The upside of tax time has a downside, too
The deadline to file our taxes has arrived once again. While this deadline looms over many of us, for low-income working families, it can be an opportunity for greater economic security.
Why? Tax credits, such as the earned income tax credit (EITC), provide a substantial infusion of resources to low-income working families, making tax time a time when they can meet their current financial obligations, pay down their debt, and maybe save a little. For a married couple with two children, for example, the EITC can be as high as $5,372 this year.
The benefits and opportunities are considerable, but for the roughly 17 million adults without bank accounts, it can be difficult and expensive to get access to that refund. The unbanked often turn to expensive check-cashing services or pay high fees on refund anticipation checks or loans to avoid long waits for a paper check.
What can help? Offering people a reasonably priced financial product at tax time, a product that provides electronic access to tax refunds via direct deposit and can be used thereafter for everyday transactions such as paying bills, receiving paychecks via direct deposit, and withdrawing money from ATMs.
In 2011, the Department of the Treasury initiated the MyAccountCard, a direct mail pilot program offering low-income unbanked and underbanked families the option of receiving their tax refund on a prepaid card. The reloadable MyAccountCard could then be used on an on-going basis for everyday transactions.
The pilot evaluation, which I conducted with my colleague Signe-Mary McKernan, found that the MyAccountCard appealed most toits target population: unbanked adults. Those most likely to be unbanked were three times more likely to apply for the card and twice as likely to deposit their tax refund into the card account, compared with those who were most likely to have a bank account.
There was also relatively high repeat use of the MyAccountCard for tax refund deposits. Nearly a quarter (23 percent) of people who directly deposited their tax refund into the MyAccountCard in year one did so again the following year.
What influenced MyAccountCard usage? Cost was a big factor. A $4.95 monthly fee decreased applications by 40 percent and the likelihood of depositing a tax refund into the card account by 50 percent, compared with no monthly fee. The linked savings account and card messaging (safety vs. convenience) did not impact take-up or use.
The federal government isn’t the only entity in the prepaid card market. Tax preparers have their own prepaid card products, but electronic receipt of refunds onto these cards is available only to filers using that preparer. Some states also offer prepaid cards, but these generally only allow people to spend down their state refunds—the card can't be used to accept federal refunds or as an ongoing account to manage finances and build savings.
The federal government offering a reloadable prepaid card at tax time can help consumers get their tax refunds quickly and safely, avoid expensive alternative financial services, and connect them with the financial mainstream. It can also save the government money, as electronic delivery of tax refunds cost roughly one-tenth as much as paper checks.
Access to the prepaid card should be easy, such as by including the card as an option on the tax form. Because of the national scale, the government would be in a position to negotiate well-priced products and provide oversight to ensure that the product and its pricing are transparent to consumers.
A program like the MyAccountCard also provides a credible platform for implementing an EITC saver’s bonus to promote and incentivize saving among low- and moderate-income tax filers—giving them a financial incentive to save and build wealth that many high-income people enjoy.
Prepaid cards at tax time will make tax time a little easier on low-income unbanked families—and provide them with a valuable tool to cover their banking needs all year long.
Tax image from Shutterstock.