Tuesday, April 9, 2013

Tax Refunds Could Provide Much-Needed Consumer Spending Boost

American consumers entered 2013 facing extreme headwinds, with a payroll tax hike that took a 2% bite of their paychecks and delayed tax refunds due to the fiscal cliff deal, not to mention rapidly rising gas prices which began approaching the psychologically significant $4/gallon level early in the new year.

This became apparent when internal e-mails leaked from Walmart showed the world's largest retailer had the worst start to February in 7 years. The company noted that $19.7 billion more in tax refunds had been received by shoppers by early February of last year, and the extra tax bite was "about equal to a year of car insurance for a family making $30,000 or a basket of groceries per month for a family making $50,000."

However, the effect might not be as bad as initially feared. A recent survey by Bankrate.com showed the majority of consumers (55%) were either unaware or unaffected by the extra 2% coming out of their paychecks, while 30% of respondents said they cut back on spending.

Surprisingly, lower-income earners (incomes less than $30k) were most likely to say that they did not notice the change (55%), while middle-income households were the most likely to cut back on spending, with only 39% saying they didn't notice the change.

On the other hand, nearly three quarters of those polled in the National Retail Federation's 2013 Tax Returns survey said they are adjusting their spending due to less take-home pay
, with nearly six in 10 (58.2%) saying their plans have been either somewhat or greatly impacted by the payroll tax hike.
  • Nearly half (45.7%) say they will spend less overall, 35.6% will watch for sales more often, one-third (33.5%) will reduce how much they dine out and 24.5% will spend less on “little luxuries,” such as trips to coffee shops, manicures and high-end cosmetic items
  • Of those greatly impacted, nearly half (49.2%) will delay major purchases, such as a car, TV or furniture, 58.2% will reduce the amount they dine away from home; another 43.4% say they will contribute less to savings, 46.4% will comparison shop more often, and 54.4% will spend less on clothing
Perhaps consumers are feeling a little relief in the form of lower prices at the gas pump. After hitting a low of $3.257 in late December, prices rose for 10 straight weeks to $3.784 in late February, and many analysts worried prices were headed to the dreaded $4/gallon level by summer. However, the national average gas price has retreated for 6 consecutive weeks and now sits at $3.608 per gallon, which is 33.1 cents or 8.4% below the year-ago level.

Considering that Credit Suisse estimates that each 1¢ change in the price of a gallon of gas frees up $1 billion of consumer spending in other goods over the course of a year, that adds up to some serious discretionary purchasing power. The EIA estimates that gasoline expenditures for the average U.S. household reached $2,912 in 2012, up nearly 10% from 2011 and representing just under 4% of income before taxes.

The biggest boost for consumers is the "better late than never" tax refunds which could definitely help ease the pain of higher taxes. About three quarters of individual income tax filers typically get a refund, which last year averaged just over $2,800. The pace of returns processed and refunds issued is running well behind last year's pace, and we estimate another $100 billion+ in cumulative will hit consumers' wallets in the coming weeks.

So what will Americans do with the over $300 billion in tax refunds this year?

For many, it seems the stimulus comes as an unexpected surprise, but most say they will be responsible and save the money, use it to pay down debt or spend it on necessities rather than splurging on discretionary purchases.

However, consider this: even if only a quarter of the haul, or roughly $75 billion is spent on more discretionary type purchases, that's still more than the combined total spent on Valentine's Day, Easter, Mother's Day and Father's Day.

65.8% of respondents to the previously mentioned NRF survey expect a refund this year. This figure, along with how people expect to spend the windfall, has remained relatively constant over the 7-year history of the survey:

A recent survey from PriceGrabber shows that 54% expect to receive a refund and 56% of those said they will use their money to shop, which is up from just 43% in 2012:
  • Clothing was the top selection with 34% of respondents, followed by home goods and consumer electronics (such as HDTVs, cameras or smartphones) at 28% of the vote. Computers, laptops, tablets and e-readers followed  with 27%, and 23% of consumers selected travel and vacations
  • Of those not planning to shop, 37% said they will put it in savings. 26% plan to pay off credit card debt; 12% plan to create an emergency fund, 11% selected home improvements and 10% will pay off student loans, auto loans or a mortgage. 5% of respondents plan to invest the money, and another 5% plan to indulge in leisure activities such as travel, dining out, concerts/events or spas
A survey from CreditDonkey suggests that behavior varies fairly significantly between men and women:

This is also reflected in a recent survey from TD Ameritrade, which also shows the differences across generations:
  • Only 47% of respondents expect a refund - 47% plan to save their refund money, 44% plan to pay off debt, 28% will purchase necessities, 15% plan to invest, 6% will donate their refund to charity (6%), while only 15% said they plan to spend their refund on discretionary items
  • Single women are least likely to save their tax refund (37%), while married women are most likely (56%) to save. The opposite is true of men, as 54 percent of single men say they will save their tax refund money and only 41 percent of married men say they'll save it
  • Younger generations have possibly learned a thing or two from the financial crises they have witnessed, as nearly two-thirds (58%) of Generation Y intend to save their income tax refund, compared to just 36 percent of Generation X and 40 percent of Baby Boomers who say the same
Finally, a survey from Capital One shows how a refund can provide an unexpected boost: 65% of Americans do not calculate their tax refund or tax payment into their annual budget. Of those expecting refunds, more than a third (35%) plan to spend all or part of their refund, nearly a quarter (22%) plan to use their refund to pay down debt, while a relatively small percentage will save (16%) or invest (4%) their returns.

Seven In 10 Americans Adjusting Spending Plans To Cope With Recent Payroll Tax Changes (NRF)
More Consumers Plan to Use their Tax Refund to Shop (PriceGrabber)
Americans Plan to Save, Not Spend, Tax Refunds (TD Ameritrade)
Most Consumers Unfazed by Higher Payroll Tax Rate (Bankrate.comhttp://bit.ly/17oZrU9)
Tax Refund - Spending or Savings in 2013 (CreditDonkey)
More than a Third of Americans Plan to Spend All or Part of Their Tax Refund (Capital One)
U.S. household expenditures for gasoline account for nearly 4% of pretax income (EIA)
2013 and Prior Year Tax Filing Season Statistics (IRS)

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