'Tax-refund season could be a disaster this year'

DETROIT — Dealers should be cautious about boosting inventory in preparation for next year’s tax-refund season, Cox Automotive’s chief economist says. The increase in car buying typically fueled by tax refunds may fail to materialize.

The 2017 tax-law changes are likely to reduce the number of shoppers with refunds and the size of those refunds next year, Cox Automotive’s Jonathan Smoke told Automotive News last week here.

“Tax-refund season could be a disaster this year,” Smoke said. “The data suggests that people have been underwithholding.”

Taking a wait-and-see approach could help dealers manage any decline in sales tied to lower tax refunds, he said.

The problem, Smoke said, is that the new tax law fundamentally changed the way taxes are calculated. The old model generally resulted in consumers withholding too much, he said, resulting in sizable refunds. In 2018, the Internal Revenue Service sent back $324.43 billion in refunds, an average of $2,899 per refund, according to IRS data. If Americans are now withholding less, it would reduce their tax refunds next year.

“A higher percentage is going to have less money, no money or even owing money,” Smoke said. “And we know the material role it plays in the used-vehicle market, but also broadly in the economy.”

In its quarterly survey of dealer optimism, Cox Automotive reported that federal tax changes had given dealers almost “euphoric” optimism leading into 2018. Now, heading into 2019, that optimism has dropped substantially.

“The silver lining for dealers is that maybe the complexity of the withholding tables and changes are such that the lower-income households who drive the majority of used-vehicle purchases in that time of the year, maybe they’re not as affected,” Smoke said. “But I think it’s going to be big enough to have an impact.”