Withholding change leaves some owing instead of owed


April 15, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- Jack Mayo and his wife are finding tax day different this year: Instead of getting a refund, they owe Uncle Sam money. This could be bad news for the economic recovery, as well as for the Mayos.

The Gaithersburg couple are among millions of "victims" of former President Bush's effort to boost the sluggish economy last year. As president, Mr. Bush issued an executive order in March, lessening the payroll withholding rate on federal income taxes to give consumers like Mr. and Mrs. Mayo more dollars to spend or save a week.

But now, after receiving refunds for the past two years, Mr. Mayo, 44, an advertising copywriter and actor, and his wife, 40, the director of publications for a Washington professional organization, find themselves owing the Internal Revenue Service $1,200.

"Our situation has been worsened by the lower withholding," he said. "There were other factors as well, but I am sure the change in withholding made by the Bush administration has affected our return."

The Bush tactic may wind up doing more economic harm than good as the drop in refunds affects consumer spending on everything from new cars to vacation plans.

"It's a drag," said Diane Swonk, an economist with First Chicago Corp. "It is not small. The fact [that] we have seen a fall off in confidence partly reflects that we have not had an improvement in employment, and now people don't even have the tax refunds they were banking on."

The Congressional Budget Office estimated that the lower withholding rate pumped $1 billion monthly into consumers' pockets in the past year, adding 0.2 percent to the $6 trillion annual national economy. This is only slightly less than the $16 billion in spending proposed in President Clinton's stimulus package.

But the increase in weekly take-home pay was so small that most wage earners barely noticed it. Their drastically reduced tax refunds are making a much bigger impression.

"What seemed like a modest give-back [in lower withholdings] in 1992, all of a sudden seems like a pretty big shock [in lower refunds] in 1993," Ms. Swonk said.

Anita Edwards, who manages the H&R Block tax preparation office in Wheaton Plaza, Md., said many of her clients count on getting their refunds each year.

"For some people this is to pay the rent, the charge card, or car repairs," she said. "Now they don't have it. We have had clients this year who said. 'It can't be,' and walked out of the office saying, 'I've always gotten a tax refund.' "

Refund checks have often been used as down payments for such large-ticket purchases as autos. Perhaps significantly, the Conference Board's Consumer Confidence Index detected a drop last month in the number of people planning to buy a new car in the next six months. It fell from 7.2 percent of those questioned in the survey in February to 5.4 percent in March.

"If car sales do slow down in the next few weeks or months, the low refunds could be a factor," said Jason Bram, a Conference Board economist.

In the growth-sensitive Clinton White House, concern also focuses on any effect the lower rebates might have on the still-hesitant recovery, particularly with retail sales slipping 1 percent in March, the worst drop since January 1991.

Laura D'Andrea Tyson, chairwoman of President Clinton's Council of Economic Advisers, said,"There is speculation out there that it might be a dampening factor, but it's too early to tell."

In the H&R Block district office in Woodlawn, manager Kathy Coleman is on the front line of taxpayer disappointment. She had to inform many of the 4,000 taxpayers who have called in to have their returns completed that their hopes for a rebate were either inflated or misplaced.

So many taxpayers owe taxes or are getting lower-than-expected refunds this year that millions delayed filing their returns until close to tonight's deadline, the IRS said.

Nationally, as of April 2, 74.2 million, of an expected total 110 million federal returns, had been filed, 5 percent fewer than normal by that date. Locally, as of April 9, 1.85 million of the total 2.6 million local Baltimore region taxpayers had filed federal returns, 9 percent fewer than normal, said Domenic LaPonzina, spokesman for the IRS in Baltimore.

As of April 2, the average refund is $971 paid to 44 million taxpayers, compared with last year's average of $976 paid to 47 million recipients.

But as the disappointed or indebted late-filers claim their reduced refunds or mail their owed taxes, this year's final average refund is expected to end up closer to $800.

The new withholding schedule applied only to federal income taxes. It had no impact on state income taxes. According to Marvin Bond, of theMaryland comptroller's office, the average state refund this year will be in line with last year's average of $370. But those taxpayers who delayed filing their federal returns have also kept their state returns back.

"There are going to be many of them, for the first time in their lives, who are going to be owing Uncle Sam, but still getting a refund from the state," Mr. Bond said.

"Now there are going to be a lot of people kicking themselves because they could have got the money [from a state tax refund] a long time ago to help them pay their federal taxes. The one thing most people don't want to do, is they don't want to owe anybody on April 15."

H&R Block offers a suggestion for this year's disappointed taxpayers: Fill in form W-4 instructing your employer to return to the pre-1992 withholding rate, and look forward to a bigger refund next year.

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