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Tax Refund: Lagged, But Are Picking Up

 February 21, 2013 10:31 AM

(By Mani) So far in 2013, individual income tax refunds are running below year ago levels due to a delayed tax return filing season this year. However, on a recent daily basis, refunds are catching up and have been running above last year's daily pace through mid-February.

Tax refund is an anticipated annual recurring event and thus are more likely to affect consumption than temporary swings in tax rates and gasoline prices. Moreover, retailers are hoping the tax refunds, albeit delayed, will boost spending from consumers, who are already pressured by higher social security taxes and gasoline prices.

This year, taxpayers have until April 15, to file their 2012 tax returns and pay any tax due. The Internal Revenue Service (IRS) expects to receive more than 147 million individual tax returns this year, with about 75 percent projected to receive a tax refund.

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However, so far in 2013, total year-to-date refunds are running a cumulative $55 billion through Feb. 14, representing a 28 percent drop from $77 billion through mid-February a year ago.

The weakness mainly stems from a delayed filing season this year. The IRS officially began the filing season on Jan. 30 this year versus Jan. 17 last year due to changes in the tax code as part of the fiscal cliff deal. There has only been roughly 10 days of refunds issued this year versus about 17 days in 2012.

However, recently the pace of refunds has picked up. For the first 10 days of this year's filing season (through Feb. 14) versus the 10 first days of last year's season (through Feb 6), refunds are running a cumulative $55 billion versus $37 billion last year.

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"Admittedly, that comparison is not perfect, but what appears to have been a headwind for the consumer in late-Jan/early-Feb now appears to be turning into a tailwind as refunds are picking up the last few days," UBS economist Maury Harris said in a note to clients.

Last year, the IRS issued more than nine out of 10 refunds to taxpayers in less than 21 days, and it expects the same results in 2013.

Although tax refunds are picking up, the delay would have a temporary impact on consumer spending that in turn is partially hurting the sales of retailers. Early February reports from some major retailers have been disappointing and even retail giant such as Wal-Mart Stores, Inc. (NYSE:WMT) said to have had one of the worst sales start to any month in seven years in February.

Three popular explanations to the retail weakness are higher Social Security taxes, gasoline prices and slower than normal payment of Federal income tax refunds.

"We see the latter as the most important near-term reason, and it is just temporary," Harris said.

The now expired two-year Social Security payroll tax cut was publicized as just temporary, with the estimated consumption impact at only around $0.40 per $1.00. That estimated result limits how much consumption may be harmed by elimination of the temporary tax cut this year.

Similarly, the public can easily remember retail gasoline price oscillating between $3.00 and $4.00 per gallon in recent years and thus will not change consumption in lockstep with gasoline price swings known to be temporary.

Last year, federal income tax refunds totaled $310 billion—almost three times this year's Social Security payroll tax hike and well over the approximately $10 billion per annum consumer expense rise for each dime jump in retail gasoline prices.

Meanwhile, retail sales in the U.S. saw a modest increase in the month of January, according to a report released by the Commerce Department. The report showed that retail sales crept up by 0.1 percent in January following a 0.5 percent increase in December. The modest increase in sales indicated that consumers are adjusting spending to higher payroll taxes and rising gas prices.



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