Tax Refunds Rise, But Gas Prices Threaten Economic Boost

WASHINGTON (AP) — The U.S. Economy entered the year anticipating a surge in consumer spending fueled by larger tax refunds stemming from President Donald Trump’s tax legislation. However, escalating gas prices are poised to absorb a significant portion of these refunds, leaving many Americans with limited disposable income.

The Promise of Larger Refunds

In December, President Trump projected “the largest tax refund season of all time,” aiming to alleviate voter concerns about the economy and persistent high prices.¹ Initial data from the IRS indicates an average tax refund of $3,676 through March 6, an increase of $352 compared to $3,324 in 2025.¹ Taxpayers claiming new deductions for seniors, tip income, overtime pay and car loan interest are receiving refund increases averaging $775, with projections reaching $1,000 by the end of the filing season.³

The Impact of Rising Gas Prices

The outbreak of the Iran war on February 28 triggered a sharp increase in oil and gas prices. As of Sunday, March 22, 2026, the nationwide average gas price reached $3.94 per gallon, a rise of over $1 in just one month.¹ Economists anticipate that these elevated gas prices will persist, even if the conflict resolves quickly, due to disruptions in shipping and production.¹

Economic Slowdown Expected

Economists now predict slower economic growth this spring and throughout the year, as funds allocated to gasoline are less likely to be spent on discretionary items like dining, clothing, or entertainment. Oxford Economics forecasts U.S. Economic growth at just 1.9% for 2026, down from an earlier estimate of 2.5%.¹ The impact is expected to be particularly severe for lower and middle-income households, who receive smaller refunds whereas allocating a larger proportion of their income to gasoline.¹

Uneven Distribution of Benefits

Bank of America Global Research projects a $65 billion increase in tax refunds compared to the previous year, totaling $135-$140 billion in consumer stimulus.² However, the benefits are expected to be unevenly distributed, with middle and higher-income households receiving the largest share due to changes in the state and local tax (SALT) deduction caps.² This trend exacerbates the existing “K-shaped” economic divide, where the financial fortunes of the wealthy diverge from those of lower-income Americans.²

The “Rocket and Feathers” Phenomenon

Economists anticipate gas prices could peak in May at $4.36 a gallon, based on Goldman Sachs’ oil price forecasts, followed by a slow decline – a pattern known as the “rocket and feathers” phenomenon.¹ Calculations suggest the average household could pay $740 more for gas this year, nearly offsetting the estimated $748 increase in tax refunds.¹

Consumer Resilience and Future Outlook

Despite these challenges, many analysts still expect the U.S. Economy to expand in 2026, albeit at a slower pace. American consumers have demonstrated resilience in the face of economic shocks, continuing to spend despite soaring inflation, rising interest rates, and tariffs.¹ However, the persistence of high gas prices could gradually erode consumer discretionary spending.¹