Will Larger US Tax Refunds Spur Consumer Spending or Not?

Americans can expect, and are receiving, larger tax refunds this year, largely attributable to President Donald Trump’s One Big, Beautiful Bill Act (OBBBA) which introduced a slew of new deductions. According to IRS filing data presented by ModernRetail’s Mitchell Parton, the average tax refund is so far up 10.6% versus last year’s numbers, although projections from analysts, including TD Bank, suggested something more like up to 30% higher — or between $800 to $1,000 more than last year’s average of between $3,167 or $3,382, depending on which calculations are used.

But how will Americans receiving larger tax refunds apportion the money? Various experts weighed in.

Morgan Stanley analysts suggested a mixed bag of results, with a 4.1% increase in real disposable income being on the table.

“While refunds will boost spending this year, we do not expect an immediate jump. The most common uses of tax refunds are saving and paying off debts, neither of which count as consumption,” Morgan Stanley U.S. Economist Heather Berger said.

“As we progress throughout the year, though, we’re anticipating steady growth in real consumer spending as the labor market stabilizes, inflation decelerates and lagged effects of easier monetary policy flow through,” Berger added.

TD economists suggested that, despite many using refunds to pay down debt or invest, a notable amount of the tax refunds will be spent.

“The fiscal boost will linger beyond the tax season. About 85% of households are likely to get a tax cut this year, with OBBBA provisions expected to reduce taxes on average by $2,9008. While the boost from higher tax refunds is expected to be the most impactful on consumer spending, the increase in disposable income due to lower taxes paid this year will also lift spending,” they noted, further anticipating that inflation adjusted consumer spending would trend upward by 2.8% this year, beating last year’s 2.7% gain and outperforming earlier December projections of just 2% growth.

The K-Shaped Economy, Income Disparity, and Tax Refund Spending

A significant proportion of the debate around where tax refunds might go centered around middle- and upper-income households, particularly given the topic of the K-shaped economy dominating headlines and the fact that these households would be the ones receiving the most substantial refunds.

Parton cited University of Texas economist David Quigley as stating a belief that purchase timing could be influenced by tax refunds, but that consumer spending as a whole wouldn’t be significantly impacted. And, seeing as how middle- and high-income households were less likely to change entrenched spending habits over a tax refund, Quigley didn’t see much change on the horizon.

Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals, was also quoted by Parton, putting forth a similar view.

“I’m hearing less of, ‘I’m going to buy a new car,’ or maybe, ‘We’re going to look at putting new windows in the house,’” O’Saben said, stating that, “Many [clients] say, ‘Well, I think I’m going to pay down some debt,’ or, ‘I’m going to boost my savings,’” instead.