Abstract

This report, co-authored by the Progressive Policy Institute's Work, Family & Community Project and the Brookings Institution's Center on Urban & Metropolitan Policy, details for the first time how the use of tax preparation services and "fast cash" refund loans is concentrated among working poor families and neighborhoods.

In the Washington, D.C. area, the report finds that a typical recipient of the federal Earned Income Tax Credit (EITC) for low-income workers pays roughly $200 for commercial tax preparation, electronic filing and a "rapid refund" loan. Nearly $2 billion in EITC refunds nationwide were diverted to pay for these services and products in 1999, with more than half of all low-income families purchasing refund loans in some of the nation's largest cities and suburbs.

The authors outline a policy agenda that would help to preserve the full value of the Earned Income Tax Credit, including: simplifying tax credits for low-income families; broadening the availability of free and affordable tax prep assistance and electronic filing of returns; and expanding access to low-cost bank accounts to promote direct deposit of EITC refunds.

Key Findings

A study of how low-income taxpayers collect tax refunds, including an analysis of the spatial distribution of commercial tax preparers and "rapid refund" loans in the nations 100 largest metropolitan areas, finds that: In the Washington, D.C. area, taxpayers claiming an Earned Income Tax Credit (EITC) of $1,500 spend, on average, more than 10 percent of this amount on tax preparation, electronic filing and a refund loan if they use a commercial tax preparer. One local preparer's prices were typical of those for national chain preparers: $60 for preparation of a federal return with the EITC, $34 for a state return, $20 for electronic filing, and up to $90 for a refund loan, for a total of $204. The nation's largest commercial tax preparation service and tax refund lenders earned $357 million from "fast cash" products in fiscal year 2001. This more than doubled the approximately $138 million these companies earned on similar products in fiscal year 1998. Electronic tax filing and reparation services cluster in neighborhoods where large numbers of families claim the EITC. High-EITC zip codes are home to 50 percent more electronic tax reparation services per filer than low-EITC zip codes. Cities and suburbs in the U.S. South and West are home to low-income neighborhoods with the highest concentrations of tax preparers. An estimated $1.75 billion in EITC refunds in 1999 was diverted toward paying for tax preparation, electronic filing and high-cost refund loans. In 1999, nearly half of the $30 billion in EITC claimed nationwide was refunded through high-priced loans.