Delaying Tax Refunds Constrains Spending On Daily Living Expenses

From Forbes.com

The Protecting Americans from Tax Hikes (PATH) Act of 2015 required the IRS to delay tax refunds until at least February 15 for taxpayers who claimed an earned income tax credit (EITC) or additional child tax credit (ACTC). The delay was intended to provide the IRS with enough time to match information documents (such as W-2 forms) to tax returns in order to improve compliance. The provision, which took effect in 2017 (when people were filing their 2016 tax returns), postponed refunds for about two weeks for many low- and moderate-income taxpayers who tend to file early in the tax season. New research from the Federal Reserve shows as refunds were being delayed, so too were purchases from retail and grocery stores.

About 27 million people claim the EITC each year.  Most people receive their EITC alongside any other tax refunds (such as from over-withheld income taxes) soon after filing their returns. Prior research has shown that these relatively large, one-time tax refund payments aid recipients in purchasing and maintaining vehicles that can help them get  to work as well as buying other durable goods such as  clothing and home furnishings.

But EITC payments (and other tax refund amounts) also help pay for day-to-day living expenses, such as groceries and gas. Delaying tax refund payments can create cash flow problems for EITC claimants. Even before the  change, about one-third of low-income filers reported that even a one week delay in receiving their refund would hurt  their household finances.

To more accurately measure these effects, economists at the Fed matched consumer spending data with EITC refunds before and after Congress adopted the refund delay. They found that EITC recipients, on average, spent about 15 cents of every dollar from the refundable credit within two weeks at retail stores and restaurants. When tax refunds were delayed, so was this spending by EITC claimants. In contrast, non-EITC eligible workers did not change their spending patterns in 2017, suggesting that delays in spending could be caused by the slowdown in refunds.

From Forbes.com