Electronic Tax Refunds Add Additional Burdens for the Underserved

Credit card swipeVirginia has announced that effective January 2013 the state will provide all tax refunds electronically. In other words, receiving a tax refund in the form of a paper check will no longer be an option for Virginia residents. Instead tax filers will have the option of having their refunds directly deposited into their bank accounts or receiving their refunds on a prepaid MasterCard called the “Way2Go Card.”

The movement away from paper checks and towards electronic benefits payments is not surprising. In 2010 the federal government announced that effective March 2013, but for a few exceptions, everyone receiving federal benefits (such as Social Security and veterans benefits) will receive their benefits electronically either by direct deposit or on a MasterCard prepaid card called the Direct Express CardAs discussed in a recent Clearinghouse Review article, the new federal electronic payment requirements are just the next step in an evolving movement.

The Virginia prepaid card has a fee structure similar to that of the Direct Express card. If used properly, a cardholder could avoid all fees associated with the card. If not, however, cardholders could rack up fees. With the Way2Go Card, cardholders receive one free ATM withdrawal per month at any MoneyPass ATM; additional withdrawals cost $2.50 each plus any additional ATM surcharges. Cardholders who overdraft their accounts face an overdraft fee of $0.50. Since cardholders are charged $2 to talk to customer service representatives on the phone after the first two calls, cardholders need to use the Internet if they want avoid fees to check balances and transaction histories. While the State of Virginia claims that these prepaid cards will allow the unbanked to avoid check cashing fees, many consumers may incur card fees that end up equaling or even surpassing check cashing fees. 

Virginia is not the only state to contract with credit card companies in order to distribute tax refunds; Oklahoma, Louisiana, and Connecticut have similar programs. Although these programs may save the state money, they may not be the best for unbanked/underbanked tax filers. These cards are meant for people without bank accounts, but they do little actually bring these individuals into mainstream banking. Instead, a more productive approach would be to use these accounts to initiate savings or checking accounts for un/underbanked people.

The U.S. Treasury developed this idea in 2011 and piloted a program where people could have their tax refunds placed on a debit card that allowed for checking and savings capabilities. According to the evaluation of the pilot, this type of program could be feasible on a large scale. Moreover, in addition to still saving states money, it would address the problem of the 34 million Americans who are un/underbanked. It is these kinds of win-win situations that we should be pursuing.      

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