Last fall the Cox Automotive Industry Insights team and I started warning about potential surprises lurking in tax refund season due to rushed changes to withholding tables made in the wake of the Tax Cuts and Jobs Act.
In January, we published our view and the insights behind our concern. Our conclusion in aggregate was that total refunds and average refunds would likely be lower. However, we did acknowledge that the impact would vary by demographics and geography and that the impact to the used-car market was uncertain as a result.
We are now seven weeks into tax refund season. Armed with more data, we can now assess our prediction and provide an updated view on what will likely happen to the auto market this spring.
The IRS has provided data on forms processed and refunds issued through March 1. After a few weeks of data even worse than we were expecting, refunds have improved dramatically over the last two weeks as a result of filers eligible for refundable tax credits being represented in the data.
Year-over-year, the volume of tax filings processed is down 3.7 percent. Number of refunds issued is down 4.2 percent, which means that about 1 percent more of filers so far have ended up owing money rather than receiving a refund. Total refunds in dollars are down 3.5 percent, but the average refund is now up 0.7 percent.
We are still in the early innings of tax filing and refund season. We anticipate that the average refund will remain positive for a few more weeks as the bulk of tax credit filings are processed. As we reach the end of tax filing season, we are likely to see the average refund come down.
When the average refund changed dramatically this past week with households eligible for tax credits represented in the data, the IRS figures started to more closely align to some unique views of this refund season that are relevant to the used-car market.
Tax Max Data Provides New Insights
As a result of the January media coverage of tax refund uncertainty, I met Bill Neylan, president and CEO of Tax Max. Tax Max provides a tax preparation service that offers car dealerships a tax season solution by filing the customer’s tax return and using the tax refund as a down payment. Tax Max is headquartered in Tampa, Florida, but has a portfolio of more than 3,000 dealership locations nationwide.
When I met Bill, he had a very bullish view of the prospects for this tax refund season and the impact on his dealer clients. As we started to compare notes on our data and analysis, we each gained insight into the fact that there would be winners and losers in this tax refund season.
The data seem to suggest that Tax Max’s clients are more likely to get bigger refunds. For the tax filings they had processed through the end of February, Tax Max’s average refund was $4,665.82, which was an increase of 9.8 percent from last year’s average through the same time frame.
Unlike the IRS’ data, Tax Max’s average refund has been tracking positive growth every week this tax season. The reason? Tax Max clients are far more likely to be eligible for tax credits while also more likely to live in lower tax markets including states with no state income taxes like Florida and Texas.
That would be an indication that much of the used-car market could still enjoy a strong spring market, albeit delayed by a few weeks given the slower processing of tax refunds this year.
Consumer Survey Reveals Refund Surprises
To give us further insight into the impact and possible identification of winners and losers, we conducted a consumer survey of adult workers in the U.S. from February 21-25. Below are the summarized key findings based on a national representation of 500 respondents.
As of February 25, 43 percent of respondents had filed, and 78 percent of those indicated they were getting a refund. With the margin of error from the survey, these percentages are in line with the IRS data.
The percentages of those reporting they were getting a higher or lower refund than expected were even at 29 percent. That means that those getting more or less far outnumbered those getting the amount they expected.
Furthermore, of those who were receiving a refund this year who also received a refund last year, 78 percent said they were surprised by their refund situation. Interestingly, 33 percent said they were getting a lower refund while 33 percent said they were getting a higher one.
Americans depend on these refunds. Our survey indicated that the two uses that most people planned for the tax refunds were saving money (56 percent) and paying off debt (54 percent). Relevant for the auto market, 11 percent said they intended to use their refund to purchase or provide a down payment for a vehicle.
What did you do/plan to do with your 2018 tax refund?
More than one option can be selected.
|Pay off debt (loans, credit cards, etc.)||54%|
|Everyday spending (groceries, gas, dining, etc.)||27%|
|Buy a gift for yourself or a family member/friend||12%|
|Purchase/down payment on an automobile||11%|
|Give money to a family member/friend||11%|
|Purchase/down payment on a house||9%|
|Base: Received a tax refund for 2018|
|(MOE +/-) 7.58%|
Of those getting a refund or owing money, we asked what impact their situation would have on their 2019 spending plans. Only 15 percent intend to spend more than last year, while 45 percent intend to spend the same, but 40 percent said they would now spend less than last year.
The impact on spending behavior is clear. Tax refunds amount to be the biggest payday of the year for many households. As a result, 46 percent of our surveyed tax filers said that their tax refund situation impacts the type of purchases they make each year.
An additional impact would come from any adjustments that consumers make on their own, or potentially with the help of new W4 forms to be rolled out later this year. In our survey, 46 percent of filers said they were considering changing the amount of money withheld. Interestingly, 44 percent said that they prefer to have more money taken out of their paycheck in order to get a bigger refund.
What we didn’t find in the survey was a clear link to differences by state. We surveyed an additional 985 consumers in four large but very different states for state and local income taxes. The survey results were inconclusive for finding clear differences along tax refund surprise disparity across the states of California, New York, Florida and Texas. Our February survey could be skewed by the timing of people who have completed their filings so far versus those who have yet to start.
Cox Automotive Payroll Data Shows W4-Refund Connection
According to our analysis of 2018 Cox Automotive payroll data, we’re finding more of a connection to allowances claimed on the W4 than with state of residence in terms of identifying who is most likely to be in store for a positive or negative surprise.
The old tax structure, which used exemptions and had more itemized deductions, was more directly related to allowances. Our analysis of payroll data suggests that employees claiming more than 4 allowances are more likely to be underwithheld and therefore more likely to owe or get less of a refund compared to those with 1 to 4 allowances.
In our payroll data, the high tax states have a higher concentration of people with more than 4 allowances. Therefore, states may have differing percentages of people positive or negatively surprised, but the differences are more a function of the type of filers who live there rather than all filers in those states being more negatively or positively impacted.
Tax Refund Season Impact on the Used-Car Market
Despite the unclear connection to states, we now have better insights into this year’s tax refund season. Americans seem to be slower to file, and the IRS is even slower to process and issue refunds. At a minimum, that means some lag to the time frame we’ve observed in the spring bounce in recent years.
While tax refunds are down in total and a large number of people are clearly surprised and even in a situation of owing when they are used to getting a refund, most people are still getting refunds. The average refund may end down compared to last year, but it will still be substantial.
The best news for the used-car market is that a sizable number of households getting a refund do plan to use that money to buy or finance a vehicle. And many of the households most likely to buy used appear to be those more likely to be positively surprised by receiving a bigger refund.
The more severe impact on those who previously itemized will disproportionately fall on high tax states and higher income households, so there will be differences in the used-car market regionally.
The weekly price trend at Manheim, as illustrated by the three-year-old Manheim Market Report (MMR) Index, suggests that the after a slow start, demand is now picking up. After starting the year with six straight weeks of declines, the index stabilized in weeks seven and eight and then turned up last week.
The changing trend also coincides with the move by President Trump to pursue the Section 232 tariff on autos and parts, so we can’t say that the price move is entirely related to a real tax refund-powered bounce. Either way, we know that many used-car dealers are now positioning themselves for a good spring market.
By Jonathan Smoke, chief economist, Cox Automotive