How Smaller Tax Refunds Could Impact Auto Finance in 2019

The potential for fewer or decreased tax returns as a result of the 2017 tax act will likely bring down vehicle sales this spring, Chief Executive of JoyDrive Hunter Gorham told Auto Finance News.

“Consumers use the tax refund as a whole down payment, and they won’t be a buyer [this year] without that down payment,” Gorham said. “When you take that away — there’s an impact there.”

The IRS issued refunds for about 75% of 2017 returns, with the average refund close to $2,800, according to Cox Automotive Chief Economist Jonathan Smoke. Yet a Government Accountability Office report last year warned that changes from the Tax Cuts and Jobs Act of 2017 will likely cause several million households to not receive refunds, and several million more households will end up owing more money than usual.

The used-vehicle market sees the “greatest impact” from tax refunds within the automotive market, Smoke noted in an insights report on Cox’s website. As a result of tax refunds, “March and April have historically enjoyed 10% to 15% more used-car sales than the average month, and 25% to 35% more sales than the slower months in the year,” according to Smoke.

Additionally, the consumer demand that follows tax refunds has used-car prices appreciating 3% to 5% causing a “spring bounce,” according to Smoke. The risk is that the spring market may be much less pronounced than normal, he notes.

However, the changes in consumers’ tax returns shouldn’t create any “material impact” on auto finance, Gorham said. Instead, there is an increased sensitivity toward vehicle sales.

“Everyone’s eyes are peeled looking for anything to trigger a reduction in sales,” Gorham said, noting tariffs, interest rates, and even digital disruptions are causing concern. “Anything that will affect sales makes auto finance nervous,” he added.

For 2019, NADA Senior Economist Patrick Manzi anticipates a 1.1% falloff in new-vehicle sales to 16.8 million units.

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