The Treasury Department is taking a lot of heat for complaints about smaller tax refunds this filing season.

The issue was front and center during a Feb. 13 hearing on the middle class, which gave House Ways and Means Democrats a chance to pan the 2017 tax overhaul. This filing season is the first under which individuals are dealing with the law’s changes to the tax code, and since it started the government has been fighting back against reports that refunds are down this year.

Treasury and the Internal Revenue Service in 2018 released new withholding guidelines to help employers and taxpayers determine how much money should be taken out of each paycheck and set side for taxes. The updated guidance accounted for changes made in the tax overhaul.

The department’s implementation was an “an effort to really juice things up this time last year,” said Mark Zandi, chief economist at Moody’s Analytics. The withholding guidance resulted in many taxpayers being under-withheld, which meant higher paychecks each period, but individuals are now “paying the price” in the form of lower refunds or even tax bills, said Zandi, who was an invited witness at the House Ways and Means Select Revenue Measures Subcommittee hearing.

Rep. Mike Thompson (D-Calif.), the subpanel’s chairman, called the Treasury guidance “withholding manipulation.”

Refund Estimates

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In statistics from the first week of the filing season, the agency said the average refund is down about 8 percent at $1,865 in 2019 compared with $2,035 during the same time period last year.

It’s still too early in the filing season to determine how much of a problem smaller refunds will be. But if the numbers continue to trend downward, the effects will be felt not only by individuals who rely on that extra boost each year, but also by retailers that look forward to the uptick in spending, Zandi said.

Treasury adjusted 2018 withholding tables to account for changes in tax reform: the elimination of personal exemptions, lower tax rates, and the larger standard deduction.

“The construction of the tables was otherwise the same as for 2017 and earlier years and were built by dedicated Treasury tax professionals. Any claim to the contrary is baseless and false,” a Treasury official said in an email statement Feb. 13.

Eighty percent of American families will receive a tax cut in 2018, averaging more than $2,000, the official said.

Expected SALT Concerns

As expected, Democratic lawmakers, including Reps. Thomas Suozzi (N.Y.) and John Larson (Conn.), discussed their concerns with the tax law’s $10,000 cap on deductions for state and local taxes.

Both support repealing the cap, which was added in the tax overhaul.

Groups like the Tax Policy Center have said taking that step would primarily benefit the top 20 percent of households. But Democrats who represent high-tax states like New York, California, Connecticut, and New Jersey, say the middle class has been hit hard by the cap.

The determination of how much income places a person in the middle class varies from place to place, Suozzi said during the hearing.

Larson said the average SALT deduction in his state used to be $19,000. “So now when it comes to paying the fiddler this April,” many people in Connecticut will see a tax increase, he said.

The SALT cap paired with the tax law’s reduction to the mortgage interest deduction will have a significant impact on the housing market, especially in states like California, said Kevin Brown, a former president of California Association of Realtors who Democrats invited to speak at the hearing.

The law has reduced the incentive for individuals to buy a home, Brown said.

Republican Counterargument

Republicans spent the hearing focusing on low unemployment numbers and growing gross domestic product.

“The economy is going strong, we ought to keep it going,” said Rep. Darin LaHood (Ill.).

Employers added 304,000 jobs in January, beating expectations, according to statistics from the Department of Labor.

“My goodness, how can we not be just celebrating these figures?” Rep. Tom Rice (S.C.) said, after listing off several positive job statistics.

But Democrats said job numbers and GDP growth don’t paint the whole picture. Thompson said lawmakers should also look at factors like consumer debt, the distribution of GDP growth, and homeownership.