WASHINGTON (AP) — The U.S. Economy was expected to commence the year with strong growth, fueled by larger tax refunds stemming from President Donald Trump’s tax cut legislation. However, rising gas prices are now projected to offset much of that benefit, potentially leaving many Americans with limited disposable income.
Gas Prices and Tax Refunds
President Trump stated in December that “next spring is projected to be the largest tax refund season of all time.” This projection came before the beginning of the Iran war on February 28, which triggered a surge in oil and gas prices. As of Sunday, the nationwide average gas price reached $3.94 a gallon, an increase of over a dollar in just one month.
Economists anticipate that gas prices will remain elevated, even if the war concludes soon, due to disruptions in shipping and production. This is expected to slow economic growth, as funds spent on gasoline will be less available for other purchases like dining, clothing, and entertainment.
Impact on Households
Lower and middle-income households are expected to be disproportionately affected, as they typically receive smaller tax refunds and allocate a larger percentage of their income to gasoline. Alex Jacquez, chief of policy at the Groundwork Collaborative, noted, “The energy shock is going to hit those who have the least cushion. And it doesn’t appear like those tax refunds are going to be here to save them.”
Calculations by Neale Mahoney, director of the Stanford Institute for Economic Policy Research, suggest gas prices could peak at $4.36 a gallon in May, based on forecasts from Goldman Sachs. Economists refer to the tendency for gas prices to rise quickly but fall slowly as the “rocket and feathers” phenomenon.
The average household could pay $740 more for gas this year, potentially negating the $748 increase in refunds estimated by the Tax Foundation. Through March 6, average refunds had risen by $352, from $3,324 in 2025 to $3,676 in 2026, but could still increase as more complex returns are processed.
Broader Economic Context
Oxford Economics estimates that if gas prices average $3.70 a gallon for the year, consumers will spend approximately $70 billion – exceeding the $60 billion in increased tax refunds. This situation is occurring as consumers are already facing financial strain, with hiring nearly at a standstill and savings rates declining.
Julie Margetta Morgan, president of The Century Foundation, observed that many consumers are “maxed out their credit cards, are using ‘buy now, pay later’ to purchase their groceries,” and are “making it work for now, but that can fall apart quite quickly.” The situation is expected to exacerbate the “K-shaped” economic recovery, where higher-income households are faring better than lower-income households.
Despite these challenges, most analysts still anticipate overall economic growth this year, albeit at a slower pace. Whereas higher gas prices may contribute to short-term inflation, reduced spending could eventually slow growth. Economists note that Americans currently spend a smaller proportion of their income on energy compared to a decade ago.
Frequently Asked Questions
What is driving up gas prices?
The Iran war, which began on February 28, has caused oil and gas prices to soar, with the nationwide average reaching $3.94 a gallon as of Sunday.
How much could gas prices increase this year?
Gas prices could peak in May at $4.36 a gallon, based on oil price forecasts by Goldman Sachs.
Will tax refunds offset the higher gas prices?
Economists estimate that the increase in gas prices could offset the increase in tax refunds, leaving many Americans with little extra spending money.
How will these economic factors impact your household budget in the coming months?
