Tax Refunds Could Test Struggling Auto Industry This Spring

Published: February 23rd, 2026

The auto industry is banking on a potential lifeline this spring that has nothing to do with better vehicles or lower prices—it’s counting on tax refunds to bring hesitant buyers back to showrooms.

Average IRS refunds are up 10.9% so far this season, hitting $2,290 compared with $2,065 at the same point last year, according to early filing data through February 6. Industry analysts say that extra cash could provide a crucial test of whether Americans priced out of the new-vehicle market will use windfalls to finally make a purchase, or whether deeper economic anxieties will keep them on the sidelines.

Why refunds are bigger this year

The increases stem from tax changes in the One Big Beautiful Bill Act, signed in July 2025 but made retroactive to January 2025. The legislation eliminated taxes on overtime pay and tips, and created a new deduction allowing eligible taxpayers to write off up to $10,000 in annual interest paid on loans for new, U.S.-assembled vehicles.

Because many of the changes were retroactive, taxpayers likely withheld more throughout 2025 than they ultimately owed, leading to larger refunds now. “Their new tax bill is actually going to be less, and they’re going to be getting more in their tax return. It’s going to be a little bit of a surprise, we think, for a lot of potential buyers out there,” said Charlie Chesbrough, senior economist at Cox Automotive, at a recent industry conference.

The timing could matter. March historically ranks as one of the strongest months for U.S. vehicle sales, particularly for used cars. Over the past 12 years, March has accounted for 9.1% of annual new-vehicle sales on average, trailing only December at 9.3%.

An industry under pressure

Auto sales have been struggling. New-vehicle sales in January totaled approximately 1.105 million units, essentially flat compared with the same month last year despite having one extra selling day. The seasonally adjusted annual rate dropped to 14.9 million units from 15.5 million in January 2025.

Cox Automotive projects full-year 2026 sales will reach just 15.8 million units, down from 16.3 million in 2025. The decline reflects softer job growth, the expiration of $7,500 electric vehicle tax credits at the end of 2025, and persistent affordability challenges.

Average transaction prices for new vehicles hovered around $50,000 toward the end of last year—a 30% increase from early 2020. The manufacturer’s suggested retail price hit a record $52,627 in December. Monthly payments reached an all-time high of $772 during the fourth quarter, according to data from Edmunds, as buyers increasingly agreed to longer loan terms to manage the cost.

“The new-vehicle sales pace always slows in January,” Chesbrough said in a separate statement. “The market is slowing due to ongoing concerns about the U.S. economy and persistently high new-vehicle prices.”

January’s performance varied by manufacturer. Tesla posted a 9.5% gain, Toyota rose 7.9%, and Honda increased 1.9%. But Ford fell 5.5%, GM dropped 1.4%, and Stellantis managed just a 1.2% increase. Passenger car sales declined 4.8% while light trucks—SUVs and pickups—rose 0.8%.

The economic backdrop

Whether tax refunds translate to vehicle purchases depends heavily on broader consumer sentiment, which remains fragile. U.S. consumer confidence fell to 84.5 in January, the lowest reading since May 2014, driven by anxiety over high prices and a weakening labor market.

National credit card debt stands at a record $1.28 trillion. Many households face a choice: use refund money for a vehicle down payment, pay off high-interest debt, or rebuild savings depleted by years of inflation.

“What we don’t know is with consumer finance so stressed already, is that extra money already spent?” Chesbrough said. “It’s a really mixed bag out there.”

The current environment differs sharply from the last time the government injected cash into consumers’ pockets. During the pandemic, the Trump administration issued $1,400 stimulus checks that helped fuel vehicle purchases. But back then, federal interest rates were near zero and new vehicle inventory was scarce, creating pent-up demand. Today, the Federal Reserve funds rate sits at 3.5% to 3.75%, making borrowing more expensive, while inventory has normalized to 2.77 million units—a 76-day supply—entering January.

David Oakley, manager of Americas vehicle sales forecasts at GlobalData, said the refund boost “feels like it could be really beneficial to vehicle sales, particularly in that sort of Q1-Q2 time frame.” But he acknowledged the uncertainty.

Who benefits most

The tax changes particularly help middle- and higher-income consumers who might now pull ahead a planned vehicle purchase. The $10,000 deduction on loan interest specifically targets buyers of new, U.S.-assembled vehicles—a policy designed to support domestic manufacturing.

For consumers putting down extra cash from refunds, the immediate benefit is lower monthly payments. With average payments topping $770, even a $2,000 down payment can reduce the monthly burden by $50 to $75 over a typical loan term.

Used vehicle buyers may see the most activity. Used cars traditionally sell well in March, and buyers stretching budgets often turn to the used market where prices, while still elevated compared with pre-pandemic levels, remain more accessible than new vehicles.

TD Economics noted that rising prices and the loss of electric vehicle subsidies have particularly dampened demand. The expiration of the $7,500 federal EV credit at the end of 2025 led to a rush of fourth-quarter purchases followed by a January slowdown. Hybrid vehicles, meanwhile, have seen rising interest as buyers seek fuel efficiency without the higher upfront costs and charging concerns of full electric vehicles.

What dealers are watching

Dealerships are preparing for a potential spring uptick while remaining cautious. Fleet sales rose 14% year-over-year in January, suggesting commercial buyers are taking advantage of improved inventory. Retail sales, however, are projected at 908,500 units for the current period, down 3.7% from last year.

Dealers are emphasizing light trucks and SUVs, which showed modest growth in January, and promoting longer loan terms to keep monthly payments manageable. But they’re also mindful that stretched financing—some loans now extending seven years or more—creates risks if buyers face income disruptions.

Potential tariffs add another layer of uncertainty. The U.S.-Mexico-Canada Agreement is under review, and any new trade restrictions could force manufacturers to raise prices further or accept lower profit margins. Industry forecasts for 2026 already cite tariff risks alongside high prices, supply chain challenges, and stalled electric vehicle adoption as headwinds.

“It’s only confident people, people who feel comfortable about their economic fortunes and the economy of the United States, that are going to be interested in taking out a $40,000 or $50,000 auto loan,” Chesbrough said. “It’s a very difficult situation right now.”

The next few months will reveal whether tax policy can overcome economic anxiety—and whether an industry that’s struggled with affordability can convert temporary cash windfalls into sustained sales momentum. For now, showrooms are waiting to see if refund checks bring buyers through the door, or if Americans will choose to shore up their finances instead.

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