WASHINGTON ― Several million households may be getting a surprise tax bill this filing season because of the new GOP tax law, but Republicans insist nobody should be mad.
The law’s authors argue that people should not evaluate the new tax code based on the size of their refunds because refunds happen when workers have too much money withheld from their paychecks ― not necessarily because their taxes went up.
“Why don’t you write a story saying, ‘You’re stupid to look at your refund to see whether or not you got a tax increase or a decrease,’” Senate Finance Committee Chairman Chuck Grassley (R-Iowa) told HuffPost this week. “You can’t measure by the refund.”
Grassley has half a point. The vast majority of U.S. households got their taxes reduced last year because of the Tax Cuts and Jobs Act. Most people pay their federal taxes by having a portion of their wages withheld from each paycheck, so the new law’s lower tax rates should have resulted in slightly more take-home pay for most workers.
But the new law probably did mess up refunds for several million households. Republicans rushed to write and pass a sweeping tax overhaul at the end of 2017, leaving the IRS little time to revamp the formula that employers and employees are supposed to use to figure out how much should be withheld from their wages.
“Passing a tax law the last week of December and expecting the tax system to adjust in a week is just unreasonable,” said Howard Gleckman, a senior fellow at the independent Tax Policy Center.
The IRS said last year that it expected that the share of people who have too much withheld (and therefore get a refund) to decline from 76 to 73 percent and that the percentage who have too little withheld (and therefore owe the IRS) would increase correspondingly. The agency said that, according to payroll processors, it would have taken half a year to come up with a better withholding system.
Democrats said congressional Republicans and the Trump administration encouraged insufficient withholding in order to boost people’s paychecks ahead of the 2018 midterm elections.
“I think it’s one of those I-told-you-so moments,” House Ways and Means Committee Chairman Richard Neal (D-Mass.) said.
Many Americans are accustomed to getting a tax refund in the first part of the year, and the way they plan to spend the money suggests they truly count on it, Gleckman said. A survey last year found that 44 percent of Americans polled said they would pay down debt if they got a refund from the new tax law. The average federal refund is about $3,000.
“For low-income people, if you’re unbanked ... this is really the only way you’ve got to save money,” Gleckman said.
At the same time, most Americans are not experts on the mechanism for adjusting their withholding: the W-4 form they fill out and give to their employers. Only 19 percent of Americans polled said they updated their W-4 last year after the law changed, according to a December H&R Block survey.
Republicans have been annoyed by news stories about surprise tax bills. Like Grassley, Rep. David Schweikert (R-Ariz.), a member of the House tax subcommittee, suggested journalists should do a better job of informing the public. He said that people who are now missing refunds should be glad that they had not effectively lent money to the government.
“Why don’t they know that?” he said. “Do they know they functionally have been being scammed by government withholding?”
But Republicans for the past year have not exactly been jumping up and down yelling about the scourge of overwithholding. Instead, they’ve been touting the big tax cut they gave the American people. The IRS, for its part, did try to warn people to check their withholding with a new calculator on IRS.gov.
The most recent data from the IRS shows that refunds for this filing season are up 1.3 percent compared with the previous year. Multiple-child households that don’t itemize their expenses are the likeliest to get bigger refunds from the new tax code. Filers in wealthier households that previously deducted expenses such as mortgage interest and local tax payments are likelier to be stuck with a bill, partly because those deductions have been curtailed and their tax burden is just higher. So even though a person’s effective tax rate and the amount they withhold are two separate things, they do overlap.
It’s human nature to be shocked by a huge bill after having failed to notice relatively small tax changes in a paycheck, Gleckman said. And it’s also human nature not want to fuss with numbers on an arcane government document.
“Human beings are not going to spend any time going on the IRS website figuring out what they’re withholding is going to be,” he said.