According to JPMorgan's calculations, the approximately $200 billion tax cut dividend brought by the Inflation Reduction Act this year can still offset the impact of rising oil prices—but there is a red line: once oil prices rise to $5 per gallon, the benefits of the tax cuts will be entirely consumed by gasoline bills. More challenging is that tax refund data from the filing season already shows a discounted effect of the tax cuts, and the possibility of $5 oil prices before mid-April is not low. Under these two pressures, middle- and low-income households will bear the brunt.
The conflict between the US and Iran has driven international crude oil prices above $100 per barrel, with the average price of regular gasoline at US gas stations rising to $4 per gallon. This raises a very real question: Will the tax cuts brought by the Big Beautiful Act (OBBBA), passed last year, be entirely offset by rising oil prices?
According to Storm Chasing Trading Desk, JPMorgan economist Michael S. Hanson's response is: "Probably not, but there are conditions." At the current level of $4 per gallon, if sustained throughout the year, household purchasing power will suffer an additional loss of about $100 billion; whereas OBBBA’s tax cuts for individuals and households this year are estimated to exceed $200 billion slightly. There remains nearly half of that amount as a buffer. However, this buffer has a clear upper limit: If oil prices rise to $5 per gallon and persist, household additional gasoline expenses will reach approximately $233 billion, essentially offsetting the entire tax cut benefit.
The problem is that due to persistent supply shortages, the likelihood of gasoline prices reaching $5 before mid-April is not low. Meanwhile, refund data from this year's tax filing season is already dampening market expectations in advance: As of March 25, refunds were only about $32 billion higher than the same period last year. At this rate, the total annual increase in refunds may be only about $55 billion, far below previous market expectations.
Considering both factors together, the actual scale of the tax cut benefit may be lower than expected, while the impact of oil price shocks could be higher than anticipated, jointly constituting a downside risk to US economic growth in 2026.
$5 represents a clear red line.
Gasoline demand exhibits extremely low elasticity to price changes, which forms the core premise of this analysis and is supported by substantial data – PCE data over the past three decades shows that nominal household spending on gasoline has grown almost in sync with retail gasoline prices, with little change in actual consumption, even after the inflationary shock of 2022-23.
This means that for every $0.10 increase per gallon in oil prices, it equates to an additional annual withdrawal of over $12 billion from household pockets. Based on an average gasoline price of $3.10 per gallon in 2025 and total household expenditure of approximately $380 billion, JPMorgan provided a set of scenario estimates:
$4 per gallon: Additional expenditure of approximately $110 billion
$4.65 per gallon: Additional expenditure of approximately $190 billion
$5 per gallon: Additional expenditure of approximately $233 billion
$5 is the critical threshold. Beyond this level, the full benefit of individual tax cuts will be offset by gasoline bills, and this threshold could be reached before mid-April.
It should be noted that this calculation is actually a conservative estimate. Higher oil prices will gradually affect more consumer goods through airfare and transportation costs, while prices for industrial products such as aluminum and fertilizer raw materials are also rising due to developments in the Middle East. If these second-order effects compound, the erosion of household purchasing power will only worsen.
Tax refund data already indicates a story of scaled-back tax cuts.
The OBBBA was passed in July 2025, but the IRS has not proactively updated its withholding guidance for the year since. This means that most salaried workers will not see an automatic reduction in withholdings unless they manually submit a W-4 form. Actual data confirms this: wage income grew by 4.6% year-over-year in Q4 2025, while withholding taxes increased by 6%—unchanged from the growth rate in 2024.
As a result, the impact of the tax cuts is likely concentrated in this year’s tax filing season, manifesting either as larger refunds or reduced tax liabilities in April. The issue, however, is that refund data so far has been less than optimistic: as of March 25, the increase in refunds amounted to only about $32 billion, and based on historical progress of approximately 60%, the total increase in refunds for the year is projected to be around $55 billion.
Estimates from various third-party institutions (Tax Foundation, AEI, Tax Policy Center) suggest that the reduction in personal tax burdens for 2025 will range between $125 billion and $135 billion, with additional business tax relief via partnerships and other channels bringing the total to approximately $150 billion to $160 billion. If refunds increase by only $55 billion, the remaining benefits of the tax cuts must materialize through another channel—lower tax payments in April. This path is difficult to track in real time, and the market will have to wait until the end of the tax season to know the final outcome.
Of course, there is room for counterarguments: the tax cut benefits of the OBBBA are heavily concentrated among the top 20% of income earners, who tend to delay filing until the deadline and benefit more from reduced tax payments rather than refunds. After April 15, the numbers will become clearer.
Two asymmetric shocks hurt middle- and low-income households more.
The distribution of oil price shocks and tax cut dividends across the population moves in opposite directions, which masks an important structural issue behind simple numerical comparisons.
Tax cut benefits are concentrated among high-income groups, with the top 20% of households capturing the majority of the tax relief. In contrast, gasoline expenditures are distributed fairly evenly across income levels, with the lowest quintile of households spending over 3% of their annual budget on gasoline—more than one percentage point higher than the top quintile.
In other words, for middle- and low-income households, the pain of rising oil prices is real and immediate, while the benefits of tax cuts are relatively limited; for high-income households, the situation is reversed — they gain the most from tax cuts, but their gasoline expenditures account for the smallest proportion of total income. When these two sets of figures are combined, the actual drag on consumption caused by high oil prices is more concentrated on groups with already weaker purchasing power.
JPMorgan still maintains its baseline assumption of approximately $200 billion in annual tax cut benefits from OBBBA and expects about $180 billion to be realized in the first half of the year. Correspondingly, if current oil price levels persist throughout the year, there will be an additional loss of purchasing power of approximately $100 billion, which does not fully offset the tax cuts. However, this assessment heavily relies on two premises: oil prices do not rise significantly further, and the benefits of the tax cuts are ultimately fully realized. Both of these assumptions are now uncertain.
Editor/Melody