Americans are in for a surprise as the government begins disbursing tax refunds this year. Uncle Sam is doling out less money than usual.
While the average refund amount has risen slightly by $22 on average, 2 million fewer refunds were issued compared to 2018, per the first five weeks of data available from the Internal Revenue Service. In total, the amount refunded fell 3.5% to $142.4 billion from $147.6 billion during the same period last year.
Despite this dip, the Tax Cut and Jobs Act of 2017—President Donald Trump’s signature legislative triumph to date—is expected to benefit the vast majority of Americans. Four-out-of-five of taxpayers will end up with a tax break, forecasts the Tax Policy Center. As employers automatically withhold fewer dollars from workers’ paychecks, instead of earmarking the funds for government coffers and returning them later on, American households will save $1,600 on average in federal obligations, the Washington, D.C.-based think tank estimates.
This is good news—but the well-documented irrationality of consumer psychology may lead people to believe otherwise. Many taxpayers like getting a lump sum payment from the government, even if they could have been earning interest on those funds in the meanwhile. The absence of a seeming windfall in the form of a fat refund may mistakenly dampen spirits.
The change-up could impact the economy too. Fiona Grieg, a director of consumer researcher at the JPMorgan Chase Institute, found in a recent study she coauthored that, over the past three years, average expenditures of tax refund recipients increased by 74% the week after a refund was received. Recipients tended to put the money toward paying down credit card debt, or purchasing durable, big-ticket items from big box retailers, like furniture, electronics, cars, or home appliances. The new regime could shave tens of billions of dollars, or 0.3%, off annualized United States GDP, estimates Michael Pearce, senior U.S. Economist at London-based Capital Economics.
While it’s hard to know how tax refunds will shake out so early in the season—trends may change as the weeks unfold—fewer rebates, as suggested by the initial data, could pile on a first quarter already weakened by a prolonged government shutdown. To know “how it all plays out, we’re going to have to wait till the whole season comes to an end,” Greig says.
A version of this article appears in the April 2019 issue of Coins2Day with the headline “Fewer Refunds Tax Retailers.”