Tax season is wrapping up, and while the initial forecasts for consumer spending looked bullish, things are getting trickier. Although tax refunds are significantly outpacing last year's figures and tax liabilities are mostly stable, the skyrocketing fuel prices are wiping out much of that positive momentum. Goldman Sachs is predicting weak growth in real consumption in the coming months.
The impact of higher tax payments on capital gains this year was likely offset by last year's fiscal package introduced under the One Big Beautiful Bill Act (OBBBA). Tax returns are 17% higher than last year, while tax payments are expected to be $40-55 billion more than last year. This is still $25-40 billion below the $80 billion increase that would have occurred without the OBBBA.
This tax season, incoming payments show that tax payments are below expectations. "The revenue forecasting model without withholding, using data on stock market performance, home sales, and cash flow suggests that these payments should be 14% higher than last year, or about $80 billion by mid-May," noted Goldman Sachs.
Annual tax bills remain roughly unchanged, while the estimated total benefits from OBBBA are in the range of $75-90 billion.
Since the tax breaks from last year's fiscal package roughly equal the current increase in capital gains taxes, the net effect on consumer spending will be minimal.
The bottom line is that support for consumer spending is limited. Tax breaks are virtually neutralized by energy price inflation.
Regarding energy expenses, since the start of the war, the price of gasoline has risen by 40%. This amounts to about $140 billion annually in negative impact on American households' income at current levels. Goldman Sachs expects this negative impact to shrink to $60 billion by the end of the year on an annual basis, but will total $70 billion for all of 2026.
Notably, higher gasoline prices are most burdensome for households in the lowest income quintile. These households spend about four times more than the top quintile on gasoline as a percentage of after-tax income.
This will also put pressure on discretionary spending categories.
Based on oil price forecasts, Goldman Sachs expects real disposable income to grow by 1.6% from Q4 to Q4, or 1.2% for the full year. Real consumption growth is projected to be 1.2% from Q4 to Q4, or 1.5% for the entire year.
The benefits provided by tax breaks have been absorbed by the rise in gasoline prices.