By Barbara Hagenbaugh
USA TODAY
WASHINGTON -- Taxpayers' refund checks will increase nearly 27% to an average $2,500 per family early next year, according to new forecasts from tax experts and economists, who say the windfalls will aid consumers, the economy and President Bush's re-election campaign.
As a result of the 2003 tax cut, about 8 million families who did not receive refunds this year will likely get them in 2004, says tax software publisher Petz Enterprises. It estimates refunds for the tax season will go to 108 million households vs. 100 million this year and will total $227 billion. That's up 38% from 2003. Merrill Lynch estimates total refunds from February through May will be up 34% from this year.
The Treasury Department estimates it will collect $100 billion less in taxes in the first half of 2004 than it would have without the tax cut. That reflects not only the higher refunds but also reduced tax payments by those who don't get refunds.
The refunds will fatten bank accounts and, if spent, boost the economy because consumer spending accounts for 70% of U.S. economic activity. That will help ensure that the economic gains underway do not fizzle out, and it will ultimately benefit the 9 million Americans who are out of work.
An improving economy would aid Bush's re-election hopes and blunt Democratic criticism of job losses and economic weakness during his tenure. But the cuts, along with increased federal spending, have contributed to a record federal budget deficit that is estimated to hit $494 billion this year.
''There is a real strong correlation between after-tax income growth and the share of the vote the incumbent party candidate gets,'' says Mark Vitner, senior economist at Wachovia Securities in Charlotte who has studied the historical links between economics and elections.
''The economy should actually help Bush,'' he says.
The larger refunds aren't an accident. Because the tax cut was passed midyear and was retroactive, taxpayers are entitled to more money to reflect their tax overpayments from the first half of 2003, unless they adjusted their withholding later in the year -- something few likely did, says Craig Petz, head of marketing at Petz Enterprises, which publishes TaxBrain software.
The biggest winners, Petz says, will be the approximately 10 million married couples with a combined income of $46,700 to $56,800. Those couples dropped from the 27% bracket to the 15% bracket.
Other winners will include parents who had their first child in 2003. They will be eligible for a $1,000 credit. Married couples may also receive benefits.
With the job market improving, more consumers likely will feel comfortable spending their refund money rather than saving it or using it to pay off bills.
''There should be a pretty good propensity to spend,'' says Kathy Bostjancic, a senior economist with Merrill Lynch.
That spending will be on top of a spree consumers went on earlier this year. Not only did workers see their withholding taxes cut midyear, but $14 billion in child-tax-credit checks hit mailboxes right before the back-to-school shopping season. Both Merrill Lynch and Goldman Sachs figure consumers spent about three-quarters of that money, far more than anyone expected and much more than after the 2001 tax cuts.
The spending gain led to the biggest jump in economic activity in 19 years in the July-September quarter. The tax cut ''clearly provided the boost the economy needed to get back on track,'' Treasury Secretary John Snow said in a speech Thursday.
Noting that retail sales growth has slipped recently, some economists have worried the initial tax cut boost is fading. But others argue the refunds next year will keep the party going.
''The people who think it (third-quarter growth) was a one-shot sugar high have another think coming,'' says Greg Valliere, managing director of Schwab Washington Research Group.
