Tax refunds may look a little different this season in some states. Instead of issuing paper checks, a number of states will require that taxpayers receive their refunds either through direct deposit or, for those who are unbanked, prepaid debit cards. While the use of direct deposit and debit cards may save states money by cutting down on printing and mailing costs, taxpayers may wind up paying more in the long run.
Most states currently offer direct deposit, and some, including Illinois and South Carolina, encourage electronic payment of refunds but still offer to mail checks to those who want them or to those who do not have bank accounts. Increasingly, however, states have stopped mailing tax refund checks in favor of electronic transfers and prepaid cards. Oklahoma, Louisiana, Georgia, and Connecticut are among these states.
Oklahoma recently introduced the Tax Refund Card, which will be administered by MasterCard. Although the state claims that the card is a safe, convenient, and secure alternative to the traditional refund checks, many Oklahoma taxpayers are unhappy with the decision due to the card’s ATM fees and a $1.50 inactivity fee. Free withdrawals are available at any MoneyPass ATM network, but this network has limited locations, forcing consumers to use other networks that charge fees. Additionally, due to limits on ATM withdrawal amounts, taxpayers may have to make multiple withdrawals, thereby incurring multiple fees.
Both Louisiana and Connecticut have contracts with Chase to offer a similar tax refund debit card. In 2011, over one million Connecticut residents received tax refunds, while 45% of Connecticut taxpayers received paper checks. This year, this 45% will be receiving prepaid debit cards and paying hefty fees to access their money.
An estimated 7.7%, or over 9 million Americans, are unbanked and therefore, do not have the option of direct deposit. Their only option will be such prepaid tax refund cards and the fees associated with them. One solution to this problem would be for states to create BankOn initiatives, which offer the unbanked the opportunity to open low-cost accounts at mainstream financial institutions. These include so-called “second chance” accounts that provide those who have had an account closed in the past a second chance to open a new account. By starting BankOn programs, states have the opportunity to not only save the costs associated with paper refund checks, but also to provide their unbanked residents with a chance to enter the mainstream financial market. Ultimately, such access will enable residents to save more at tax time and build assets for the long term. Instead of taking a narrow view solely focused on cost containment, states need to expand their focus to include creating asset building opportunities for their residents that, in the long term, will prove even more lucrative for states.
This blog post was coauthored by Alison Terkel.