New changes to the U.S. tax code were designed to give Americans more money to spend, helping boost the economy. This year, many people are getting larger tax refunds than they did in 2025. However, the ongoing war involving the United States, Israel, and Iran is driving up energy prices and creating new financial pressures that could cancel out much of that benefit.
Recent IRS data shows that as of late February 2026, the average federal tax refund was about $3,742—roughly 10.6% higher than the same time last year. For millions of Americans, especially those with lower or middle incomes, a tax refund represents one of the largest single cash inflows they receive all year. People often use this money to pay off debts, make big purchases like appliances or cars, add to savings, or cover everyday expenses.
Economists had expected this extra cash to flow into the economy, increasing consumer spending on things like dining out, travel, clothing, and home goods. That kind of widespread spending can create jobs and support growth.
But the war in Iran, which began in late February 2026 with U.S. and Israeli airstrikes, has changed the picture. Oil prices have surged because of disruptions in the Middle East, including threats to key shipping routes like the Strait of Hormuz. This has pushed gas prices sharply higher. As of mid-March 2026, the national average for a gallon of regular unleaded gas is around $3.60–$3.67, up significantly from just a month earlier (when prices were closer to $3 or below in many areas).
“When a war pushes oil up, it is not just a gasoline story,” explained Paul Dietrich, chief investment strategist at Wedbush Securities. Higher costs hit diesel too, raising prices for commuting, groceries (due to higher shipping costs), and basic household needs.
Experts point out that families facing steeper bills at the pump and for food have less left for optional spending. “If families have to spend more filling the tank and buying food, they spend less on restaurants, travel, clothing, home goods and everything else,” Dietrich said.
The war adds other burdens to household budgets. Inflation has lingered since the post-COVID period, combined with past tariffs, rising debt, and a softening job market. Now, surging energy costs could reignite inflation pressures. Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co., noted that higher energy prices might raise inflation expectations, potentially forcing interest rates higher to control it.
Mortgage rates illustrate this effect. The average 30-year fixed-rate mortgage climbed to around 6.11–6.41% in early to mid-March 2026, up from about 5.9% before the conflict escalated. Higher borrowing costs make home buying and refinancing more expensive.
Max Kahn, president of retail and technology research firm Coresight Research, said any economic lift from tax refunds is “definitely being muted a bit by what’s going on in the Middle East.” Without the war, people might have spent more on fun or discretionary items, but now a bigger share will likely go toward gas and necessities.
There is some silver lining: Larger refunds could help cushion the blow from high gas prices and ease some psychological stress about the economy. Still, experts agree it won’t deliver the full boost that was possible.
The pain isn’t equal for everyone. Lower-income households feel the squeeze hardest, since gas and energy take up a larger share of their budgets. Unlike groceries or household goods, where people can shop sales or buy in bulk, options to cut gas costs are limited for most drivers.
“When energy costs rise, consumers do not stop spending,” Dietrich added. “They just stop spending on what they want and spend more on what they have to buy.” Over time, this shift hurts the broader economy, which relies heavily on consumer spending. Even higher-income people can feel it if stock markets drop or asset values fall.
In short, the Iran war is acting “like a tax increase on the consumer, except nobody voted for it,” Dietrich said. While tax refunds provide welcome relief, soaring energy costs and related pressures threaten to wipe out much of the expected economic gain.
