Gas Prices to Offset Tax Refunds, Slowing US Economic Growth

WASHINGTON (AP) — The anticipated surge in tax refunds this year, largely stemming from President Donald Trump’s 2017 tax cuts, is running into a significant headwind: soaring gasoline prices. What was projected to be a boost to the U.S. Economy is increasingly likely to be absorbed by the rising cost of filling gas tanks, leaving many households with little discretionary income.

President Trump had touted the coming tax refund season as a sign of economic strength, stating in December that “next spring is projected to be the largest tax refund season of all time.” Although, the outbreak of the Iran war on February 28th dramatically altered the economic landscape, triggering a sharp increase in oil and gas prices. As of Sunday, March 22, 2026, the national average price for a gallon of gas reached $3.94, a dollar more than the price just one month prior. The situation is complicated by disruptions to shipping and production, suggesting that elevated prices could persist even if the conflict in Iran resolves quickly.

Refunds and Rising Energy Costs: A Near Wash

Economists are now forecasting slower economic growth this spring and throughout the year, as funds earmarked for discretionary spending are diverted to cover energy expenses. The impact is expected to be particularly acute for lower and middle-income households, who receive smaller tax refunds although allocating a larger proportion of their income to gasoline. Alex Jacquez, chief of policy at the Groundwork Collaborative, a left-leaning think tank, and a former economist in the Biden White House, noted, “The energy shock is going to hit those who have the least cushion. And it doesn’t look like those tax refunds are going to be here to save them.”

Calculations by Neale Mahoney, director of the Stanford Institute for Economic Policy Research, suggest that gas prices could peak in May at $4.36 per gallon, based on oil price forecasts from Goldman Sachs. This “rocket and feathers” phenomenon – where prices rise quickly but fall slowly – could result in the average household paying $740 more for gasoline this year. This increase nearly offsets the estimated $748 rise in tax refunds anticipated by the Tax Foundation for the average household.

Early IRS data, through March 6, 2026, shows average refunds at $3,676, an increase of $352 compared to $3,324 in 2025. However, these figures are preliminary, as more complex tax returns are still being processed. The IRS reports that as of March 8, 2026, nearly 63.5 million returns have been processed, representing 45% of the anticipated total.

Broader Economic Implications

Oxford Economics, a consulting firm, estimates that if gas prices average $3.70 a gallon for the year, consumers will collectively spend approximately $70 billion on gasoline – exceeding the $60 billion increase in tax refunds. This shift in spending comes at a time when consumers are already facing financial pressures, a stark contrast to 2022 when many households still benefited from pandemic-era stimulus payments and a robust job market.

Currently, job growth has stalled, and the U.S. Personal savings rate has been declining in recent years as households increasingly rely on credit and “buy now, pay later” options to maintain their spending levels. Julie Margetta Morgan, president of The Century Foundation, a think tank, observes that consumers are “making it work for now, but that can fall apart quite quickly.”

The “K-Shaped” Recovery and Disparate Impacts

The situation is likely to exacerbate the existing “K-shaped” economic recovery, where higher-income households have fared significantly better than lower-income households. Pantheon Macroeconomics estimates that the bottom 10% of earners spend nearly 4% of their income on gasoline, while the top 10% spend only 1.5%. This disparity highlights the disproportionate impact of rising gas prices on vulnerable populations.

Despite these challenges, most analysts still anticipate overall economic growth in the U.S. This year, albeit at a slower pace. While higher gas prices are expected to contribute to short-term inflation, weaker consumer spending could eventually moderate growth. American consumers have demonstrated resilience in the face of economic shocks – including inflation, rising interest rates, and tariffs – continuing to spend despite concerns about a potential recession.

Consumer Spending Patterns and Future Forecasts

Recent data from the Bank of America Institute indicates a 14.4% increase in gas spending on credit and debit cards for the week ending March 14, 2026, compared to the previous year. Prior to the Iran war, gas spending was actually 5% below the previous year, providing a benefit to consumers. However, spending on discretionary items like restaurant meals, electronics, and travel continues to grow, albeit without significant acceleration. David Tinsley, senior economist at the Bank of America Institute, suggests that prolonged high gas prices will gradually erode consumer discretionary spending.

Oxford Economics economists Bernard Yaros and Michael Pearce have revised their U.S. Economic growth forecast down to 1.9% for 2026, from a previous estimate of 2.5%, citing the impact of rising gasoline prices. They note that “we had anticipated a lift in spending from a bumper tax refund season, but the rise in gasoline prices, if sustained, would more than offset that boost.”

Treasury’s Perspective on Tax Cuts

The Treasury Department, however, emphasizes the broader benefits of President Trump’s tax cuts. As of March 10, 2026, the Treasury reported that nearly 45% of tax returns claimed at least one of the new tax cuts, with over 3.5 million returns claiming No Tax on Tips and over 15.5 million claiming No Tax on Overtime. Treasury Secretary Scott Bessent stated that the tax cuts are “already delivering meaningful relief to middle- and low-income taxpayers.”

Looking Ahead: Monitoring Gas Prices and Consumer Behavior

The coming months will be crucial in determining the extent to which rising gas prices offset the impact of increased tax refunds. Analysts will be closely monitoring gasoline price trends, consumer spending patterns, and the broader economic indicators to assess the overall health of the U.S. Economy. The duration of the Iran war and its impact on global oil supply will be a key factor in shaping the economic outlook.