Teresa Rivas 

Americans still have time to file their taxes, but those who have already done so are likely looking at less-generous refunds. That could crimp their spending this spring.

The Internal Revenue Service releases weekly data about the number of tax returns it's processed. KeyBanc Capital Markets' analyst Bradley Thomas took a look at the data through Friday. He found that while the IRS has refunded a higher total dollar amount so far than it had at this point last year, at $87.2 billion versus $78 billion, that's because the agency's simply worked its way through more filings. The average refund has actually dropped, 11.2%, to $3,140 from $3,536 last year.

That's not really a surprise, given that the government was still working through pandemic benefits last year, and legislators weren't able to codify even popular programs such as the enhanced child tax credit.

Of course no one likes to see a smaller check, no matter the circumstances. Yet as Thomas notes, that 11% gap could hit more-vulnerable Americans the hardest. "While tax refunds provide the average American a little boost, many low- and middle-income consumers depend on these checks to make ends meet, particularly following the holiday season," he writes.

If these consumers do find themselves constrained, given the ongoing high cost of living, that could spill over to some of the retailers where they often shop in March and April. Thomas cites Big Lots (ticker: BIG), Dollar General $(DG)$, Dollar Tree $(DLTR)$, Five Below $(FIVE.UK)$, Ollie's Bargain Outlet Holdings $(OLLI)$, PROG Holdings $(PRG)$, Rent-A-Center $(RCII)$, Target $(TGT)$, and Walmart $(WMT)$ as those that could feel the pinch.

Indeed, last week Walmart's management already warned that its consumers were still under pressure, and more likely to focus on essentials over discretionary items. Dollar General already cut its forecast as well, though the discounter cited winter weather as the main culprit. We'll get an update from Target when it reports tomorrow.

Lower refunds come at a particularly crucial time for Americans with modest incomes -- and the retailers catering to them -- given that they have already been struggling with higher prices. By contrast, wealthier Americans still seem comfortable enough to treat themselves, although it remains to be seen whether or not they've chosen to do so at stores, or are more keenly focused on experiences like dining out.

Some will argue that a lower refund is a good thing, given that getting any money back from the government is a sign that you've given it an interest-free loan. Yet that's largely an academic exercise to many lower-income Americans who count on an annual windfall.

Moreover, government benefits are undeniably lower this year, as pandemic programs end, and lower-income consumers may be feeling nervous about proposed further cuts to services.

The good news is that inflation is cooling, however slowly, and while goods such as food are still pricey, gasoline has come down notably. Still, it's unclear if some Americans will still hit the mall after the sticker shock of their lower refunds.

Write to Teresa Rivas at teresa.rivas@barrons.com

(END) Dow Jones Newswires

February 27, 2023 09:53 ET (14:53 GMT)

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