other alternative energy systems. Much of the funding for these programs comes from the federal government, although the refunds are administered by each state and municipality. For example, the City of Long Beach, CA offered rebates of up to $500 to encourage the purchase of solar water heaters, tank-less water heaters, energy-efficient doors, windows and skylights that have the Energy-Star certification.
Hybrid car tax rebates
With protecting the environment a major concern in many areas, state and local governments also initiate a number of rebates to encourage the purchase of hybrid cars that reduce gasoline consumption. In prior years, the State of California authorized a rebate of $5,000 for the purchase of light-duty, zero-emission or plug-in electric vehicles, and $3,000 for plug-in hybrid vehicles.
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