Higher tax refunds will likely be used to offset rising gas prices

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The U.S. economy was supposed to kick off the year with a boost from an unusually large jump in tax refunds tied to President Donald Trump’s tax cut legislation, but rising gasoline costs tied to the Iran war are threatening to blunt that effect, according to economists cited by the Associated Press. The pressure arrives as oil and gas prices increased after the war began Feb. 28, and the nationwide average for gas reached $3.94 Sunday, up more than a dollar from a month earlier.

Trump had told voters in December that “Next spring is projected to be the largest tax refund season of all time,” framing the refunds as help for households dealing with stubbornly high prices. The AP reported that the gasoline-cost rise came after that message, with analysts warning that higher fuel bills could leave many Americans with little additional money from refunds to spend elsewhere.

Economists said gas prices are likely to remain elevated for some time even if the war ends soon, pointing to disruptions to shipping and production that they expect to take time to unwind. In that environment, they projected slower growth this spring and for the year as a whole, in part because dollars spent on gasoline are less likely to go toward restaurant meals, new clothes, or entertainment.

Lower- and middle-income households, analysts said, could be hit particularly hard because their tax refunds are smaller while their fuel spending takes up a larger share of their earnings. Alex Jacquez, chief of policy at the Groundwork Collaborative and a former economist in the Biden White House, said, “The energy shock is to going to hit those who have the least cushion,” adding that, “And it doesn’t look like those tax refunds are going to be here to save them.”

Neale Mahoney, director of the Stanford Institute for Economic Policy Research, calculated a scenario in which gas prices could peak in May at $4.36 a gallon, based on oil-price forecasts by Goldman Sachs, followed by slow declines. In that scenario, Mahoney estimated the average household would pay $740 more in gas this year, nearly equal to a $748 increase in refunds that the Tax Foundation projected for the average household.

The AP reported that IRS data through March 6 showed refunds had risen by much less than that gap: refunds averaged $3,676, up $352 from $3,324 in 2025. It also noted that average refunds could rise as more complex returns are processed, while other projections suggest large fuel costs that outstrip refund increases. Economists at Oxford Economics estimated that if gas averaged $3.70 a gallon all year, it would cost consumers about $70 billion—more than the $60 billion in increased tax refunds they said would result.

The gas-price spike is coming after a period of worsening household financial flexibility, economists said, with many Americans already in a precarious position compared with 2022, when households had pandemic-era stimulus and companies were still hiring rapidly. Julie Margetta Morgan, president of The Century Foundation, described the current consumer strain, saying, “When you start looking across the perspective from a consumer side, you’re seeing people who have maxed out their credit cards, are using ‘buy now, pay later’ to purchase their groceries.” She added that, “They’re making it work for now, but that can fall apart quite quickly.”

Analysts also said the broader economic pattern—sometimes described as “K-shaped,” in which higher-income households have fared better than lower-income households—could worsen as households spend more on gasoline. Pantheon Macroeconomics estimated that the bottom 10% of earners spend nearly 4% of their incomes on gasoline, while the top 10% spend just 1.5%.

Despite the warning about household strain, the AP reported that many economists still expected the U.S. economy to expand this year, though more slowly, with higher gas prices expected to weigh on inflation in the near term and reduce spending over time. The Associated Press also reported that Americans and businesses have repeatedly continued spending through earlier shocks since the pandemic, even when economists warned about recession.

Data from the Bank of America Institute, released Friday, showed spending on gas on the bank’s credit and debit cards rose 14.4% in the week ended March 14 compared with a year earlier. Before the war, the report said, that spending had been running 5% below the previous year, and the institute said spending on discretionary items—including restaurant meals, electronics and travel—was still growing, as evidence of consumer resilience, though it was not accelerating as some economists had hoped.

David Tinsley, a senior economist at the institute, said, “The longer these gasoline prices persist, the more that will gradually sap consumer discretionary spending.” Other analysts said growth could slow further because of the war; Oxford Economics economists Bernard Yaros and Michael Pearce forecast that the U.S. economy would grow 1.9% this year, down from an earlier estimate of 2.5%, writing that they had anticipated a lift in spending from a bigger refund season, but that “the rise in gasoline prices, if sustained, would more than offset that boost.”