Tax Refund Fears: Would A Government Shutdown Hurt Spending

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The IRS could delay refunds (Getty Images)

A government shut down could cause consumer spending to drop by just over $30 billion. It’s a lot of money. And certainly meaningful to the people who count on those checks. But the real question is this: Is that enough to derail the economic recovery, or at least delay it?

The spending hit has to do with tax refunds, which many Americans still expect to get in the next month or so. The Internal Revenue Service has said that if the government shuts down, Americans would still need to send in their taxes by the deadline, which this year is April 18. If you owe money, checks would still be cashed. But for the many people who are expecting to get a refund, a government shutdown could mean a much longer wait than usual. Worse, at a time when American consumers seem to be wavering between spending again and keeping their wallets shut, the lack of refunds could put a large dent in the economy. Here’s why:

How much does the IRS give back in refunds? Last year, about 120 million Americans got a tax refund. And in 2011, the average refund is running at $2,952. That means the IRS should return about $354 billion before tax season is over. The good news is that a good portion of that money has already been paid out. As of March 25, the IRS has already sent out to tax filers just over $206 billion in checks. That still leaves $148 billion that the IRS would normally still have distribute to Americans in the next month or so that now because of the possible shutdown would be delayed.

But not all of that money would be delayed. The IRS says that people who file electronically will still get their money on time, because those returns are processed automatically. (Which might be a tip for tax cheats.) According to a February survey from the National Retail Federation, about 58% of all filers expected it to do it electronically this year. But even that leaves just over $60 billion that consumers would have to wait to get.

The question for the economy is how much of that money would actually get spent. In the same NRF survey they asked people what they planned to do with the money. To make matter confusing, people were allowed to answer more than category. About 40% said they would pay down debt. Another 40% said they would pay off their debt. Around 30% said they would use it for regular spending. While 13% and 12% respectfully said they would use some portion of their refund for a big purchase or for a vacation. There’s probably no scientific way to use those numbers, so lets say about half the money would get spent in the first month. Total stimulus effect of tax refunds that would be on hold: $31.5 billion.

That still is a lot of money. But will it matter to the economy? Probably not. Right now, monthly consumer expenditures are running at about $883 billion a month. So a drop off in $31.5 billion, if it occurred all in one month, would only lower spending by 3.5%. So the lack of tax refunds may give people one more reason to hate the IRS, but it probably won’t do much to hurt the unemployment rate.