Higher tax refunds could boost consumer spending

Opinions are mixed as to what kind of benefit this year’s refunds will have on consumer spending. Instead of making purchases, customers may also choose to use the refunds to pay down debt or save the extra cash.

Morgan Stanley researchers estimate that this year’s larger refunds could fuel a 4.1% increase in real disposable income in the first quarter, but that the impacts will be felt disproportionately. The firm expects deductions for tips and overtime will benefit middle-income consumers, while the increase in the state and local tax deductions will benefit high-income consumers and homeowners.

Walmart has factored the increase in tax refunds into its projection that its sales will increase 3.5-4.5% year-over-year in 2026, the company’s chief financial officer, John David Rainey, said on its earnings call in February.

“We have to make assumptions about how much of [the refunds] will be saved versus spent — and of what is spent, how much goes into the first quarter versus later quarters in the year; it remains to be seen,” Rainey said. He added during a buy-side investor follow-up call that the company does expect a higher level in spending due to the tax refunds.

The Home Depot president and CEO Ted Decker, however, presented a much more pessimistic view on tax refunds during his company’s earnings call last month. “We’re actually not counting on a lot of support from tax stimulus,” Decker said. “We’re hearing that it’s just as likely that that’s either going to be used for debt pay-down for lower-income deciles or saved by higher-income deciles.”

John Tomlinson, global director of research at M Science — a research and analytics firm — said his firm is still analyzing spending data to determine whether there has so far been any increase in spending related to tax refunds.

So far, consumer transaction data for the month of February has been inconclusive on whether the refunds are showing any boost to spending, he said. The company tracks anonymized credit and debit card transaction data. He expects it to be difficult to analyze the impact in future months of data because of an earlier Easter and pent-up spending from winter storms across the country in January and February.

“It’s not clear if consumers are spending it yet,” Tomlinson said, adding that he expects they may save the money due to fears surrounding job security, the conflict with Iran and the economy generally. “I do expect it will be spent to a certain degree. Now, do I think all of it will be spent? Probably not, but I think we won’t really know for another couple of weeks.”

David Quigley, an economist at The University of Texas at Arlington, said refunds could lead to a change in the timing of purchases, but won’t significantly increase consumer spending overall. He also said that if the deductions do mostly benefit middle- or high-income households, a slightly larger-than-expected tax refund is unlikely to change their spending habits.

“Customer spending of the wealthier households has been pretty strong, and so, a tax refund, of course, is generally not going to be a large part of their overall expenditures and income,” Quigley said.

This year’s larger refunds are also likely a temporary phenomenon because the tax changes were made in the summer of last year. People are getting higher refunds in part because their withholdings may have been kept the same as before the new laws passed — as these are often adjusted at the start of the year — said Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals.

“Nonetheless, they’re seeing more money coming back to them,” said O’Saben, who is also a longtime tax agent based in the St. Louis area. “I’m seeing anywhere from a couple hundred dollars to $400, to $500, maybe $600 or $700.”

O’Saben said people shouldn’t expect as big of a bump in their refunds next year, as withholding amounts will have been adjusted for this year.

“A year from now, we’re not going to see that several-hundred-dollar bump up in refund, because they’re going to be getting it in their paychecks this year,” O’Saben said. “The bump in refunds we’re seeing in the 2025 year is really because of the law changing in the middle of the year.”

With rising unemployment and global conflicts, O’Saben expects people to focus on paying down debt or increasing savings rather than making big purchases.

Clients “don’t all tell me what they’re going to do with the money, but many say, ‘Well, I think I’m going to pay down some debt,’ or, ‘I’m going to boost my savings,'” O’Saben said. “I’m hearing less of, ‘I’m going to buy a new car,’ or maybe, ‘We’re going to look at putting new windows in the house.’”