Trump touted big tax cuts, but petrol to eat up refunds

The U.S. economy was expected to start the year with a bang, fueled by an unusually large increase in tax refunds resulting from President Donald Trump’s tax cut legislation.

But rising oil prices are on track to eat into those refunds, leaving most Americans with little extra to spend.

“Next spring is projected to be the biggest tax refund season of all time,” Trump said in a prime-time speech in December aimed at addressing voters’ concerns about the economy and persistently high prices.

But this was before the Iran war, which started on February 28.

Oil and gas prices have risen sharply since then, with the average petrol price across the country reaching US$3.94 ($A5.62) per gallon on Sunday; that’s up more than a dollar from just a month ago.

Oil prices are likely to remain high for some time even if the war ends soon, as shipping and production have been disrupted and will take time to recover.

Economists now expect growth to be slower in the coming months and throughout the year as people have less money for restaurant meals, new clothes or entertainment.

Low- and middle-income households are likely to be particularly hard hit, as they spend a larger share of their earnings on oil and receive lower reimbursements.

“The energy shock will hit those with the least cushion,” said Alex Jacquez, policy chief at the left-leaning Groundwork Collaborative and a former Biden White House economist.

“And it doesn’t look like the tax refunds will be here to save them.”

Based on oil price forecasts from Goldman Sachs, Neale Mahoney, director of the Stanford Institute for Economic Policy Research, calculates that oil prices could peak at US$4.36 ($A6.22) per gallon in May, followed by slow declines throughout the rest of the year.

The idea that oil prices are falling much more slowly than they are rising is so ingrained among economists that they call it the “rocket and feathers” phenomenon.

In this scenario, the average household will pay US$740 million ($1.1 billion) more for gasoline this year; That’s nearly equal to the $748 ($1,066) increase in refunds the Tax Foundation estimates the average household will receive.

There was a much smaller increase in refunds than that through March 6, according to IRS data.

Their average is $3676 ($A5241), up from $3324 ($A4739) in 2025 to $352 ($A502).

However, average refunds may increase as more complex returns are submitted.

Other estimates show similar effects. Economists at Oxford Economics, a consultancy, estimate that if oil prices averaged $A3.70 ($A5.28) per gallon all year, it would cost consumers about $A70 billion ($A100 billion); That’s more than the $60 billion ($86 billion) in incremental tax refunds.

The increase in gasoline prices has already put many consumers in a precarious situation, especially compared to 2022, when oil prices will also rise due to Russia’s invasion of Ukraine.

At the time, many households still had bank accounts swollen from pandemic-era stimulus payments, and companies were hiring rapidly and raising wages sharply to attract workers.

Now that hiring has come to a near halt and Americans’ savings rate has fallen steadily over the past few years as many households take on more debt to keep up their spending.

“When you start looking at the consumer perspective, you see people who have maxed out their credit cards and are using ‘buy now, pay later’ to buy groceries,” said Julie Margetta Morgan, president of The Century Foundation, a think tank.

“They’re making it work for now, but it could break down pretty quickly.”

This impact will likely worsen the “K-shaped” narrative about the U.S. economy, in which higher-income households are better off than lower-income households, analysts said.

According to estimates from Pantheon Macroeconomics, the bottom 10 percent of earners spend about 4.0 percent of their income on oil, while the top 10 percent spend only 1.5 percent of their income.

For now, most analysts expect the U.S. economy to grow this year, albeit at a slower pace, given the gas price shock.

Higher oil prices will likely worsen inflation in the short term, but over time weak spending will also slow growth.

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