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A $24B Shortfall in Tax Refunds Could Reduce Consumption in 2019

Big tax refunds are often thought of as windfalls, and the extra dollars typically give consumers an excuse to spend at retail.

Well, maybe not this year.

“Since late January, refunds have largely run behind the pace consistent with our forecast. The shortfall has persisted since then,” UBS economist Robert Martin said.

According to data tracked by the economist, the cumulative shortfall in refunds, as of March 28, was $24 billion.

Martin, along with some accountants, have noted that one reason why refunds are lower this year, is because 2018 withholding tables were not adjusted properly following the 2017 tax cuts.

“Refunds represent an overpayment of taxes during the year, not the level of taxes paid overall. Nonetheless, refunds influence the timing of household spending. A substantial shortfall in net payments to households will reduce consumption in 2019,” the economist said.

And according to Michael Lasser, broadlines analyst at UBS Securities, the latest IRS statistics for tax refunds for the week of March 29 showed the total of tax refunds issued year-to date is $206 billion, or down 3 percent year over year. Moreover, the average refund amount is $2,973, or down 1 percent compared to the prior year. Slower refunds, Lasser said, could be a moderate drag on first-quarter consumption. The report on March retail sales is expected on April 18.

Taxpayers in the upper income brackets that reside on both coasts could see risks to having lower refunds because of itemization rules and the new limitations on state and local tax deductions. In contrast, those in the low- to middle-income tax brackets with multiple children could see higher refunds due to the expanded child tax credit.

Some companies had already expressed concern earlier this year over what might happen with the tax refunds.

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Foot Locker warned investors last month when it reported fourth-quarter results about the prospects of smaller and later tax refunds due to tax reform. And Instinet analyst Simeon Siegel noted Feb. 20 that tax refunds back then were 9.7 percent below the year ago figures, which could impact consumer spending at some off-price retailers like TJX Cos. and Ross Stores due to lower levels of disposable income. In subsequent weeks, that the rate of tax refunds had picked up a bit, Siegel noted, although the cumulative amount refunded remained down year over year.

But even for those who are getting refunds, spending at retail might not be top of mind.

The National Retail Federation, the retail industry’s third largest trade organization, surveyed 7,729 U.S. adults in early February and found that 65 percent of respondents expected a tax refund this year. That group was broken down into three categories, based on expectations: 22 percent expect their refund to be less, 48 percent said about the same, and 29 percent believe their money back will be higher than last year. As for how they plan to use their refunds, 34 percent said they’ll pay down debt, 50 percent said savings, and 22 percent will use it to pay for everyday expenses. The balance ranged from a major purchase to home improvement, a splurge purchase or a vacation.