What happens if I decline a Steam gift?

A declined gift will be returned to the owner's gift inventory, from where it can be gifted again.

Valve generally does not grant refunds in this case, as Steam already tells the user if the gift target already owns the game.

Generally, if you decline a gift, it will be deleted, and the sender will automatically receive a refund.

The sender will receive a notification like this:

Gift refunded: "We've automatically initiated a refund for the purchase of the gift."

However, if the gift was sent from the sender's gift inventory, it will not be refunded, and instead just remain there. It can be re-gifted or redeemed at will.

Since May 4th 2017, it is no longer possible to add games to your inventory, but pre-existing gift copies can still be sent this way.

Gift returned to inventory: "Your gift has been returned to your Gift Inventory."

If you decline the game (or any gift) it will just return back to the senders inventory. From there, they can send/trade it with someone else.