Trump tax law 'could put people in financial stress this year'

new study from the JPMorgan Chase Institute documents how tax refunds impact American families’ income, saving, and spending habits. The research examines data from 2015-17 and shows that tax refunds are a “major financial event” that effectively “resets” the spending and savings habits of the families that get them.

Amar Hamoudi, one of the report’s co-authors, says that the impacts of a tax refund go beyond 6 months, and into the following year.

“There are two types of impact,” he says. “Their daily spending patterns — even by a couple of bucks — is higher. And [the second], the amount of cash they have on hand. Their checking account balances are about 11% higher than when they received [their refund].”

52 PHOTOS
Average tax refund in every U.S. state
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Average tax refund in every U.S. state

Texas

Average refund: $3,206

Number of refunds: 10,087,693

Total income tax refunded: $32.3 billion

Louisiana

Average refund: $3,115

Number of refunds: 1,611,412

Total income tax refunded: $5 billion

Connecticut

Average refund: $3,099

Number of refunds: 1,396,609

Total income tax refunded: $4.3 billion

Oklahoma

Average refund: $3,098

Number of refunds: 1,300,577

Total income tax refunded: $4 billion

New York

Average refund: $3,059

Number of refunds: 7,712,210

Total income tax refunded: $23.6 billion

New Jersey

Average refund: $3,013

Number of refunds: 3,479,321

Total income tax refunded: $10.5 billion

Wyoming

Average refund: $2,989

Number of refunds: 214,649

Total income tax refunded: $641.6 million

North Dakota 

Average refund: $2,983

Number of refunds: 277,422

Total income tax refunded: $827.4 million

Florida

Average refund: $2,933

Number of refunds: 7,854,538

Total income tax refunded: $23 billion

Mississippi

Average refund: $2,922

Number of refunds: 1,018,429

Total income tax refunded: $2.97 billion

California

Average refund: $2,911

Number of refunds: 13,594,703

Total income tax refunded: $39.5 billion

Washington D.C.

Average refund: $2,900

Number of refunds: 277,399

Total income tax refunded: $804.5 million

Illinois

Average refund: $2,900

Number of refunds: 4,973,653

Total income tax refunded: $14.4 billion

Maryland

Average refund: $2,861

Number of refunds: 2,329,288

Total income tax refunded: $6.7 billion

Massachusetts

Average refund: $2,850

Number of refunds: 2,704,250

Total income tax refunded: $7.7 billion

Alaska

Average refund: $2,843

Number of refunds: 276,887

Total income tax refunded: $787 million

Nevada

Average refund: $2,830

Number of refunds: 1,111,952

Total income tax refunded: $3 billion

Georgia

Average refund: $2,832

Number of refunds: 3,606,774

Total income tax refunded: $10.2 billion

Alabama

Average refund: $2,802

Number of refunds: 1,650,125

Total income tax refunded: $4.6 billion

Virginia

Average refund: $2,771

Number of refunds: 3,129,030

Total income tax refunded: $8.7 billion

Arkansas

Average refund: $2,759

Number of refunds: 989,288

Total income tax refunded: $2.7 billion

Tennessee

Average refund: $2,726

Number of refunds: 2,465,816

Total income tax refunded: $6.7 billion

Utah

Average refund: $2,681

Number of refunds: 1,033,141

Total income tax refunded: $2.8 billion

Washington

Average refund: $2,681

Number of refunds: 2,749,362

Total income tax refunded: $7.4 billion

Arizona

Average refund: $2,672

Number of refunds: 2,244,925

Total income tax refunded: $6 billion

Kansas

Average refund: $2,665

Number of refunds: 1,044,275

Total income tax refunded: $2.8 billion

New Mexico 

Average refund: $2,657

Number of refunds: 724,549

Total income tax refunded: $1.9 billion

South Dakota

Average refund: $2,651

Number of refunds: 321,372

Total income tax refunded: $852 million

West Virginia

Average refund: $2,649

Number of refunds: 649,049

Total income tax refunded: $1.7 billion

Kentucky

Average refund: $2,648

Number of refunds: 1,590,274

Total income tax refunded: $4.2 billion

Delaware

Average refund: $2,648

Number of refunds: 365,749

Total income tax refunded: $968.4 million

Rhode Island

Average refund: $2,643

Number of refunds: 436,490

Total income tax refunded: $1.1 billion

Pennsylvania

Average refund: $2,643

Number of refunds: 5,071,264

Total income tax refunded: $13.4 billion

Colorado

Average refund: $2,636

Number of refunds: 2,014,233

Total income tax refunded: $5.3 billion

North Carolina

Average refund: $2,629

Number of refunds: 3,580,471

Total income tax refunded: $9.4 billion

Nebraska

Average refund: $2,615

Number of refunds: 711,103

Total income tax refunded: $1.8 billion

Indiana

Average refund: $2,612

Number of refunds: 2,577,994

Total income tax refunded: $6.7 billion

Iowa

Average refund: $2,602

Number of refunds: 1,141,151

Total income tax refunded: $3 billion

New Hampshire

Average refund: $2,602

Number of refunds: 558,359

Total income tax refunded: $1.4 billion

Missouri

Average refund: $2,601

Number of refunds: 2,220,029

Total income tax refunded: $5.7 billion

South Carolina

Average refund: $2,569

Number of refunds: 1,719,299

Total income tax refunded: $4.4 billion

Hawaii

Average refund: $2,564

Number of refunds: 535,763

Total income tax refunded: $1.4 billion

Michigan

Average refund: $2,560

Number of refunds: 3,776,668

Total income tax refunded: $9.7 billion

Ohio

Average refund: $2,517

Number of refunds: 4,570,589

Total income tax refunded: $11.5 billion

Minnesota

Average refund: $2,516

Number of refunds: 2,112,212

Total income tax refunded: $5.3 billion

Idaho

Average refund: $2,457

Number of refunds: 561,133

Total income tax refunded: $1.4 billion

Wisconsin

Average refund: $2,436

Number of refunds: 2,236,886

Total income tax refunded: $5.4 billion

Montana

Average refund: $2,401

Number of refunds: 372,817

Total income tax refunded: $895 million

Oregon

Average refund: $2,398

Number of refunds: 1,431,924

Total income tax refunded: $3.4 billion

Vermont

Average refund: $2,392

Number of refunds: 254,192

Total income tax refunded: $608 million

Maine

Average refund: $2,336

Number of refunds: 509,896

Total income tax refunded: $1.2 billion

Average tax refund by state
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Financial stress

With tax season now underway, Americans are starting to see how the new Tax Cuts and Jobs Act has impacted their refunds. Some have complained their returns are lower, while others have been hit with surprise tax bills.

But with refunds representing such a big moment in many households’ financial trajectory, reduced refunds or unexpected tax bills could have a big impact on their finances.

“There no question that surprise could put people in financial stress this year,” says Fiona Greig, a co-author of the study. “How does this change people’s spending and savings patterns?”

42 PHOTOS
States where Americans pay the highest in state income taxes
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States where Americans pay the highest in state income taxes

California

State income tax: 1% to 13.3% 

Maine

State income tax: 5.8% to 10.15%

Oregon

State income tax: 5% to 9.9%

Minnesota

State income tax: 5.35% to 9.85%

Iowa

State income tax: 0.36% to 8.98%

New Jersey

State income tax: 1.4% to 8.97%

Vermont

State income tax: 3.55% to 8.95%

Washington, DC

State income tax: 4% to 8.95%

New York

State income tax: 4% to 8.82%

Hawaii

State income tax: 1.4% to 8.25%

Wisconsin

State income tax: 4% to 7.65%

Idaho

State income tax: 1.6% to 7.4%

South Carolina

State income tax: 0% to 7%

Connecticut

State income tax: 3% to 6.99%

Arkansas

State income tax: 0.9% to 6.9%

Montana

State income tax: 1% to 6.9%

Nebraska

State income tax: 2.46% to 6.84%

Delaware

State income tax: 2.2% to 6.6%

West Virginia

State income tax: 3% to 6.5%

Georgia

State income tax: 1% to 6%

Kentucky

State income tax: 2% to 6%

Louisiana

State income tax: 2% to 6%

Missouri

State income tax: 1.5% to 6%

Rhode Island

State income tax: 3.75% to 5.99%

Maryland

State income tax: 2% to 5.75%

North Carolina

State income tax: 5.75%

Virginia

State income tax: 2% to 5.75%

Oklahoma

State income tax: 0.5% to 5.25%

Massachusetts

State income tax: 5.1%

Alabama

State income tax: 2% to 5%

Mississippi

State income tax: 3% to 5%

Utah

State income tax: 5%

Ohio

State income tax: 0.495% to 4.997%

New Mexico

State income tax: 1.7% to 4.9%

Colorado

State income tax: 4.63%

Kansas

State income tax: 2.7% to 4.6%

Arizona

State income tax: 2.59% to 4.54%

Michigan

State income tax: 4.25%

Illinois

State income tax: 3.75%

Indiana

State income tax: 3.3%

Pennsylvania

State income tax: 3.07%

North Dakota

State income tax: 1.1% to 2.9%

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“People are going into this tax season with much more ambiguity over where they’ll land,” she says.

Hamoudi says a refund that is smaller this year (compared to last year) could change a family’s spending habits.

“When you file,” he says, “if you get a lot less than [prior refunds], what you spend is lower this year. That could end up happening.”

But, he adds that he expects families will “adjust to the new normal.”

The report shows most Americans use their refund as a savings tool, either purposely or not. They point to the opacity and complexity of the tax system for inspiring this type of behavior. Underwithholding can cause taxpayers to owe a balance to the IRS, which could take some by surprise and cause problems for their families.

“Even in a steady state world it makes sense why people would tilt the scale towards getting a refund,” says Greig.

A ‘watershed’ moment

According to the report, 80% of those studied received a tax refund to the tune of 6 weeks’ take-home income — roughly 10% of their yearly take-home pay. For households saddled with a tax bill, that payment equated to 2.5 weeks’ income. In the study, JPMorgan Chase Institute analyzed financial data from over 8 million families who used a Chase checking account to either receive a tax refund direct deposit, or make an electronic tax payment.

"The receipt of a tax refund is a watershed financial moment for many American families," said Diana Farrell, president and CEO of JPMorgan Chase Institute, in a statement.

Hamoudi says that tax refunds serve as a “reset” to a family’s budget.

But why? According to Greig, tax time can provide “financial clarity.”

“They see it all in one place: ‘Wow, this is how much I earned last year,’” Greig says. “So they know relative to last year how things will go. It also seems like people get information about their financial circumstances through tax time.”

And with a lump sum delivered at once, tax refunds are like disposable income enable families to immediately spend.

In the week after a refund arrived, family spending jumped nearly 75%. Families also doubled their spending on durable goods — items like home appliances, furniture, and tools — from $25 to $50 in a typical week. This was especially true for Americans with lower cash balances, who the report says timed durable good spending around their refund.

But tax refunds don’t just make Americans spenders. It also impacts saving habits.

“On average,” the study says, “families use a fifth of their refund to pay down bills – mostly bills from past consumption, including credit card and healthcare bills.”

A lasting impact

But 6 months after receiving a refund, the report says the average family still had 28% of their refund remaining.

By holding on to the refund, families were able to boost their spending. Throughout the year family expenditures increased, settling to a new steady-state of 7% higher than the pre-refund steady-state.

“During this time frame we observed a strengthening economy and some growth in wages,” Greig says. “So in some sense it’s no surprise we see slight upticks over time after the tax refund, because we are studying this in a time of macroeconomic growth.”

Greig says it’s encouraging to see so many families holding onto their refund, instead of blowing it all at once. But, she adds, instead of saving only 28% of their refund 6 months later, why not 50%?

“If this is the main vehicle people use to accrue saving, they are spending it at a faster clip than if they wanted to use this as their savings mechanism.”

Both Greig and Hamoudi point out that while tax refunds do enable families to save 10% of their take-home income, it doesn’t provide families the cushion they need throughout the year in case of emergency.

“How do you give people the nudges to save throughout the year for that buffer or just be able to make sure they’re paying down the full balance of their credit card bill each month and not accruing revolving credit card debt?” Greig asked. “This initial year could be painful, especially for early filers.”

But, Hamoudi points out, there is no better tool than a tax refund to force people to save over a short period of time — without penalizing them for receiving their money afterwards.

“This isn’t a great tool,” he says, “but there isn’t a better tool.” 

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