Tax Refund Parasites
Howard Karger is professor of social work at the University of Houston and author of Shortchanged: Life and Debt in the Fringe Economy.
Tax time is feeding time for America’s fringe economy. From December to April, advertisements on telephone poles, in convenience stores, on public transit and in various media promise the cash hungry “instant tax refunds,” “fast cash” and “quick money.”
This cash frenzy is fed by the Earned Income Tax Credit, or EITC, the largest federal, tax-based, anti-poverty program. In 2005, EITC provided more than $39 billion in tax refunds to 22 million families. For a few months a year, low-income communities are awash in cash. But in America’s fringe economy a “rapid refund” isn’t free, even if it is your own money. In 2004, 12.4 million U.S. taxpayers paid $1.24 billion just to get their tax refunds seven to 10 days earlier.
The vehicle for getting quick cash is a tax refund anticipation loan, or RAL, a usurious short-term loan secured by the tax-filers expected refund. The mechanics are simple. A customer goes to a tax-preparer who charges about $60 for a federal tax return with the EITC, $34 for a state return and $20 for electronic filing (EITC recipients spent $840 million in tax preparation fees alone). If the customers want their refunds early, they get a RAL; if they want it today they pay another $20-$45.
But, borrowing your own money is expensive. According to the National Consumer Law Center’s Chi Chi Wu, the annual interest rate for a 10-day RAL is about 178 percent, but it can go as high as 700 percent for a small loan.
Low-income consumers spend about $100 for an average $2,150 EITC refund. To guarantee repayment, the tax preparer opens a “dummy” account into which the IRS deposits the refund. After the refund is deposited, a paper check is issued, and for another three percent of the check, the tax preparer will also cash it. Since many low-income tax-filers are unbanked (about 20 percent of U.S. families have no checking or savings account), check-cashing becomes another way to gouge the low-income consumer on their way out.
In 2005, almost half of EITC recipients spent $205 million—$65 a check—in RAL check-cashing fees. The predatory lending circle is completed: Low-income taxpayers are gouged by high tax preparation fees, high interest RALs and check-cashing fees. All told, low-income taxpayers can spend more than 10 percent of their tax refund—or about $276—on various tax preparation and RAL fees.
Who takes out RALs? According to Chi Chi Wu, RAL borrowers tend to have a high school education or less; work in a service occupation or a semi-skilled/unskilled blue collar position; rent instead of own; are more than twice as likely to be African American; be female; have children (and be in their child-bearing years); and earn below the median income (three-fifths earned below $40,000 a year). They are America’s poor.
Tax preparers, however, generally do not provide their own loans, instead relying on partnerships with large mainstream financial institutions. The largest RAL lender, HBSC/Household, has a relationship with approximately 5,600 tax preparers nationwide. For instance, H&R Block is the nation’s largest tax preparer and RAL provider, accounting for 16 million tax individual returns prepared by Block in 2004. Of these, almost 27 percent included RALs. H&R Block offices make up more than 50 percent of the 17,000 outlets with which HSBC/Household does RAL business.
Household and its subsidiary, Beneficial Finance, were bought for $14 billion in 2003 by HSBC, the world’s second largest bank, as well as a major violator even of weak existing consumer protection laws. The company was accused of duping tens of thousands of low-income home buyers into loans with unnecessary hidden costs. A $484 million settlement was reached in 2002 between all 50 states and Household. In 2003, another $100 million settlement was reached around their abusive mortgage lending practices.
Jackson Hewitt, the second largest tax preparer chain, prepared 3.3 million individual tax returns in 2005. Jackson Hewitt’s main bank partners for RALs and pay stub loans are Santa Barbara Bank and Trust (SBBT) and HSBC. Other banks in on the RAL game are Bank One (part of JP Morgan Chase) and a number of smaller institutions.
Since tax preparers have no fiduciary duty to tax filers, they are therefore free to push RALs or others predatory schemes that benefit themselves at the expense of their customers. Despite this, only nine states regulate RALs and all but Connecticut basically rely on weak disclosure strategies.
David Shipler summarizes the dilemma in Working Poor :
Tax time in poor neighborhoods is not April. It is January ... With cunning creativity, the preparers have devised schemes to separate low-wage workers from as much of their refunds … as feasible. The marvel of electronic filing, the speedy direct deposit into a bank account, the high-interest loan masquerading as a ‘rapid refund’ all promise a sudden flush of dollars to cash-starved families. The trouble is, getting money costs money.