As we go into April, refunds are still down, and the deficit is still up

As we head toward the end of tax filing season, there hasn’t been a lot of change from what we’ve seen for the last 2 months regarding the number and amount of refunds of federal taxes. There are less of them, and therefore, less money coming back to consumers than we saw in 2018.

Individual tax refunds this year have been only slightly smaller than last year, but those shortfalls are adding up. At the end of last month, the amount of money the IRS government to individual taxpayers was $6 billion below this time last year.

As of March 29, the Treasury had issued 71.8 million refunds. This time a year ago it had issued 73.4 million. So while the average refund, at $2,873, is only $20 less than it was last year, about 1.6 million fewer people are getting refunds, the IRS said…

With another two weeks left to file taxes, the general trend could shift. But it's unlikely that average refunds will go up, tax pros say. That's because the people who tend to file their taxes later in the season are the ones who know they owe money.

"Generally speaking, folks who expect a refund will file early, but folks who expect to pay file late," said Ivan Havrylyan, a Chicago financial planner.

As you can see, this has been a persistent gap for the last month.

I can’t think that a lack of refunds is going to help a consumer sector of the economy that’s already been sluggish to start 2019, particularly as gas prices jump back toward $3 a gallon (or more!).

In addition, given that it seems likely that many more of those April filers will be writing checks instead of getting the refunds they’re used to, don’t be shocked if you see that “refund gap” grows in the next couple of weeks, as we get the final bits of data from the regular tax filing season.

The flip side of that is all of those check-writers will be adding to the US Treasury, which is needed as the GOP’s Tax Scam had previously stopped any growth of resources for that side of the balance sheet. That was reiterated from the Congressional Budget Office’s budget review for March, which came out last Friday.

The CBO admits that tax revenues for Uncle Sam were up last month compared to March 2018, which was the first full month the Tax Scam’s lower withholdings were in effect.

CBO estimates that receipts in March 2019 totaled $228 billion—$17 billion (or 8 percent) more than those in the same month last year. Withholding of individual income and payroll taxes increased by $8 billion (or 4 percent), thus increasing receipts. Individual income tax refunds declined by $6 billion (or 10 percent), further boosting net receipts. Remittances from the Federal Reserve decreased by $2 billion, or 31 percent.

But that hasn’t translated into full-year revenue totals. In addition to the US budget deficit for the first half of the Fiscal Year has gone up more than 15% compared to last year (at $693 billion for FY 2019). Individual income and corporate taxes have declined, and the only reason there isn’t a further hole is because of extra money paid in that are generated for/from Social Security, Medicare and tariffs.

Change in US revenues, Oct-March, FY 2019 vs FY 2018
Income taxes DOWN $12 billion
Corporate taxes DOWN $11 billion
Estate/Gift taxes DOWN $3 billion
Payroll taxes UP $26 billion
Tariffs/Customs Duties UP $16 billion
Everything else DOWN $6 billion
TOTAL CHANGE REVENUES +$9 BILLION (+0.6%)

The payroll tax increase of 4.7% and the March's income tax withholding increase of 4% indicates what we SHOULD have had as the economy and employment continue to grow, but that hasn't happened for the full Fiscal Year due to the Tax Scam. And that drop in revenues doesn’t count the $7 billon more that has been paid out for the Earned Income Tax Credit and Child Tax Credit, some of which also goes back to the Tax Scam.

Then combine it with notable increases in spending, and you get a ballooning deficit.

Change in US spending, Oct-March, FY 2019 vs FY 2018
Defense UP $28 billion
Social Security UP $26 billion
Interest on the Debt UP $22 billion
Medicare/Medicaid UP $15 billion
EITC and Child Tax Credit UP $7 billion
EVERYTHING ELSE UP $4 BILLION

But if that spending growth gets slammed to a halt, so does a lot of what’s left to stimulate growth these days. The Federal Reserve Bank of Atlanta has steadily increased its estimates to 1st Quarter growth for 2019 to 2.3%, but over 25% of that growth will be due to more government spending to start the year.

I've said that the coming reports on consumer spending are more crucial than usual, precisely because it seems that headwinds are forming on consumer spending. Prices rising, fewer refunds and a possibility of lower spending to limit a deficit blown up by the GOP's Tax Scam adds up to a very tenuous situation, and a UW economist pointed out today that a downturn is still a significant possibility.

10yr-3mo Treasury spread implies near 50% prob recession starting w/in next 12 mos. Principle components of 3 factors of yield curve implies 20%.
Do we want Cain and Moore running monetary policy in a recession? pic.twitter.com/XuRDGFAQBj

— Menzie Chinn (@menzie_chinn) April 9, 2019