Morgan Stanley says federal tax refunds are rising compared with a year ago but remain marginally below the firm’s forecast, and that increases in gasoline prices could undercut the spending power of larger refunds.
According to Morgan Stanley, federal refunds are up 14% on a year-over-year basis, below its anticipated increase of 15% to 25%. The average refund amount has risen by 11%, and a greater number of consumers are receiving refunds this year compared with last.
The firm had expected the recent fiscal measures to lift consumption only modestly - by a couple of tenths this year - but the latest refund and price data suggest the effect on consumer spending could be smaller than originally projected. Morgan Stanley notes that if average gasoline prices climb by 15% this year, reaching $3.60 per gallon or higher, that rise in fuel costs would more than offset a $350 increase in the average tax refund.
Morgan Stanley’s analysis also examines tax-rate dynamics. When taxes paid are included, the effective tax rate remains below last year’s level but is higher than the firm’s prior forecast. That outcome implies downside risk to the firm’s roughly 20 basis point projected lift to consumption in 2026.
The composition of refund recipients matters as well. A larger share of low-income households are receiving refunds, though their average refunds are smaller in dollar terms. For this group, dollar spending on gasoline is also lower, which moderates how much fuel-price increases will reduce their discretionary spending.
At the same time, state tax collections are trending upward. Morgan Stanley highlights a rise in withholding, which the firm interprets as consistent with continued income growth among higher-earning households. That pattern could support some pockets of consumption even if broader effects are muted.
Overall, Morgan Stanley’s read of the data suggests that while refunds are larger and reaching more taxpayers, higher gasoline prices and tax-rate developments create uncertainty about how much those refunds will translate into additional consumer spending now and into 2026.