Tax refunds less than predicted
By John Byczkowski
The Cincinnati Enquirer
Amy Merk thumbed through a folder of a year's worth of family financial papers, looking for an answer to a simple question: Did she pay more in taxes this year than last?Like many taxpayers, she knew the size of her refund - a little smaller for her family's 2003 income compared to 2002's - but the West Chester housewife didn't know her tax bill.
When she found the answer, she was surprised: The federal tax bill for her, her husband and four children went up slightly for 2003. "It's not alarming, but it is a little bit surprising. Everything you read this year, it's all about tax cuts," Merk said.
"My refund is not as lucrative as last year. I'm looking at this, and I have to say I'm a little surprised."
Some economists echo Merk's disappointment. Many predicted the U.S. economy would get a boost this spring when tax refunds are paid out. But how big an impact will it have?
Less than last summer, when two big tax changes helped the economy accelerate. Billions of dollars in advance child tax credits were mailed to American taxpayers, and withholding rates were cut. That put more money into Americans' pockets and, with a hot housing market and a wave of mortgage refinancing, helped the economy grow at a blistering 8.2 percent annual rate last summer.
But many who were hoping for more of the same this spring are backing off. The early numbers on tax refunds show that they're not as big as first hoped.
Through March 19, average federal tax refunds were up 4.9 percent compared to a year ago, or $101 to $2,151, reports the Internal Revenue Service. A jump in electronic filing means returns are coming in faster, and refunds are being processed faster. With tax returns coming in 5 percent faster this year compared to 2003, total refunds paid out were about $11 billion ahead of last year, at $122.4 billion.
Gene Fugate, a commercial banking officer from Pierce Township, said he's getting about $1,200 more back this year than last year. Much of that increase is due to more careful tax planning, and the lower tax rates helped, he said.
And, that money's going back into the economy. "We can certainly use the money," he said. "We have a daughter who wants to go to Xavier, and in our bracket, financial aid is not much of a help," he said.
How much impact?
The U.S. Department of Treasury says the impact of higher refunds and lower tax bills will put an extra $50 billion into taxpayers' pockets this spring. Some economists disagree, however, saying the impact will be lower.
David Wyss, chief economist for Standard & Poor's in New York, sides with the Treasury. He said $50 billion in tax refunds and lower tax bills will put enough cash into the economy to raise economic growth by half a percentage point.
Others aren't so optimistic. Cynthia Latta of the consulting firm Global Insight in Lexington, Mass., is backing off her estimates from last year. She now says the refunds will have an impact of around $25 billion.
Ed McKelvey, an economist at investment banker Goldman Sachs in New York, estimates the impact this year will be about $40 billion, but not all that may go back into the economy. So far, it appears the early filers aren't getting the biggest refunds. That means wealthier taxpayers with more complicated returns are waiting to file.
They'll get the biggest refunds, but wealthy taxpayers tend to save more of their refunds than taxpayers with lower incomes. Nicholas Souleles, associate professor of finance at the Wharton School in Philadelphia, said "illiquid" consumers - with lower incomes and lower assets - spend two-thirds of their refunds quickly, much of it on nondurable items, such as food.
Wealthier, "liquid" consumers save two-thirds of their refunds, and spend a third. If the goal of tax cuts is to revive the economy, "that would suggest disproportionately targeting the tax cuts to liquidity-constrained households," he said.
But it appears wealthier taxpayers are filing later. "This raises the question whether (this year's tax changes) will have the same kind of effect on consumption that you might have had otherwise," McKelvey said. "Early filers aren't the ones that are taking in the big bucks."
Results mixed
Local tax preparers are seeing a range of results. Jacqui Jordan of Jordan & Jordan Tax Accountants in Finneytown said her clients are seeing an average increase in their refunds of about $900, to more than $4,300.
"The lower tax rate has definitely been responsible for increasing refunds, because employers didn't necessarily withhold at the lower tax rate," she said. That means employers withheld more, and workers end up with bigger refunds.
Diana Thompson of Tax Tyme in West Chester said she's seeing smaller tax bills and smaller refunds. But she said she's also seeing any supposed benefits from the elimination of the marriage penalty being canceled by other changes. The reduction of child care credits, for instance, is leading to more households being subject to the alternative minimum tax.
Overall, families with children and incomes less than $110,000 are gaining the most, Thompson said. "The average person has a little more in their pockets, but they're getting it throughout the year and they don't know it. It's so minor that they don't realize it," she said.
Accountant Drew Flynn of Southgate agrees. "I'm seeing young families, or even single people who have children, get more back because of child credit," she said. "Unfortunately, the people who are not being helped are the people whose kids are grown, still working, and probably don't have big mortgage payments anymore. Nothing has relieved the older person."
Thompson points out that higher gasoline prices and a higher Ohio sales tax might be eating up any savings seen by taxpayers. "The federals reduced their taxes, but everybody else came by and got it," she said.
Economy helped
In the end, the tax cuts may not have made the economy stronger, but they did keep the economy from getting worse. The cuts "are providing a temporary boost to income, to allow consumers to keep on spending until job growth kicks in more strongly," said Gus Faucher, senior economist with Economy.com in West Chester, Pa. "The tax cuts prevented the recession from being worse than it would've been, and they supported the economy over some rough times."
But the cuts won't carry the economy much further. "We're on our last legs with them," he said. He believes that job growth will improve, raising incomes and adding fuel to the economic expansion.
And with rising gas prices sucking an estimated $35 billion out of the U.S. economy, the tax refunds "may just offset higher gas prices," Latta said.
E-mail johnb@enquirer.com
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