The Tax Refund 'Disaster' of 2019 That Quite Simply Wasn't
Everyone’s favorite time of year, tax filing season, has officially begun (cue the kazoos!), which means it’s not long before many Americans will start receiving their refunds. Maybe, just maybe, the media will manage to get through this refund season without blowing preliminary data out of proportion.
That’s exactly what happened last year. When the Internal Revenue Service (IRS) released the first week’s worth of data on tax refunds, a minor panic ensued, as the average refund at that earliest part of the filing season was down 8.4 percent. The usual human tendency to react to sensational news rather than wait for more concrete data was exacerbated by the fact that the 2018 tax filing season was the first with reforms from the Tax Cuts and Jobs Act (TCJA) in place.
A narrative quickly emerged — tax refunds were plummeting, and it was because the TCJA hamstrung them. Articles about tax refund sizes were suddenly everywhere, with special attention given to Tweeters convinced it was the TCJA’s fault. Never before had the size of the average tax refund been so interesting to Americans.
Democratic opponents of the tax reform law gleefully fanned the flames of this news story. The Democrat-controlled House Ways & Means Committee tweeted that Americans “have a right to be mad” because refunds were “plummeting…thanks to the #GOPTaxLaw.” Senator (and, at the time, presidential candidate) Kamala Harris (D-CA) called it proof that the TCJA was a “middle-class tax hike.”
Making this narrative particularly silly is the fact that looking at tax refund sizes was always a poor indicator of the impacts of the tax reform law on taxpayers’ pocketbooks. The size of a taxpayer’s refund is nothing more than the size of the interest-free loan that taxpayer provided Uncle Sam during the previous year by over-withholding. Really, in an ideal world, taxpayers would receive no tax refund at all because the money over their actual tax liability never would have been taken out of their paychecks in the first place.
What was truly important was taxpayers’ actual tax liability. And on this count, there’s no question that the vast majority of Americans received a tax cut — 80 percent paid less in taxes, and the average cut was 1.7 percent for the middle class.
Nevertheless, many Americans have come to expect a sizable refund come April, and the tsunami of breathless news articles about collapsing refunds had some taxpayers worried. But there were reasons to expect that the early data was not necessarily indicative of what was actually going on with refunds.
In fact, the National Taxpayers Union Foundation warned after the IRS released the second week of refund data (still showing refunds down significantly) that the five week government shutdown lasting through January and early February of 2019 was likely having a major effect. The shutdown meant that the IRS was late out the starting gate, and left with a shorter filing season.
Because of this, the agency struggled to answer phone calls and requests for filing help — in a year where taxpayers were attempting to grapple with the most significant changes to the tax code since President Reagan was in office. In other words, an unrepresentative group of taxpayers was filing their taxes, because those that needed help grappling with the numerous changes the tax reform law ushered in were still on hold.
Additionally, refund data was skewed by provisions of the Protecting Americans from Tax Hikes Act of 2015 that prevented the IRS from issuing refunds on returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit before February 15. These provisions exist to ensure adequate time to identify fraudulent returns. The TCJA expanded the child tax credit significantly, so the delay in processing had a dramatic effect; the first couple weeks of refund data came out before February 15.
The “collapsing tax refunds” story lasted only a little while longer, until the story suddenly disappeared when refunds went up over the year before. In the end, the average refund was within 1.4 percent of the previous year, constituting little more than year-to-year statistical noise. But many Americans that did not seek out this information were left with the impression that tax refunds had dropped massively, as there was no proportional media firestorm when refunds leveled off.
The “refund disaster that wasn’t” is just one more story in a long list in the media’s utter failure to educate the American public about the realities of the tax reform law — one 2019 poll found that just 17 percent of Americans thought they were receiving a tax cut (again, the actual number is closer to 80 percent). One can only hope that if the IRS releases some surprising refund data early on, journalists will learn last year’s lessons before writing sensationalist articles.
Just don’t hold your breath.