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How Much Will Tax Refund Dollars Boost Consumer Spending in 2012?

Like Christmas, it seems that tax season starts just a little earlier every year. Anyone who works as a tax preparer for individual income tax filers is already very, very busy. On TV and elsewhere, advertising abounds for tax services available both online and at thousands of retail outlets across the country.

Naturally, the point for many early tax filers is to get their returns in to the IRS as soon as they have W-2 forms in hand, in order to get their tax refund dollars as quickly as possible. The earliest filers eligible for refunds have already received checks from Uncle Sam, meaning that some of the money is already flowing from consumers’ pockets back into the retail economy. This could be good news for small business owners, as some of them could see a boost in sales at a time of year that otherwise might be very sluggish.

Not surprisingly, those expecting large refunds are more likely to file early in the tax season. Ever since electronic filing and direct deposit became options, greatly speeding up the total time it takes to get a refund, there has been a spike in payouts from the IRS every February. In all, well over $300 billion has flowed back to taxpayers from the federal government in refunds each of the last two years, at an average of about $3,000 per return. Roughly the same amount of money will no doubt be in play again in 2012, with a large chunk of it again arriving in bank accounts in February.

Retail business owners understandably cannot help but wonder how much of that figure will find its way to their stores and shops. Of course, many businesses explicitly make a bid for a share of people’s tax refund checks at this time of year. For instance, many car dealership ads suggest that making a down payment on a car would be a good use for a tax refund. Other purveyors of big-ticket items, from appliance and electronics stores to travel agents, run similar ads, because as one financial writer put it, for many people this is the one time each year that they feel rich.

After hard economic times hit in 2008, survey statistics suggested that Americans were being more conservative with their refund dollars, putting more into savings and paying down more debt than they did in better times. In one 2010 survey, 58 percent of taxpayers receiving refunds said that’s how they planned to spend the money. By contrast, only 7 percent said they were going to splurge. By the 2011 tax season, an annual survey conducted by one maker of tax return preparation software revealed that the number of people planning to spend their tax refund on a vacation had doubled.

The slowly improving economy could mean that Americans will be more likely to spend their tax refunds a little more freely this year. And even people who won’t spend their entire tax refund on expensive luxuries or high-dollar necessities may just be that much more likely to spend the money shopping on Main Street, giving a much-needed boost to their hometown economies.

Since 1966, through bad times and good, PADGETT BUSINESS SERVICES® has been a friend and ally of small business. Padgett provides bookkeeping, financial planning and payroll services for small businesses throughout the United States and Canada. We are one of North America’s most trusted small business consulting and accounting companies.