Tax refund season is coming, but it could be a mild one for U.S. auto dealers. New withholding rules the IRS put in place last year mean smaller refunds for most taxpayers, which affects used-vehicle sales in two ways: decreased demand and accelerated depreciation. Auto Dealer Today reached out to Anil Goyal, executive vice president of operations for Black Book, to ask what dealers can expect this spring.

ADT: The IRS says average refunds are down 8.4% for early filers. Assuming that average holds through tax season, how accurately are we able to calculate the effect that loss of capital will have on used-vehicle sales?

Goyal: It is difficult to say, since there is a good chance people will still shop for vehicles even though the amount of tax refunds will be lower this year compared with last year or years past. When people need to replace vehicles, they sometimes do so regardless of the size of their refund. That being said, we may see people shop for a different type of vehicle based on the size of their refund check. Many used-vehicle shoppers look for value rather than features, so these shoppers may look for a vehicle under a certain price threshold compared with one they would have shopped for with a larger refund check.

ADT: What can dealers do to prepare?

Goyal: It is important for dealers to make the right inventory decisions based on the right data. We’re advising dealers, remarketers and lenders to watch data closely to help them make the right decisions. Leveraging data such as Black Book’s weekly Market Insights report or monthly Used Vehicle Retention Index can help identify trends of which segments of cars or trucks are in higher demand than others. This insight can help automotive professionals make more precise decisions not only for the spring, but to help set the tone for the entire year ahead.

ADT: Could it be argued customers will be more likely to spend less than forgo a needed purchase?

Goyal: That is correct, and we have seen this in the past. While there are often seasonal aspects to the calendar and the automotive buying and selling seasons, there are aberrations that can sometimes take place. Not every spring season is the same, and this reinforces the importance of monitoring vehicle depreciation data and trends to get a closer understanding of which vehicle segments are in stronger demand than others.

ADT: Is a lesser tax season necessarily a bad thing? Doesn’t more accurate withholding mean car buyers have more money in their pockets all year long?

Goyal: Technically, yes, the consumers have a little more in their paycheck with lower deductions all year long, and they are not giving the IRS an interest-free loan. However, many consumers plan for a big purchase based on tax refund and, as a result, vehicle purchase tends to pick up with down payment — helped by tax refunds.