The Truth About “Lower Tax Refunds” in 2019

Americans are getting smaller tax refunds this year, and it’s putting the current presidential administration and the republican party on the defensive. Following an extended government shutdown during which the IRS warned that ongoing suspension of its operations could prevent taxpayers from snagging their refunds in a timely fashion, the focus has immediately shifted to the “payouts” associated with tax season: the much-lauded tax refund. 2019 is the first year to reflect major changes in tax policy made at the end of 2017 by the Trump administration, and every media outlet and politician is eager to weigh in on the results.

According to early IRS reporting, the average refund size through February 8, 2019, was about 8.7 percent smaller than early filers received the year prior[1]. The result, of course, has been plenty of snarking about how the tax reform bill was simply an overt move to give “the wealthy” yet another advantage over the United States’ middle class and poor.

The decline equates to a difference, on average, of just under $200 per filer, with a cumulative difference that has taken refunds down 23 percent to $22.2 billion from $28.9 billion last year[2]. While the reason for these lower amounts is, in many cases, the fact that taxpayers paid less in taxes on their 2018 earnings, the issue arises because the tax refund check has become a staple in the American household budget.

“Refunds become an annual check that some three-quarters of U.S. taxpayers typically count on. For some lower-income households, it is the biggest cash infusion of the year,” explained AP author Marcy Gordon. The Treasury Department estimates about four in every five taxpayers will see a decrease in their tax bill this year, but that fewer people will receive a refund.

Opposition to the president has seized on this issue, which is, of course, trending on social media. Early democrat presidential nominees in particular are taking to public platforms to bemoan the lower refund volume. Kamala Harris (D-CA), tweeted after the first week’s IRS data was released, “Let’s call the president’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1 percent.” Both the IRS and supporters of the tax reform measures point out that the latest reports on refund volume are based on just a few days of data.

What About SALT?

Perhaps one of the most controversial aspects of the 2017 tax reform was the state and local tax (SALT) cap of $10,000, which limited the amount taxpayers could deduct from their taxes due to payment of local taxes. This deduction has historically included property taxes, meaning that SALT was expected to disproportionately affect high earners in high-property-tax states, such as those in the northeast. SALT deductions tend to go to high earners who take itemized deductions, and the Tax Foundation estimates that nearly nine in 10 SALT deduction benefits go to people earning more than $100,000 a year. Lower earners and those in lower-property-tax states are less likely to itemize their deductions or derive substantial benefits from SALT[3].

As many industry analysts predicted, the main result of SALT, in addition to lower tax refunds for a specific, high-earning subpopulation of homeowners, was to drive residents of high-tax states to more “tax-friendly” states, such as Nevada, Texas, and Florida. Depending on your tax-policy preferences, this may lead you to blame the SALT tax and consider the entire issue the fiscal manifestation of a vendetta against your political party, as New York governor Andrew Cuomo did when he stated earlier this month that “SALT was an economic civil war [that] literally restructured the economy to help red states at the cost of blue states,” or consider the high-tax exodus as nothing more than physical proof that high taxes are bad for the economy, as lower-tax-state politicians have boasted.

Jumping the Gun

Of course, given we’re only operating with, at best, about two weeks’ worth of data, any attempt to draw firm conclusions about how tax reform will affect the 2019 tax season is a bit premature. Ryan Ellis, a tax lobbyist and enrolled agent, warned against jumping to conclusions about tax trends this early in the game. “Everybody is jumping the gun here,” he told The Hill in an interview yesterday, observing that neither party should consider the data available a win or a loss so far[4]. Ellis went on to point out many taxpayers who will receive bigger refunds thanks to expanded child tax credits and new pass-through business deductions do not typically file taxes this early, and other analysts said in light of this “refunds could end up being the same size or even bigger than they were last year.

What is your tax policy?

  • Do you file early?
  • Are you worried about your refund this year?

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[1] https://thehill.com/policy/finance/430305-smaller-tax-refunds-put-gop-on-defensive

[2] https://abc13.com/finance/average-tax-refunds-fall-for-second-straight-week/5142805/

[3] https://smartasset.com/taxes/trumps-plan-to-eliminate-the-state-and-local-tax-deduction-explained

[4] https://thehill.com/policy/finance/430305-smaller-tax-refunds-put-gop-on-defensive

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