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Poor workers got fast cash at high prices

Much of tax credit went to loan companies, study says

By JOEL DRESANG of the Journal Sentinel staff

Thursday, May 30, 2002

Nearly $2 billion in tax credits earmarked for low-income workers instead went to businesses that offer high-interest loans against pending tax refunds, according to a new study by the Brookings Institution and the Progressive Policy Institute.

About $15 billion of the $30 billion paid out in earned income credits reached low-wage workers through so called anticipation loans from tax preparation firms.

An analysis of the largest 100 U.S. cities found that one in five of central Milwaukee's taxpayers, or more than 24,000 families, filed for the earned income tax credit in 1999. Of those, half borrowed against the money with refund anticipation loans -- short-term deals based on anticipated tax refunds.

Fees on those loans amount to annual percentage rates of 67% to 774%, according to a recent report by the Consumer Federation of America and the National Consumer Law Center.

The federal and state earned income tax credits pumped more than $82 million into the hands of 29,000 Milwaukee families in 2000, which helped lift 4,700 of those families out of poverty, said John Pawasarat, director of the Employment & Training Institute at the University of Wisconsin-Milwaukee.

Pawasarat, who has been tracking detailed data on nine central Milwaukee ZIP codes for five years, said the diversion of tax credits to rapid loans diminishes the economic impact on those families.

"The amount of money that's there from the EITC is eroded," said Pawasarat, whose latest study found a continued rise in employment levels, housing values, child-care funding and earned income tax credit use in the city.

The national study used data from the Internal Revenue Service and corporate reports from H&R Block Inc. and Jackson Hewitt Inc. to suggest that such tax preparation firms are more concentrated in low- income areas in part to profit from the desire of poor workers for fast cash.

A typical example in Washington, D.C., according to the study, was a taxpayer receiving $1,500 in tax credits spending $204 -- nearly 14% -- for tax preparation ($94), electronic filing ($20) and refund loan ($90).

Denise Sposato, a spokeswoman at H&R Block headquarters in Kansas City, Mo., said the complex rules for filing for an earned income tax credit refund drives a lot of low-income workers to professional tax preparers. She said the additional services of electronic filing and rapid loans are available to all the firm's customers, which this year exceeded 18 million, about one-seventh of all the returns received by the IRS.

"Because of need, speed and convenience, they are very popular with a number of our clients," Sposato said of the refund loans. "It's an individual choice."

The study concluded that because the government drives the need for tax preparation services, the government should take steps to ease the burden of such services on poor taxpayers. Among their recommendations:

-- Simplify filing requirements, especially for families below the poverty line.

-- Expand the availability of free or low-cost help.

-- Make free or low-cost electronic filing available to low- income taxpayers.

-- Help low-income filers set up low-cost bank accounts where the IRS can deposit refunds.

-- Promote consumer awareness of the costs of rapid refund loans.

Christine Bauman, an accounting professor at UWM and director of an IRS-funded clinic for low-income taxpayers at the school, applauded the recommendations and called for the expansion of free tax filing services for poor workers.

"The tax issues faced by low-income individuals, especially with these credits, are very complex," Bauman said. And often, she said, the complexity is compounded by a lack of financial savvy among those taxpayers.

National report:www.brook.edu/dybdocroot/es/urban/publications/ berubekimeitcexsum.htm Milwaukee neighborhood indicators:www.uwm.edu/ Dept/ETI/2001/indy01cd.htm

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