Rising Gas Prices Expected to Consume Americans’ Larger Tax Refunds

While President Trump had promised the largest tax refund season ever, surging fuel costs from the Iran conflict are projected to eat up most of those gains. Economists warn that lower-income families will be hit hardest as gas prices could peak at over $4 per gallon this spring.

WASHINGTON — What was anticipated to be a strong economic start to the year, boosted by significantly increased tax refunds from former President Donald Trump’s tax reform measures, is now being undermined by rising fuel costs that threaten to consume those additional dollars.

During a December evening address aimed at calming voter anxiety over economic conditions and persistent high costs, Trump declared, “Next spring is projected to be the largest tax refund season of all time.”

However, this prediction came before the Iran conflict erupted on February 28. Since then, petroleum and gasoline costs have skyrocketed, with Sunday’s national gas price average hitting $3.94 — more than a dollar higher than just four weeks prior.

Fuel prices are expected to stay high even after any conflict resolution, as supply chains and production facilities require time to restore normal operations. Economic forecasters now anticipate reduced growth this spring and throughout the year, since money allocated for gasoline won’t be available for dining, clothing purchases, or recreational activities.

Families with lower and moderate incomes face the greatest burden, receiving smaller refunds while dedicating larger portions of their income to fuel expenses.

Alex Jacquez, policy chief at the progressive Groundwork Collaborative and former Biden administration economist, explained, “The energy shock is to going to hit those who have the least cushion. And it doesn’t look like those tax refunds are going to be here to save them.”

Stanford Institute for Economic Policy Research director Neale Mahoney projects gas prices could reach $4.36 per gallon in May, based on Goldman Sachs oil forecasts, then gradually decrease through year’s end. This pattern of rapid increases followed by slow declines is known among economists as the “rocket and feathers” phenomenon.

Under this projection, typical households would spend an additional $740 on gasoline annually, nearly matching the $748 refund increase the Tax Foundation estimates average households will receive.

Current IRS data through March 6 shows more modest refund growth: averaging $3,676, representing a $352 increase from the previous year’s $3,324. However, refund amounts may grow as more complicated tax returns are processed.

Similar projections come from other sources. Oxford Economics consultants estimate that $3.70 average annual gas prices would cost consumers approximately $70 billion — exceeding the $60 billion in additional tax refunds.

This fuel price surge affects consumers already facing financial strain, unlike 2022 when gas prices also spiked due to Russia’s Ukraine invasion. During that period, many families maintained healthy savings from pandemic relief programs while companies actively recruited workers with substantial pay increases.

Currently, job growth has nearly stopped and Americans’ savings rates have consistently declined as households increasingly rely on borrowing to maintain spending levels.

Julie Margetta Morgan, president of The Century Foundation think tank, observed, “When you start looking across the perspective from a consumer side, you’re seeing people who have maxed out their credit cards, are using ‘buy now, pay later’ to purchase their groceries. They’re making it work for now, but that can fall apart quite quickly.”

Analysts suggest this situation will intensify the “K-shaped” economic pattern, where wealthy households outperform lower-income families. Pantheon Macroeconomics data shows the lowest 10% of earners spend nearly 4% of income on gasoline, while the highest 10% spend only 1.5%.

Most analysts still predict U.S. economic expansion this year, albeit at slower rates due to gas price impacts. While higher fuel costs will temporarily increase inflation, reduced consumer spending will eventually slow overall growth.

American consumers and businesses have consistently weathered various challenges since the pandemic — including high inflation, increased interest rates, and tariffs — while maintaining spending patterns that prevented recession. Many economists note that Americans now spend a smaller percentage of income on energy compared to ten years ago.

Bank of America Institute data released Friday revealed gas spending on the bank’s cards jumped 14.4% in the March 14 week compared to the previous year. Before the conflict, such spending was running 5% below year-earlier levels, benefiting consumers.

Discretionary purchases — including restaurant visits, electronics, and travel — continue growing, the institute reported, demonstrating consumer strength. However, there’s no indication of the acceleration many economists had anticipated.

Institute senior economist David Tinsley warned, “The longer these gasoline prices persist, the more that will gradually sap consumer discretionary spending.”

Other analysts expect war-related growth slowdowns. Oxford Economics economists Bernard Yaros and Michael Pearce now forecast 1.9% U.S. economic growth this year, down from their earlier 2.5% projection.

“We had anticipated a lift in spending from a bumper tax refund season,” they noted, “but the rise in gasoline prices, if sustained, would more than offset that boost.”