What Smaller Tax Refunds Could Mean for Summer Travel

Spring is here, and summer is just around the corner. For many people, that means finally taking some much-needed vacation time. And to do that, many rely on those April tax refunds to finance their adventures.

According to the National Retail Federation's 2019 Tax Return Study, 18% of people surveyed plan to use their tax refund on a major purchase or a "splurge," and 12% specifically intend to use a check from the United States Treasury to pay for a vacation.

“Each year, my wife and I set aside our tax refunds exclusively for travel and [have] been doing so for almost 12 years now,” media outreach specialist Frankie Rendón told TPG. “Over the years, this helped us set foot in 27 countries across five continents.”

Publicist Blaine Heck also used her yearly tax refund to jet off to Europe in the summer. “Before I went freelance, my husband and I would use both our refunds to go to Europe every July — Italy, France, wherever we could check off our bucket list. It never paid for all of it, but it helped.”

And even though Alex Smith, director of communications for StockX, only used her refund a couple of times to venture to Ireland and Cape Cod, she was planning to use it for another trip this summer. “I was looking forward to a vacation,” she said. “Unfortunately, that probably won’t happen this year.”

Like Smith, Heck and Rendón also said their warm-weather travel plans are going to be halted or altered this year due to one thing in particular: the new tax codes.

“I’m only getting half of what I usually get back on taxes,” said Smith. “So, I will most likely just pay off my credit card bills.” Heck echoed this sentiment, saying, “When we filed, it was awful. We owe double this year compared to last.” Rendón is in a similar boat. “Under the new tax laws, we most likely will owe this year,” he said.

In fact, initial reports from the IRS indicated that tax refunds were down an average of 16% in 2019. Though those numbers have since normalized, Smith said some consumers may still be skeptical.

So, why are so many people getting shortchanged this year? When the tax reform bill took effect, the IRS came out with new guidelines for employers to withhold income taxes from employees' paychecks,” personal finance expert and founder of BraveSaver.com Elyssa Kirkham, explained. “When these new guidelines were implemented, most taxpayers (but not all) saw larger paychecks throughout 2018 because they had less federal income taxes withheld.”

She added, “The change in the tax code and the new withholding guidelines also mean, however, that many taxpayers who were used to getting larger refunds are in for a surprise. Many have seen the checks they get back after filing a return shrink.”

It’s this surprise that could force travelers who have been counting on their tax refunds to pay for big trips to instead allocate that money for debts leftover from the 2018 holidays. “If you're hoping to use a tax refund to pay for a getaway with friends or the annual family vacation, a smaller refund check could leave you scrambling to cover those costs,” said Kirkham. “Some people might delay travel plans to save up, modify travel plans to choose cheaper locales, airfare or hotels — or cancel some travel plans altogether.”

This adjustment in spending could have a significant effect on the travel industry as a whole. Although many travelers complain that the days around Thanksgiving and Christmas are the busiest during the year, it’s actually the summer months that most people hit the road. According to Roger Dow of the US Travel Association, the busiest travel days of the year are Fridays in June, July and August.

According to Bankrate, families of four more spend more than $4,000 on average on vacation and, in a 2018 survey, found that one in four Americans reported they wouldn't take a summer vacation because they couldn't afford it. Fewer travelers could mean lower profits for hotels, airlines and tour operators who rely on that summer traffic.

While the smaller tax refunds are certainly not as bad financially speaking for Americans as the 2008 recession, it was during that economic downfall that the tourism industry took a huge hit. In the US, travel demand fell by 6% over six quarters, according to a 2010 report in the Journal of Travel Research. This is significant because it shows that people cut back on seemingly superfluous spending when money is tight; not getting back a couple of thousand dollars this year makes budgeting for a summer trip difficult.

Nonetheless, experts believe the tourism industry won't suffer too much in the grand scheme of things. "In a perfect world, no one would get a refund, because they would have the appropriate withholding and would come out to '0' come tax-time," Kelly Anne Smith, an analyst at Bankrate, told TPG. "But consumers are reliant on these refunds, and some researchers and policymakers say the refunds are ingrained in their savings behavior and it'll be hard to expect them to stop relying on the returns."

Rendón, for once, plans to take from other money sources to fund their family’s summer trip. “While these changes may throw our entire travel budget into disarray,” he said, “We plan to pull from other savings to continue our adventures.”

Heck is doing something similar. “Though we are going away still in July, what we wanted to do is cut short because our taxes this year hit us harder than ever.”

Although you might not get a refund this year, Kirkham and Smith both say you should just alter your budgeting to make up for the “missing” cash.

"Consumers should save for these vacations a little bit throughout the year instead of relying on a tax refund to fund them," Smith said.