Higher Tax Payments Blamed For Dropoff In Consumer Spending

One of the major reasons for the weakness in consumer spending this spring was the sharp rise in payments among many homeowners and affluent taxpayers to cover their unexpectedly high 1994 income tax obligations, two separate reports by Wall Street economists have found.

“Consumers got hit with a whopping tax bill in April,” Joseph Liro, an economist at S.G. Warburg & Co. wrote in a research report released earlier this month.

Another economist, David J. Greenlaw at Morgan Stanley, came to similar conclusions. After analyzing Treasury Department reports, Greenlaw, said: “Individuals wrote $20 billion more in checks this year than last to settle their obligations with the IRS. That’s a 30 percent increase.”

Indeed, spending growth slowed sharply in April, when most of those who owe taxes file their returns, according to a Commerce Department report.

The agency reported that spending rose three-tenths of 1 percent, to $4.82 trillion, in April, compared with a revised March gain of seven-tenths of 1 percent.

Many economists have cited the slow pace at which the IRS issued tax refunds this year as a chief culprit for weak consumer spending.

Greenlaw disputed this view, saying that at the worst point the value of refund checks issued was $6 billion behind and in mid-April began to surge ahead.

And refunds, which are running slightly higher than last year, now appear to be contributing to a modest improvement in the outlook for consumer spending.

“In the last few weeks there has been an acceleration in refunds,” Greenlaw said. “Right now refunds are $9 billion above last year’s pace.”

The average refund check this year is $1,128, up from $1,037 in 1994, the IRS said. IRS officials said they had not computed the average amount of checks submitted with tax returns.

The reason so much more money was owed the IRS this year appears to be a result of two factors that date to 1993. The first was the 1993 tax rate increase for the highest-income Americans and the other was the sharp drop in mortgage interest rates, which prompted many people to refinance their homes in late 1993.

Greenlaw said government data showed that “mortgage payments fell to 5.7 percent of disposal personal income in 1994, down from a peak of 7 percent” in the early 1990s.

Reduced mortgage interest payments mean smaller deductions for taxpayers who itemize. Many homeowners who did not adjust their income tax withholding ended 1994 owing money to the IRS, Greenlaw said.

Evidence that wealthy taxpayers also wrote bigger-than-usual checks to the IRS is found in data on savings rates, according to Liro of S.G. Warburg. He noted that wealthy individuals tend to withdraw savings to cover large tax payments.

“The savings rate plunged from 5.2 percent in March to 4.3 percent in April,” Liro wrote in his research report. He attributed the decline primarily to withdrawals to cover April tax payments.