US Tax Refunds: Off To A Bad Start

The HR Block retail store on my block in Manhattan is open for business again, which means we’re getting into tax refund season in the US. That’s important for US consumer spending, especially during the otherwise sluggish first quarter of any year. US seasonal unemployment peaks in Q1, there’s the burden of prior-year Holiday credit card bills to pay, and weather patterns can disrupt economic growth. Refunds – the checks/direct deposits issued by the Internal Revenue Service – are the one bright spot.

To give you a sense of the scale of refund season, here is the IRS data for last year through April 27 2018:

  • The US Treasury issued 99.5 million refunds during the 2018 tax season, totaling $275.7 billion.
  • Of the 132.6 million households where the IRS processed their returns by April 27th, 75% received refunds.
  • The average refund amount: $2,771. This does not include state income tax refunds, which can be several hundred dollars as well.
  • Most US taxpayers use their refunds to pay down debt, fund discretionary purchases like the down payment for a personal vehicle, and to top up any savings they may have.

The IRS just released the first refund data for the 2018 tax year (week ending February 1 2019), and it doesn’t look great:

  • Either because of the direct effects from the government shutdown or tax filers delaying submissions, the number of returns received by the IRS is down 12.4% and the number of returns processed in down 25.8% from the year ago period.
  • Total refunds paid are down 24.3% and the amount paid is 30.6% lower than last year’s first week of data.
  • The average refund this year ($1,865) is 8.4% behind last year’s ($2,035).

How much should we worry about this disappointing start to refund season?A few points to put the numbers so far in a larger context:

  • Tax returns processed thus far – a total of 13.3 million – only represent 10.0% of the 2018 total through April 27th.
  • Average first week refund levels have been erratic the last few years. From 2014 – 2016, they averaged over $3,000. Then in 2017 they dropped to $1,994 before increasing to that $2,035 last year.
  • Average refunds from 2014 – 2018 for the entire tax season through the end of April were more constant, running right around $2,700 in each year

The one wrinkle that is making economists twitchy this time around: changes to the US tax code in late 2017. Yes, personal tax rates declined, but limits on state and local income taxes (SALT) affected potentially millions of Americans who did not change their paycheck withholding. And even if they eventually did make these alterations, they would only have taken effect at the time of the change rather than go back to the start of 2018.

Our best guess on how 2019 tax season will go: average refunds will end up being very close to the historical $2,700 average, but… The states where the SALT limits matter (mostly on the coasts) will see higher-income taxpayers writing larger checks to the IRS. That will be an important piece of the data to watch, since these households drive an outsized slice of US discretionary spending. The “average” filing household does not live in these areas or face SALT limits, so their tax liability should not be materially different from prior years.

Bottom line: low end retailers and other businesses that need refund season to push Q1 sales should see little change from last year. Companies that cater to higher-end consumers in states where SALT limits apply are less exposed to refund spending, but could see their customer base take a step back as they write larger-than-usual checks to the IRS.

Source: https://www.irs.gov/newsroom/2019-and-prior-year-filing-season-statistics

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