Shrinking tax refunds are a growing problem for GOP tax law - Los Angeles Times
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Shrinking tax refunds are a growing problem for GOP tax law

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Bill Forsythe, a 57-year-old hospital radiologic technologist in San Jose, plugged his and his wife’s financial information into TurboTax this month and, like many Americans filing early this year, was shocked at the bottom line.

After a sweeping Republican law went into effect with promises of lower taxes for just about everyone, the couple owed about $9,000 in federal and state taxes. Last year, they got a $6,000 tax refund on roughly the same income.

“I’m very frustrated and exasperated and angry that this government seems to have changed things for the worse considerably,” Forsythe said.

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The couple’s case is far from unusual.

The average tax refund so far has shrunk to $2,640 from $3,169 at the same point last year, according to Internal Revenue Service data through Feb. 15 that were released late Friday. That’s a 16.7% drop.

The total number of returns that qualified for refunds was down 26.5% compared with last year and the amount of money refunded was off by 38.8%, the data showed. The IRS has processed 6.6% fewer returns compared with last year because of the partial federal government shutdown.

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The figures are based on about a quarter of the 154 million tax returns Americans are expected to file this year, and the trend could reverse. But the decline in the average refund has grown during the three weeks of IRS data released so far, and the decline in the number of returns with refunds and total money refunded both jumped in the most recent report.

Analysts had predicted the total amount of money refunded would go up this year, but economists from UBS said last week they were maintaining that forecast “with hesitance” after seeing the initial IRS figures.

Republicans point out that refunds, which usually reflect how much a person overpaid in taxes the previous year due to withholding, are different from actual taxes paid, which for most people are lower under the new law.

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Still, news of the smaller refunds has been another hit to a tax law that has been much less popular than Republicans had expected. The latest problem reflects a potential political miscalculation made by Trump administration officials who perhaps didn’t take human psychology into account.

Early last year, the administration decided to make greater-than-usual changes in federal tax withholding tables that immediately boosted workers’ income. That resulted in many workers getting a small amount more in each paycheck at the expense of a large refund when they filed their return.

Howard Gleckman, senior fellow at the left-leaning Urban-Brookings Tax Policy Center think tank, said that taxpayers could feel shortchanged even if they actually ended up paying less in taxes in 2018 than the year before.

If people judge the tax law by “the refund and not the total tax you pay — and the refund is lower than what you got last year — it stands to reason you’re going to be unhappy,” he said.

Normally, the Treasury and IRS simply adjust the withholding tables on the W-4 form for inflation. But the new law gave officials “new discretion” to make broader adjustments based on the sweeping tax changes, according to a report last summer by the Government Accountability Office.

A Treasury simulation in the report estimated 32 million taxpayers would owe money on their returns this year, about 4.6 million more than if the law had not been changed.

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Democrats, who universally opposed the tax law championed by President Trump and congressional Republicans, have pounced on the refund declines to argue that the changes helped the wealthy and corporations far more than average Americans.

“It looks like the Trump Treasury Department spent 2018, an election year, goosing people’s paychecks by under-withholding, and it should have been obvious that the bill would come due eventually,” said Sen. Ron Wyden (D-Ore.). He and other Democrats have called for the IRS to waive any penalties for people who unexpectedly owe taxes this year.

The Republican law cut individual tax rates across the board through 2025 while permanently slashing the corporate rate to 21% from 35%. People are discovering smaller refunds at the same time some large corporations are reporting record profits and huge declines in their tax bills.

The Federal Deposit Insurance Corp. said last week that U.S. bank profits were up 44% last year to a record $237 billion — about $29 billion of which came from the lower corporate tax rate.

“Let’s call the President’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%,” California Sen. Kamala Harris, a Democratic presidential candidate, tweeted in response to the lower refunds.

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Republicans already were on the defensive about the new Tax Cuts and Jobs Act.

Polls show more Americans disapprove than approve of it. And anger about the law, particularly in California and other high-tax states hit hard by a new limit on the deduction for state and local taxes, is widely believed to have contributed to the Democratic takeover of the House majority in last fall’s midterm elections.

News reports about lower refunds were “misleading” because they were based on “a small initial sample,” the Treasury Department tweeted this month.

“Isn’t it kind of stupid to look at a refund? What your refund is, that doesn’t tell you what taxes you pay,” Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), a strong backer of the law, complained to reporters this month.

He and Rep. Kevin Brady (R-Texas), one of the law’s authors, wrote an opinion article on tax refunds that appeared last week in USA Today.

“The size of your tax refund has nothing to do with your overall tax bill. It merely reflects what you overpaid the IRS in your paychecks last year,” they said. “For most Americans, the Tax Cuts and Jobs Act delivered larger paychecks starting last February, even if many workers didn’t notice.”

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That’s the problem, tax experts said.

“Most people are going to come out ahead overall, but it certainly doesn’t feel that way for those who are getting a smaller refund or end up owing for the first time,” said Lynn Ebel, director of the Tax Institute at H&R Block, which provides research and analysis to the company’s tax preparers.

The key to a tax refund is how much an employer withholds in taxes from each paycheck based on a W-4 form an employee fills out upon getting hired. The four-page form, worksheet and instructions allow workers to calculate a mix of personal allowances, tax credits, deductions and other adjustments. The goal is to withhold roughly what you owe in taxes.

Treasury and IRS officials had urged workers to check their new withholding, but many people find the whole process confusing.

“I’ve been paying taxes for a long time and I never get it right. And I do this for a living,” Gleckman said.

Heather O’Brien, 53, a novelist who lives in Sacramento, said she and her husband, a railroad worker, always set their withholding allowance at zero so the maximum amount of taxes are withheld. They got a $3,000 increase in their tax refund this year, to $15,000, after the tax law changes. They earn “over $100,000” a year combined and their tax return was helped by an increased child tax credit for their two grandchildren who are dependents.

“It’s an interest-free loan to the government, but you never have to lose sleep at night” worrying about a big tax bill, O’Brien said.

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But only about 19% of respondents to a November poll by the Tax Institute at H&R Block said they updated their withholding last year.

Forsythe said he and his wife did not.

“One of the things that could have helped was I was claiming one dependent on my W-4 and I could have knocked it down to zero,” he said. But a tax preparer he had review his return to confirm that the $9,000 owed was correct — it was — said they’d still have had a large tax bill.

The big hit to the Forsythes was the tax law’s new $10,000 limit on deductions for state and local taxes. The property taxes on their home, which is worth about $1.4 million, are about $14,000 a year, he said.

“One of the things we really count on is property tax and mortgage interest to help offset our income, and of course with the cap on the property tax that didn’t work so well,” Forsythe said.

They purchased the four-bedroom, two-bathroom, 1,700-square-foot home in San Jose’s Willow Glen neighborhood for about $900,000 in 2006. The couple have no children and a combined income of about $220,000.

Although they “live in a nice area,” the couple don’t consider themselves rich, Forsythe said. “We both have to work to keep afloat.”

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The wealthy reap the most benefits from the state and local tax deduction. But many of the people affected by the cap in California and other high-cost, high-tax states are middle-income earners.

Some politicians in California, New York and other states hit hard by the cap said Republicans put it into the law to hurt their residents because they vote Democratic. Of the top 10 states for deductions for state and local taxes, Trump carried only three in the 2016 election.

Forsythe said he had been skeptical that the Republican tax law would help him and his wife. But the results were worse than he feared.

“We thought we were either going to break even or owe a grand or something like that, but $9,000? When you’re not expecting it?” he said. “This came out of left field.”

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