It was always going to be an uphill battle for Republicans to turn last year’s tax cuts into a memorable economic and political victory that could help their party retain control of Congress in the midterm elections.
Many people won’t see a significant change in how much tax they owe. The overall economic effect was expected to be minor. And even for people who were set to benefit from the new tax cuts, a larger refund this spring might not be enough to shape how they vote in the fall.
Now, a surge in oil prices, brought on by the war against Iran that President Trump chose to launch, is threatening to raise costs across the economy and cut into the already modest stimulus the tax cuts were poised to deliver in the coming weeks.
“Rather than even a month ago thinking this could provide a boost to base line growth for the rest of the year, now I’m thinking it could limit the downside,” said Michael Pugliese, a senior economist at Wells Fargo. “This energy shock is coming just as the refund money really gets flowing.”
Republicans carefully designed their tax law to try and create an economic lift this spring. Much of the legislation was dedicated to extending an expensive series of tax cuts passed in Mr. Trump’s first term, a maintenance of the status quo that seemed unlikely to interest voters. So the party layered on an additional set of tax cuts that reflected Mr. Trump’s campaign promises, like “no tax on tips,” with the hope that the populist changes would generate more economic activity and public support for the G.O.P.
To help the new tax cuts pop, Republicans made them retroactive to the beginning of 2025. After the law passed, the Internal Revenue Service didn’t change how taxes were withheld from paychecks. As a result, the new tax cuts will only become apparent to many Americans when they file their taxes this spring.
The idea was that supersized tax refunds worth thousands of dollars would grab attention and drive spending in a way that marginally lower taxes saved throughout the year would not, even if many Americans wouldn’t be able to claim the new tax breaks. Those refunds would arrive before the law’s cuts to Medicaid, the health care program for low-income Americans, and food stamps, kicked in.
At a political rally in Kentucky last week, Mr. Trump highlighted several of his new tax policies. That included a new deduction for overtime pay that the president has branded as “no tax on overtime,” though those earnings will still be subject to taxes under the law that Republicans actually passed.
“That means every extra hour you work, your overtime pay is now 100 percent tax-free,” he said. “You have no tax. Remember that when you go and vote.”
Instead, the dominant impression of the economy for many Americans this spring could ultimately come down to gas prices that have risen rapidly, eating into their purchasing power. If the war in Iran snarls global oil supplies for months, analysts expect that the added costs to the economy could eventually overwhelm the relief the refunds are expected to deliver to some households.
Roughly halfway through the filing season, the bump from the tax cuts appears to be smaller than expected. So far, the average refund is $3,676. That’s nearly 11 percent larger compared with last year, according to I.R.S. data through March 6, the most recent numbers. But it falls far short of the 30 percent increase forecast by some analysts and advertised by the White House.
“I would have expected to see a slightly higher number, but it’s still a couple of weeks away from when you would see the bulk of the refunds coming in,” said Stephanie Roth, the chief economist at Wolfe Research. “It’s slightly underwhelming, but maybe not so surprising because it’s so early.”
Generally, Americans who expect a large tax refund and may need the money file early. More affluent taxpayers who don’t count on a refund file closer to the April 15 deadline. Some of Mr. Trump’s new tax cuts, like a larger state and local tax deduction, largely benefit higher-income Americans. That means that the increase in the average refund size could eventually end up meeting higher expectations as those richer Americans receive refunds.
In any case, the hundreds of billions of dollars sent to households as tax refunds this spring won’t go directly back into stimulating the economy. Higher income Americans are more likely to save any refund they receive rather than spend it. Many Americans use refunds to catch up on bills or pay down debt, with only a portion of the funds actually helping to stimulate new spending.
Bridget Tully, a human resources administrator in Burlington, Vt., counts on her tax refund every year to help her pay bills and credit card debt. Her refund this year was roughly $800 larger than in the past. With the extra money, she said she decided to extend an upcoming vacation in Florida by an extra day.
“I spent some of it on fun and a lot of it on bills,” she said.
Given that only a portion of refunds help generate new spending, Heather Berger, an economist at Morgan Stanley, said the tax refunds were always going to have a relatively minor near-term effect on the economy.
“It should still result in somewhat of a boost to spending, but we didn’t have it resulting in this very large jump in spending regardless,” Ms. Berger said. “If the oil shock is large and sustained, then yes, it can more than offset this boost from refunds, potentially.”
Andrew Duehren covers tax policy for The Times from Washington.
The post With Iran War, Trump Risks Stepping on Gains From His Own Tax Cuts appeared first on New York Times.
