Tax Refund Loans Cost Ohio a Bundle
Posted April 08, 2006 in Op-Eds
As the federal income tax deadline nears, be careful about running to the nearest tax shop to get your taxes done.
Well, many paid preparers can take a large chunk of your refund by charging preparation fees and persuading you to purchase refund-anticipation loans and insurance on your return.
In 2004, more than 500,000 low-income families in Ohio went to a paid preparer and 300,000 purchased a high-interest refund-anticipation loan.
They spent an average of more than $270.
A recent report that I wrote for Policy Matters Ohio, “Credit Where It’s Due,” documented that more than $100 million left the hands of working families in Ohio because of paid preparation and refund-anticipation loans.
A refund-anticipation loan is a high-interest, short-term loan based on a customer’s tax refund.
The customer gets the tax refund immediately, minus a large fee taken by the lender.
How large a fee?
In Ohio, the average refund-anticipation loan cost, not including paid preparation fees, was $130, costing Ohio families more than $39 million.
This cost equates to an annualized interest rate of about 150 percent for a 10-day loan on a refund of $1,700 (the average federal Earned Income Tax Credit refund in Ohio).
It’s no coincidence that seasonal paid preparers set up shop in low-income areas. Services like refund anticipation loans and tax-refund insurance are marketed to a greater extent to those with modest incomes.
These families are targeted, in part, because they are eligible for the Earned Income Tax Credit.
The EITC is a refundable credit available to some families and individuals making less than $38,000 a year.
The credit maximizes at $4,200 and varies depending on the number of children and yearly income.
In 2005, the EITC did more than any other government program to bring families above the poverty line.
The EITC helps working families pay bills and purchase basic needs, but it also has a value in local communities.
Studies show that much EITC refund money goes directly toward goods and services purchased in the community.
The EITC can help families pay off debt from utility and credit card bills.
Last year, the program brought more than $1.2 billion in federal money to more than 769,000 Ohio families.
There is good news for this region and its working people. Around Cuyahoga County, several locations offer free tax assistance for those who qualify.
At these Volunteer Income Tax Assistance (VITA) sites, trained and certified volunteers from the community prepare taxes and offer other information about public benefits and asset building.
The services are free, and the refunds come fast. Learn more by calling United Way First Call for Help at 211, or visiting www.refundohio.org.
There are three ways to make the EITC and VITA programs even more successful.
Ohio can enact a state EITC program, as 19 other states have done. If we set a state credit at 20 percent of the federal credit, more than 769,000 Ohio families would get an average $344 state EITC annually.
This would help Ohio workers, particularly those with children, at a cost of about 2 percent of the state budget.
Ohio could regulate refund-anticipation loans by capping the loan rate and holding paid preparers to stricter standards.
At least nine states have enacted laws to protect families from these predatory practices.
Communities and the state should invest more time and resources in VITA sites.
Cuyahoga County provided generous support to the VITA effort and will see approximately $2 million in refunds from Cleveland VITA sites through the newly formed Cuyahoga EITC Coalition.
Many tax breaks have gone to the wealthiest in recent years.
The EITC is one benefit that helps lower-income workers support themselves and their families.
Using it and strengthening it is an important way to move toward an economy that works for everyone.
Rothstein is a research assistant at Policy Matters Ohio.