For many, bigger tax refunds will be pumped into gas tank

Friendly reminder that tax day will be here in about two-and-a-half weeks. The average tax refund will be higher this year thanks to the 2025 tax cuts. The problem is, anyone receiving a bigger tax refund right now is also paying higher gas prices.

The new tax law is on track to boost refunds this year by roughly $60 billion compared to last year, said Michael Pearce, chief U.S. economist at Oxford Economics.

“And the average refund so far has been something like $3,600 per claiming,” he said. “So that’s up about 10% or 11% from year-ago levels.”

But those tax benefits start to look a little slimmer when you factor in rising gas prices.

“An increase in gasoline prices, driven by this war, is essentially a new tax on consumers. So one way of thinking about it is this is offsetting some of the benefits that are coming from this tax cut bill,” Pearce said.

Those benefits will be completely offset if gas prices average around $3.60 a gallon over the course of this year, he added. Right now, gas prices are around $4 nationally — a three-year high and a psychological tipping point.

“If they remain there for the rest of the year, then we’re going to see that the increase in gas prices more than offset any boost to consumer spending from these tax refunds,” Pearce said.

That said, another way of looking at this is that the bigger refunds are helping people afford to spend more on gas. “It provides some cushion to this energy shock. Otherwise, the hit to consumers could be much deeper,” said Kathy Bostjancic, chief economist at Nationwide.

The problem with that argument is that people basically have to spend more money on gas right now, she said.

“My gasoline prices went up, so all of the extra money I got from the refunds is going into the gas tank instead of going out to dinner, or buying a gift, or going on vacation — things like that,” Bostjancic said.

Not every consumer is going to cut back. That’s because consumer debt levels, on average, are historically low right now, per Jeff Korzenik, chief economist at Fifth Third Commercial Bank.

“And that means that the consumer can absorb price shocks more readily than if they were stretched out on debt,” he said.

Many consumers are struggling with debt though, Korzenik cautioned — especially since housing costs are so high.

“If you’re a renter, you’ve felt the pain of rent increases. If you’ve been a new buyer in the last couple of years, you’ve paid much higher mortgage interest rates,” he said.

Korzenik said he expects consumer spending to slow down over the course of this year, which means economic growth will slow, too. “Our base case is still continued expansion in the U.S. economy, but more modest growth than we would have otherwise had.”

And Korzenik expects that inflation will continue to rise.