Tax refunds aren't as large as promised

The Insider

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April 04, 2004|By BILL BARNHART

THERE'S NO doubt the Bush administration has trouble finding things. Even President Bush jokes about weapons of mass destruction.

The latest item to go missing is refunds for U.S. taxpayers.

In February, the Treasury Department boasted that the average tax refund this year would be $300 higher because of last year's tax cut.

But with the number of processed returns running 3.5 percent ahead of a year ago, through March 26 the average refund is up only $103.

The Treasury estimated in February that the tax cut would put $37 billion more in refunds in consumers' pockets this year, giving the economy an election-year boost.

The actual number is likely to be half that amount, said Stephen Stanley, economist for RBS Greenwich Capital.

"A lot of folks in the financial markets have been tracking this pretty closely," he said. "The pace of refunds has definitely under-performed, relative to what the administration had out there as an estimate."

Private-sector economists trimmed the optimistic government forecast, but the actual numbers are coming in well below private forecasts as well.

"People who are getting larger refunds have more of an incentive to file early," said Nancy Vanden Houten, an economist with Stone & McCarthy Research Associations.

Noting that the number of returns filed is up, she said, "With each passing week, it's becoming very difficult to make a case that we're going to see a big surge in refunds."

Is this one more example of political hype from the Bush Treasury Department? It's too soon to tell.

Certain high-income individuals may not have filed yet, even though they expect a bigger refund, because they can't figure out the "Qualified Dividends and Capital Gains Worksheet" or other complexities of this year's Form 1040.

Moreover, it won't be known for weeks whether those who owe taxes April 15 owe less than last year as a result of the tax cut. These individuals tend to file at the last minute.

But if average refunds stay low and average tax payments are little changed, the single-minded focus on tax cuts as an economic policy will look ineffective or unnecessary.

Either the tax cut failed to produce the intended economic stimulus, or personal incomes increased apart from tax cuts and people ended up owing more taxes.

"Those two explanations have dramatically different implications for the economy," Stanley said.

But the implication for the Bush re-election campaign is the same - tax cuts didn't work as advertised.

Analysts suspect that the alternative minimum tax, which is hitting the middle class, may account for part of the apparent decline in refunds. Perversely, last year's tax cuts pushed more Americans into the alternative minimum tax quagmire, Vanden Houten said.

But data necessary to test that theory won't be released by the IRS for two years.

The good news is that wage growth is running ahead of expectations, said Susan Sterne, economist at Economic Analysis Associates.

"If we have accelerating wage growth in the economy, we've got more money no matter what," she said.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper.

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