Through April 9, the average refund was up $102 to $2,090, an increase of about 5% from refunds during the same period last year, the IRS says. Economists and tax analysts had earlier predicted the Bush administration’s $350 billion tax-cut package would boost refunds by more than 25%. The administration estimated the average refund would increase $300.
Economists are puzzled by the smaller-than-expected refunds. “It’s a bit of a mystery,” says Goldman Sachs senior economist Jan Hatzius.
Cynthia Latta, principal U.S. economist at Global Insight, says lower refunds could be caused by a stronger-than-expected stock market last year, which has led to higher capital gains payments. And households might have adjusted their withholding last year to account for the reduced taxes, she says. Other possible factors:
•The alternative minimum tax. The AMT, originally designed to prevent the rich from avoiding taxes, will affect an estimated 3 million taxpayers this year. The AMT vaporizes many deductions and credits, reducing or eliminating the benefits of last year’s tax cut. Among this year’s AMT victims: Vice President Cheney.
•Late filers. Some taxpayers who may be eligible for a big refund had to postpone filing their returns because of confusion over taxes on investment income.
Leslie Hershey, 42, of Armonk, N.Y., who does her family’s taxes using TurboTax software, delayed filing until this week because she wasn’t sure how much she owed on stock dividends. One of her financial institutions sent three corrections to her 1099s, the forms that report interest and dividends.
•The economy. Many taxpayers were unemployed or worked fewer hours last year, resulting in lower incomes and smaller refunds, says Mark Ernst, chief executive officer of H&R Block, the USA’s largest tax preparer. Refunds for Block customers are averaging about 5% higher this year than last.
Conversely, the Bush administration says an increase in some taxpayers’ incomes could have reduced refunds. “That would be great news for the economy, and it would mean benefits from tax cuts were even larger than expected,” says Treasury spokeswoman Tara Bradshaw.
While economists and the administration had been banking on higher refunds to provide a big stimulus to the economy in the first half of 2004, the economy appears to be doing fine without them. The government said Tuesday that March retail sales rose 1.8%, the best gain in a year.
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