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Smaller tax refunds could hamper used-car demand

March 8, 2019
Tax refund season usually helps get early-spring auto sales rolling, especially for used cars and trucks. But smaller income tax refunds are likely to provide a smaller boost this year, analysts said.
Dealers and auto lenders say customers with shaky credit often rely on their tax refund as a down payment to get financing they couldn’t afford the rest of the year. And even customers with good credit may use their refund towards a new vehicle.
"Spring is typically among the busiest times of the year for car shopping since many people wait for their tax rebate check to go out and replace their aging vehicle," according to a recent blog post from Black Book, the vehicle pricing analyst firm.
Based on reports so far this year from the Internal Revenue Service, the average refund definitely has taken a downturn. The IRS started reporting tax season statistics beginning with the week that ended Feb. 1.
At that time, the average refund was down 9 percent from the same week a year ago, to $1,901. For the week ended Feb. 8 it was down 9 percent again, to $1,949. For the week ended Feb. 15, it was down 17 percent, to $2,640.
Analysts said changes to withholding in some cases mean consumers got more take-home pay during the year, but the tradeoff is a smaller refund. And some taxpayers who are used to getting a refund may owe now.
Black Book said tax refunds helped produce a substantial boost in demand last spring. In fact, the effect contributed to better-than expected used-car values for 2018 overall, the company said. 
According to Black Book, vehicles depreciated an average of just under 12.7 percent in 2018, compared with minus-14.5 percent in 2017. For context, the average pre-recession annual depreciation on vehicles was minus-15 percent to minus-18 percent.
"Last year, the spring tax refund season was a catalyst that led to some of the strongest demand for used vehicles since the recession ended in 2010," the Black Book blog reported.
Other factors also supported used-vehicle demand and therefore used-vehicle prices, including longer-lasting vehicles overall, demand for light trucks, and the popularity of certified pre-owned vehicles, which are reconditioned and come with a factory-based warranty.
Cox Automotive said separately that dealers were "euphoric" last year over spring sales fueled in part by tax refunds, but dealers were measurably more pessimistic going into 2019.