Refund Surge: The $65 Billion Flow and the IRS Bottleneck

The fiscal injection this tax season is massive. Bank of America projects refunds will surge about 18%, adding a staggering $65 billion to household budgets compared to last year. This is the primary fiscal shot in the arm from the "One Big Beautiful Bill Act," with the total consumer stimulus from the legislation estimated at $135-$140 billion.

The benefits, however, are not spread evenly. The structure of the new law, particularly the expanded State and Local Tax (SALT) deduction cap, favors middle- and higher-income households. The SALT deduction is being quadrupled to $40,000 through 2029, a change that disproportionately benefits those in high-tax states who already itemize. This means the largest share of the refund surge will flow to these groups, potentially exacerbating the nation's "K-shaped" economic divide.

For lower-income households, the impact is different. Their refunds are often bigger than a month's budget, suggesting a potential for a sharp, short-term discretionary spending lift. This could provide a brief boost to consumer spending, but the long-term trajectory still hinges on the labor market and the sustainability of these one-time payments.

The Liquidity Pipeline: IRS Capacity vs. Demand

The primary bottleneck is not in the money, but in the machinery that moves it. The IRS is operating with a reduction of 27% of its workforce from the previous year, a cut that has crippled its processing capacity. This staffing collapse, which saw the agency lose around 25,000 employees, directly threatens the timely distribution of the $65 billion in new refunds.

The risk is a classic supply-demand mismatch. The agency now faces a surge in complex returns from the new tax law, but its capacity to handle them has been slashed. While the National Taxpayer Advocate expects most straightforward e-filers to get their refunds without delay, the system is strained. The inventory of backlogged claims has more than doubled since 2019, and the agency was unable to hire seasonal staff due to a prolonged shutdown. This creates a high probability of delays for the millions who encounter problems.

For lower-income households, who often rely on refunds for basic budgeting, even a short delay can create hardship. The Advocate has called existing delays in identity theft cases "unconscionable," and the new strain could worsen this. The bottom line is that the liquidity pipeline is clogged; the money is flowing, but the IRS's ability to get it into wallets on schedule is under severe pressure.

Catalysts and Risks: The Flow Timeline

The primary catalyst is the filing season itself. The 18% jump in refunds is a direct function of the new tax law's provisions, and the volume of returns processed will dictate the pace of the $65 billion liquidity injection. Early data suggests consumers are already primed for a spending lift, with January 2026 spending strong. The timing of refund disbursements will determine whether this fiscal stimulus flows into the economy in the first quarter or gets delayed.

The main risk is a systemic delay in refund issuance. The IRS's 27% workforce reduction and doubled backlog create a high probability that millions will face waits. For lower-income households, where refunds often exceed a month's budget, this could mean a sharp, unplanned dip in spending power. The bottom line is that the liquidity pipeline is clogged; the money is there, but the agency's capacity to get it into wallets is under severe strain.

The long-term economic impact hinges on what happens next. If the refunds flow smoothly, they could provide a meaningful, if temporary, boost to discretionary spending and help narrow the "K-shape" for a quarter. But if delays persist, the fiscal stimulus is postponed, and the economy's trajectory will remain firmly tied to the labor market's strength.