Trump's "Backfire": Rising Oil Prices to "Completely Devour" Tax Cut Dividends, Landmark Achievement "Ruined"

The US-Iran conflict has pushed international crude oil above $100 per barrel, and the average price of regular gasoline at US gas stations has subsequently risen to $4/gallon. This makes one question very real: will the tax cut dividends brought to American families by the "Great America Act" (OBBBA) passed last year be eaten up by the surge in oil prices?

According to Zhuifeng Trading Desk, JP Morgan economist Michael S. Hanson's answer is: "Likely not, but with conditions." At the current oil price level of $4, if maintained for the entire year, household purchasing power would lose an additional $100 billion; meanwhile, the estimated tax cut for individual households from OBBBA this year is slightly over $200 billion. There is still a buffer space of nearly half between the two. However, this buffer space has a clear upper limit: once oil prices rise to $5/gallon and persist, additional household gasoline expenditures will reach approximately $233 billion, almost entirely offsetting the tax cut dividends.

The trouble is that, affected by persistent supply shortages, gasoline prices rising to $5 before mid-April is not a small probability. At the same time, this year's tax season refund data is already pouring cold water on the market: as of March 25, the refund amount was only about $32 billion more than the same period last year. At this pace, the full-year refund increase might only be around $55 billion, far below previous market expectations.

Looking at these two factors combined, the actual scale of tax cut dividends might be lower than expected, while the oil price shock might be higher than expected, jointly posing a downside risk to US economic growth in 2026.

$5 is a Clear Red Line

Gasoline demand has extremely low elasticity to price; this is the core premise of the analysis and is well-supported by data—PCE data over the past thirty-plus years shows that household nominal spending on gasoline has grown almost in sync with retail oil prices, with virtually no change in actual usage, even through the inflation shock of 2022-23.

This means that for every $0.1/gallon increase in oil prices, it is equivalent to taking more than $12 billion annually out of household pockets. Using a 2025 average gasoline price of $3.10/gallon and total household expenditure of about $380 billion as a baseline, JP Morgan has provided a set of scenario calculations:

• $4/gallon: Additional expenditure of approximately $110 billion

• $4.65/gallon: Additional expenditure of approximately $190 billion

• $5/gallon: Additional expenditure of approximately $233 billion

$5 is the tipping point. Beyond this line, the entire benefit of individual tax cuts will be eaten up by gasoline bills, and this line could be touched before mid-April.

It should be noted that this calculation is actually a conservative estimate. Higher oil prices will gradually permeate into more consumer goods through airfares and transportation costs, and prices of industrial goods such as aluminum and fertilizer raw materials are also rising with the Middle East situation. If these second-order effects are superimposed, the erosion of actual household purchasing power will only be greater.

Refund Data Already Tells a Story of Discounted Tax Cuts

OBBBA was passed in July 2025, but the IRS did not proactively update the withholding tax guidance for that year. That is to say, most wage earners would not have automatically paid less in withholding taxes unless they submitted a W-4 form themselves. Actual data confirms this: in the fourth quarter of 2025, wage income grew by 4.6% year-on-year, while withholding taxes also grew by 6%—no different from the growth rate in 2024.

Therefore, the tax cut effect is likely concentrated in this year's tax season, manifesting in the form of larger refunds or lower taxes due in April. The problem is that the refund data so far is not optimistic: the refund increase as of March 25 was only about $32 billion. Based on an annual progress of about 60% in previous years, the full-year refund increase is likely only around $55 billion.

Estimates from various third-party institutions (Tax Foundation, AEI, Tax Policy Center) for the reduction in individual tax burden in 2025 mostly range between $125 billion and $135 billion. Including business tax cuts through partnerships and other channels, the total is about $150 billion to $160 billion. If refunds only increase by $55 billion, then the remaining tax cut benefits must be realized through another path—lower tax payments in April. This path is difficult to track in real-time, and the market will have to wait until after the tax season to know the final results.

Of course, there is a possibility of a counterargument: the tax cut benefits of OBBBA are highly concentrated among the top 20% income group, who are more likely to delay filing taxes until the deadline and benefit more from paying less in taxes rather than receiving refunds. After April 15, the numbers will be clearer.

Two Asymmetrical Shocks, Low- and Middle-Income Families Hurt More

The oil price shock and tax cut dividends are distributed in completely opposite directions across the population, which makes simple numerical comparisons mask an important structural problem.

Tax cut dividends are concentrated in the high-income group, with the top 20% of families taking the vast majority of the tax cut dividends. Meanwhile, the distribution of gasoline expenditure across income levels is quite even. For families in the lowest income quintile, gasoline expenditure accounts for over 3% of total annual expenditure, more than a full percentage point higher than the highest quintile.

In other words, for low- and middle-income families, the pain of rising oil prices is real and immediate, while the sense of benefit from tax cuts is relatively limited; for high-income families, the situation is the opposite—they get the most tax cut dividends, but gasoline expenditure accounts for the smallest proportion of their total income. When the two sets of numbers are superimposed, the actual drag of high oil prices on consumption falls more concentratedly on the people whose purchasing power is already weak than what the aggregate numbers show.

JP Morgan currently maintains its baseline assumption of about $200 billion in full-year tax cut dividends from OBBBA and expects about $180 billion of that to manifest in the first half of the year. Correspondingly, if the current oil price level is maintained for the entire year, the additional loss of purchasing power will be about $100 billion, and the two have not yet constituted a complete offset. But this judgment depends heavily on two premises: that oil prices do not rise significantly further, and that the tax cut dividends can ultimately be fully realized. Both of these premises are now suspenseful.