Tax season offers a boom-or-bust test

DETROIT – The might of the US auto industry will face an early test this spring, one that has nothing to do with cars or trucks.

As tax season begins, industry experts predict that some Americans, many of whom have been priced out of the new-car market, will use the expected higher tax returns to purchase a new or used car.

The extra money available could provide a needed boost to an industry reeling from sluggish auto sales — or it could reveal the auto industry’s ongoing problems with inflated prices and consumers still reluctant to spend on big-ticket items.

“Their new tax bill will actually be lower, and they’ll get more on their tax returns,” Charlie Chesbrough, chief economist at Cox Automotive, said at a recent Automotive Analysts Conference. “We think that will be a bit of a surprise to a lot of potential buyers out there.”

The average IRS tax refund has risen 10.9% so far this season, compared to the same point in 2025, according to early filing data. As of February 6, the average refund was $2,290, compared to $2,065 reported nearly a year ago.

The increases were expected under the Trump administration’s tax changes, including the Big Beautiful bill signed into law in July. This legislation eliminated overtime and tip taxes and allowed eligible taxpayers to deduct up to $10,000 in annual interest paid on loans for the purchase of new vehicles assembled in the United States, among other modifications.

Many of the tax changes were made retroactive to January 2025, meaning taxpayers may have withheld more than they ultimately owe.

“Even though it’s a bit of an unknown, it looks like it could be really helpful for auto sales, especially in this kind of Q1 and Q2 time frame,” said David Oakley, GlobalData’s director of Americas auto sales forecasts.

March is historically one of the best months for car sales in the United States, especially used vehicles. This month represents 9.1% of annual new car sales on average over the past 12 years, according to Cox, trailing only December’s 9.3% of sales.

Many recent tax changes also help middle- and upper-income consumers who may decide to postpone a car purchase. The industry saw a similar dynamic during the Covid pandemic when the Trump administration issued many Americans $1,400 stimulus checks.

At the time, federal funds rates were near zero compared to the current Federal Reserve funds rate of 3.5% to 3.75%, and new vehicle inventory was low. Now, with borrowing costs rising and inventories improving, the equation may be different.

More buyers are agreeing to long-term loans amid rising financing costs and prices. Saving extra money early can help reduce monthly payments, which can otherwise make the problem worse Carmax Edmunds reports a record high of $772 per month for new vehicles during the fourth quarter.

The average transaction price for new cars in the United States was hovering around $50,000 at the end of last year, up 30% from the beginning of 2020, according to Cox.

“What we don’t know is that consumer finances are already so stretched, so has the extra money actually been spent? And whether it’s going to be in the pockets. It’s a really mixed bag,” Chesbrough said.

Consumers can choose to use higher tax revenues to pay down credit card debt — which nationally stands at a record $1.28 trillion, according to a New York Federal Reserve report released last week — or replenish their savings after a period of persistent inflation.

US consumer confidence fell to 84.5 in January, the lowest level since May 2014, driven by intense concern about rising prices and a weak labor market.

“Only people who are confident, who are comfortable about their economic fortunes for the U.S. economy, would be interested in taking out a $40,000 or $50,000 car loan,” Chesbrough said. “It’s a very difficult situation now.”

– CNBC Kate Dor She contributed to this report.