Child tax credit payments may boost retail sales as soon as this month

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Shoppers are seen wearing masks while shopping at a Walmart store in Bradford, Pennsylvania, July 20, 2020.

Brendan McDermid | Reuters

Grocery stores, big-box retailers and even auto mechanics could pick up sales in the coming months, thanks to a new source of cash: monthly payments that go directly into parents’ and caretakers’ bank accounts.

Starting Thursday, families will receive money for each of their children. The enhanced child tax credits, passed as part of the American Rescue Plan, are intended to fight child poverty. For retailers, however, they could also act as a stimulus that encourages spending on food, school supplies, clothes — or even a car payment.

“It’s a good thing for Walmart and grocery stores,” said Jim Sullivan, an economics professor at the University of Notre Dame who is studying the impact of the coronavirus pandemic on Americans living in poverty. “The retail sectors where middle- and lower-income families spend money are likely to benefit some from this.”

The payments will be the latest government-funded cash infusion. Retailers, including Walmart and Best Buy, have said they saw a spending bump after consumers received stimulus checks. Some customers have also had extra money from federal unemployment benefits, which many states recently ended. Congress has no plans for a fourth stimulus check.

“This will fill a void with some of the other payments being no longer distributed,” said Michael Lasser, a retail analyst at UBS. “It’s going to continue to support consumer spending.”

More money, upfront payments

A poverty-fighting tool

Francine Lipman, a law professor at the University of Nevada, Las Vegas, who specializes in tax policy and anti-poverty initiatives, said the payments will go toward two different kinds of consumers. Families who live at or below the poverty line will likely spend the money on necessities, like buying food, covering the rent or paying for medication.

“This $300 or $250 — and of course it’s multiplied by however many kids in the household — that can abate a slippery slope into poverty,” she said.

The payments may be used differently by families who can generally afford what they need, she said. Middle- and upper-income families may put extra dollars toward discretionary items, such as summer camp, a laptop or new clothes for back to school.

The money will be especially felt by families who are near the poverty line, said Sullivan of Notre Dame. For instance, a family with two kids, including one under 6, would get a total credit of $6,600 — and that would translate to $550 payments each month, with the rest as a credit on their 2021 tax return. Overall, that’s about a 25% boost in monthly income for a family of four that is living at the poverty line of $26,500.

Those families tend to spend the money immediately, since they have a long list of needs — from putting food on the table to fixing a fridge or paying rent to a landlord, he said.

“It will go into spending as opposed to savings, in all likelihood,” he said.

Lipman said the money may benefit a child indirectly. For instance, she said, a parent may buy clothes that gives him or her confidence to apply for a job. A grandma or aunt may have money for a car repair, allowing her to drive to a job interview or get a child to school on time. And a little extra cash on hand may make parents less stressed and decrease the chance of them abusing alcohol or drugs.

She said she’s also curious whether the nature of the payments — handed out in smaller monthly sums and paid out in advance — may nudge financially secure families to spend the money rather than stash it into savings.

A stimulus for spending

JPMorgan analyst Christopher Horvers called out Walmart, Target, Costco, BJ’s Wholesale Club and auto parts retailers as being among the biggest beneficiaries of the child tax credit. Horvers expects that value-oriented retailers, such as dollar stores, are also likely to see more sales.

However, he said in a research note that the total amount of cash will be smaller than other government benefits. Americans will receive $110 billion through the child tax credit, according to the Joint Committee on Taxation, with $55 billion of that paid through monthly installments. The smallest of the three rounds of stimulus checks — paid out in January — were $600 and totaled $130 billion, according to JPMorgan research.

Lasser of UBS said he expects the effect to be “more modest” than stimulus, too. He said he is monitoring other factors that could change spending patterns, such as the return to offices in the fall, which could dampen purchases of food for home, or the spread of the delta variant of Covid-19, which could increase it.

Dollar General Chief Financial Officer John Garratt said on a first-quarter earnings call in late May that the discounter did not include child tax credits in the company’s forecast for the rest of the year. He called it “a wild card,” with an impact that is difficult to measure, particularly as some other government benefits fade away.

Target Chief Growth Officer Christina Hennington said on a first-quarter earnings call that the extra funds could go toward back-to-school sales — a shopping season that retail experts already predict will be stronger than usual as parents and kids seek a fresh start and new clothes, notebooks and laptops for a more typical return to the classroom.

Many states are hoping to welcome students back to classrooms full time when the new school year begins later this year. On Friday, the Centers for Disease Control and Prevention said fully vaccinated teachers and students don’t need to wear masks indoors. More than 55% of the U.S. population has gotten at lease one dose of a Covid vaccine, according to the CDC.

In a statement, Target said stimulus, including the child tax credit, “could serve as near-term tailwinds for our business” and said it factored it into its positive outlook.

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