Morgan Stanley says the latest tax refund figures are a bit softer than the bank had expected and raises questions about how much incremental support refunds will add to household spending this year.
In a client note, the bank's economist Heather Berger says refunds are "trending slightly below our expectations," noting the firm had only factored in a marginal fiscal boost to consumption - "only a couple of tenths this year."
At the federal level, refunds are up 14% year over year, which falls just short of the 15% to 25% increase range Morgan Stanley had projected. Meanwhile, the average refund has risen 11% to $3,462, a softer increase that the bank attributes in part to a larger share of taxpayers receiving refunds.
Berger highlights an important nuance in the tax picture: the effective tax rate is running lower than it was last year but remains above Morgan Stanley's forecast. She warns this creates "some downside risk to our ~20bp OBBBA boost to consumption in '26."
More consequential, the note says, is the threat posed by higher fuel prices. Berger calculates that "an increase of 15% in average gas prices this year (to $3.60 or higher) would more than offset the $350 increase in the average refund." In other words, rising gasoline bills could eliminate the additional disposable income households receive from larger refunds.
The distributional effects are uneven: middle-income households could feel the impact most heavily, given their exposure to gasoline spending in dollar terms. Low-income households receive smaller refunds and also tend to spend less on gasoline in absolute dollars, the note says.
At the state level, data appear firmer: tax collections are trending higher and withholding patterns point to continued income gains among higher-earning households. But Berger cautions that, on a nationwide basis, higher spending on gas could more than offset the rise in average refunds, constraining the overall lift to consumption that policymakers had expected.
The bank's analysis underscores a delicate balance between fiscal transfers to households and cost pressures that can erode those gains, leaving the final effect on consumption uncertain.