Tax season presents boom-or-bust test

DETROIT – The strength of the U.S. auto industry will face an early test this spring that has nothing to do with cars or trucks.

With tax season underway, industry experts predict that some Americans, many of whom are priced out of the new vehicle market, will use their expected higher tax refunds to purchase a new or used vehicle.

The extra cash on hand could provide a needed boost to an industry experiencing a slowdown in vehicle sales, or it could highlight ongoing problems in the auto industry due to inflated prices and consumers’ reluctance to still spend on big-ticket items.

“Their new tax bill will actually be less, and they’ll get more out of their tax returns. We think that will be a bit of a surprise to a lot of potential buyers out there,” Cox Automotive senior economist Charlie Chesbrough said at a recent auto analyst conference.

The average IRS tax refund is up 10.9% so far this season compared to the same point in 2025, according to early filing data. The average refund amount as of Feb. 6 was $2,290; that figure was down from $2,065 reported about a year ago.

The increases were expected as part of the Trump administration’s tax changes. One, Big, Beautiful Bill It was signed in July. This law eliminated overtime and tip taxes and, among other regulations, allowed eligible taxpayers to deduct up to $10,000 in annual interest paid on loans paid for new, U.S.-assembled vehicles purchased.

Most tax changes are retroactive to January 2025; This means taxpayers may have withheld more than they will ultimately owe.

“Even though it’s a little bit unknown, it looks like it could be really beneficial to vehicle sales, especially in this kind of Q1-Q2 time frame,” said David Oakley, director of Americas vehicle sales forecasts at GlobalData.

March is historically one of the most popular months for vehicle sales in the United States, especially used vehicles. This month represented an average of 9.1% of annual new vehicle sales over the past 12 years, trailing only December with 9.3% of sales, according to Cox.

Many of the recent tax changes also help middle- and high-income consumers who may decide to purchase a vehicle. The industry saw a similar dynamic during the Covid pandemic, when the Trump administration distributed $1,400 stimulus checks to many Americans.

But at the time, federal interest rates were near zero compared to the current Federal Reserve funds rate of 3.5%-3.75%, and new vehicle inventories were low. Now, with higher borrowing costs and improved inventory, the equation may be different.

More buyers are accepting longer-term loans due to higher financing costs and prices. Investing extra money up front can help reduce monthly payments; Carmax Edmunds reports Reached a record of $772 per month for new vehicles in the fourth quarter.

According to Cox, the average transaction price for new vehicles in the U.S. was hovering around $50,000 toward the end of last year; This is up 30% from the beginning of 2020.

“With consumer finances already so stressed, what we don’t know is whether the extra money has already been spent? Whether that money is going to end up in pockets. It’s a real mess out there,” Chesbrough said.

Consumers may choose to use higher tax refunds to pay off credit card debt, which stands at a record $1.28 trillion nationally, or replenish savings after a period of persistent inflation, according to a report by the Federal Reserve Bank of New York last week.

U.S. consumer confidence fell to 84.5 in January, its lowest level since May 2014, due to intense concern about high prices and a weakening labor market.

“The only people who will be interested in getting a $40,000 or $50,000 auto loan are people who are confident, who feel comfortable about the economic chances of the U.S. economy,” Chesbrough said. “It’s a very difficult situation right now.”

– CNBC’s Kate Dore contributed to this report.