Some of the taxpayers hit hardest by the law’s changes could also be in for an unwelcome surprise this filing season. Higher-income taxpayers in high-tax states like California, New York and New Jersey could be particularly at risk for an unexpected tax liability, Morgan Stanley analysts estimate. That is because those taxpayers are more likely to have claimed large deductions for state and local taxes paid on their federal returns. Mr. Trump’s tax law capped that deduction, known as S.A.L.T., at $10,000 per household per year.
Across the country, unexpectedly large refunds would be a welcome injection of cash into an economy facing a potential slowdown. Business spending tapered in late 2018, and that slowdown most likely worsened as financial markets convulsed in December, weighing on corporate and consumer confidence. The government shutdown is also expected to sap economic growth in the first quarter, since workers and contractors were not paid and vast amounts of government work went undone.
Not paying workers drained significant consumer spending power from the economy. Some workers will catch up on their spending once they receive back pay; others, including contractors and business owners that cater to government employees, will have suffered a permanent loss. Federal workers may not be in a rush to spend any money, given the White House and Congress have only given themselves a three-week reprieve to try to resolve the differences that led to the longest shutdown in history.
Economists are divided on how much the economy has permanently lost from the shutdown, but many analysts agree that first-quarter growth will be several tenths of a percentage point lower than they had anticipated.
“An increase in refunds would be sort of a shot in the arm at the right time, if it came in Q1, early Q2,” Mr. Feroli said. “It would be nice to have consumers sort of have something to smooth over that raw patch.”
The recent shutdown-related uncertainty about possible delays in paying out refunds could also counteract some of the traditional economic fuel from refund season, said Ms. Zentner of Morgan Stanley.
The shutdown, on the heels of an awful December for the stock market, has already contributed to a recent decline in consumer confidence. Such declines are typically associated with a softening in spending behavior and an increase in savings as consumers brace for a more uncertain future.
“When the government is not functioning it’s quite scary for households,” Ms. Zentner said. “You’re just going to pile up on top of another big pile of uncertainty, if their tax refunds are delayed.”