The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

The 2013 tax season is officially in full swing, and this year consumers no longer have to worry about refund anticipation loans (RALs).  RALs are short-term, high-interest, payday loan-style bank loans sold through tax-preparation sites. The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds; however, like payday loans, RALs have usurious interest rates and hidden fees. Fortunately, tax preparers will no longer be able to offer RALs this tax season.

In 2010, the Internal Revenue Service (IRS) stopped providing its “debt indicator” device to tax- preparers. As a result federal banking regulators such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued cease and desist orders to banks funding RALs. According to federal banking regulators, because the IRS debt indicator was no longer available, tax preparers’ ability to adequately underwrite RALs was undermined. Banks were, therefore, engaging in unsound lending practices when making loans to tax preparation companies to fund RALs. The effect of these cease and desist letters was to prohibit banks from lending to tax preparers, forcing them in turn to cease offering RALs as of the 2012 tax season. Thus, in 2011 only 750,000 RALs were issued.   

Unfortunately, since tax-preparers earned millions from RALs (a high of $1.24 billion at their height in 2004), and they are no longer allowed to offer them, they have switched to a similar product that hasn’t been subjected to the same scrutiny by federal regulators: Refund Anticipation Checks (RACs). RACs are temporary bank accounts set up by the tax-preparer on behalf of a taxpayer into which the IRS direct deposits a refund check. Consumers access the money through a check or prepaid card. Consumers typically pay about the $30 to set-up the one-time use account. 

A recent report by the National Consumer Law Center (NCLC) looks at RAC growth in recent years. In 2009 12.9 million taxpayers used RACs at a cost of $387 million. By 2011, the number of RAC consumers grew to 18.3 million taxpayers paying about $550 million. Given that RALs are no longer offered, the number of RACs issued is likely to grow in 2013.

According to the NCLC report, many tax-preparers engage in deceiving practices that allow them to squeeze as much money as they can from consumers. Tax-preparers often charge add-on fees such as document processing or e-filing fees. Thus, the report estimates that RAC consumers paid a total of $140 million in add on fees in 2011. The study also points out that many people use RACs to pay for the services of the tax-preparer, which ultimately serves as a loan with a usurious interest rate. For example, a person is, in essence, paying $30 to defer a $200 tax-preparer fee for three weeks when they use a RAC. The annual percentage rate (APR) equivalent here is 260%. In addition, by allowing taxpayers to deduct the cost of tax-preparation from the RAC, the consumer is less sensitive to the cost of tax-preparation. Finally, a 2010 study using “mystery shoppers” revealed that many tax-preparers automatically sell RACs to consumers without consumers’ knowledge.

The NCLC report also warns about the new nonbank RALs, which have been sold to a few hundred thousand consumers thus far. These RALs are being offered by high-cost non-bank lenders such as payday lenders and other non-bank businesses that have stepped in to replace the banks that can no longer finance RALs. Nonbank RALs are riskier and more expensive to consumers; however, according to the report, such products have yet to really take off.

The largest issue surrounding RACs is that they allow tax-preparers and banks to profit from the Earned Income Tax Credit (EITC). The EITC is the nation’s largest federal anti-poverty program providing nearly $58 billion to 26 million families in 2011. The EITC is meant for low-income people earning incomes near the federal poverty level. According to the NCLC, EITC recipient who purchased RACs and RALs paid a total of $2.2 billion to tax-preparation organizations. Theoretically 100% of the this money should be in the hands of low-income people, but because our tax system is so contrived, complex, and inefficient,  tax-preparation companies like H&R Block and Jackson Hewitt are able to siphon off a large chunk of this money (almost 4%).

Ultimately, the federal government needs to make it simpler for people to access their tax refunds faster and more easily. The Treasury Department ran a pilot program offering the unbanked and underbanked tax refund initiated bank accounts. This demonstration project showed a lot of promise and could be brought to scale. Additionally, the IRS now allows consumers to check the status of their tax refunds online at the “Where’s my refund” website. Consumers who file their taxes digitally can expect to receive their refund in fewer than 21 days—the same time frame for receiving a RAC. Finally, consumers should be encouraged to take advantage of the free Volunteer Income Tax Preparation (VITA) sites across the country, so that they don’t waste their hard-earned money on unnecessary tax preparation schemes. All consumers should be able to access 100% of their tax-returns.

To read more about the demise of RALs see our previous blogs.

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What do gradually raising the retirement age for Medicare and Social Security, reducing military defense spending, and limiting the home mortgage interest tax deduction have in common?

The answer: Each of these deficit reduction options is more popular with the American public than reducing federal funding for programs that help lower income Americans.

Polling released by the Pew Research Center last week compared the public’s support for different deficit reduction strategies and found that cutting funding for programs that help the poor is “particularly unpopular,” disapproved by the public by a margin of 58-38%.

The most popular deficit reduction options put the burden on those who are able to afford it, including raising the income tax on income over $250,000 (69-28% approve), limiting tax deductions, raising taxes on investment income, and reducing Medicare and Social Security benefits for higher income seniors.

These poll findings demonstrate strong public support for rejecting deficit reduction measures that increase poverty, hardship, and inequality. The Bowles-Simpson National Commission on Fiscal Responsibility and Reform expressly endorsed this principle in crafting its deficit reduction package, and every previous deficit reduction agreement has adhered to it.

The Pew polling found that an overwhelming majority (74%) agree that deficit reduction must be accomplished by a balance of tax increases and spending cuts, with only 7% saying the focus should be on mostly tax increases, and 11% saying the focus should be mostly on spending cuts.

The Pew polling also yielded a number of political findings – notably that President Obama’s job approval rating is up, that he is viewed as making a serious effort to work with Republicans, and that the Republican Congress and Speaker Boehner are viewed very unfavorably and will be blamed if a deficit reduction agreement is not reached.

Polling findings, however, do not equate with political outcomes. The budget written by Rep. Paul Ryan and passed by the full House of Representatives earlier this year would have cut taxes for the average millionaire by $265,000, paying for this largesse with massive spending cuts. Two-thirds of these spending cuts would have come from programs for low-income people like the Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps) and Medicaid.

Hence, there is a very wide chasm between what the House Republicans want and what President Obama, joined by a strong majority of the American people, wants. This chasm must somehow be bridged if there is to be a deficit reduction agreement that avoids the fiscal cliff.

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As we ring the 2012 New Year we can say goodbye and good riddance to Refund Anticipation Loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites. The allure of RALs was that they provided taxpayers an immediate advance on their anticipated tax refunds. However, customers are often not aware of the usuriously high interest rates and hidden fees associated with the loan. Triple digit interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL are not unheard of.

A report released by the U.S. Department of the Treasury confirmed what consumer advocates have known all along: the primary markets for RALs are impoverished communities. RALs are concentrated in the country’s poorest areas, with 46.8 percent of RALs in only 10 percent of the nation’s zip codes. The majority of RAL users can be classified as “working poor,” with median adjusted gross income for RAL users at less than $20,000.

But now RALs are dead. In December of last year the Federal Deposit Insurance Corporation entered into a settlement agreement with Kentucky based Republic Bankcorp Inc. that will prohibit the bank from continuing to fund RALs. The demise of RALs was slow and painful. Over the last several years, federal banking regulators and the Internal Revenue Service (IRS), recognizing the danger and negative impact of RALs, slowly but surely began to prohibiting the practice of selling RALs.

As early as 2008, the IRS and the U.S. Treasury Department issued an advance notice of proposed rulemaking regarding the marketing of RALs. Although no final rules were issued at that time, in January 2010 the IRS announced it was creating a Task Force to study RALs.  

In February 2010 the Office of the Comptroller of the Currency (OCC) issued new guidance on the delivery of RALs. In addition to this new guidance, both the OCC and the Federal Deposit Insurance Corporation issued cease and desist orders to banks funding RALs. In August 2010 the IRS announced that starting with the 2010 tax filing season it would no longer provide tax preparers with the mechanism they had been using to underwrite RALs. This so-called “debt indicator” tool gave tax preparers an indication of whether a client would have any portion of his/her refund offset for delinquent tax or other debts including unpaid child support or delinquent student loans. Preparers used this indication to decide whether or not to offer a customer a RAL as an incentive to immediately pay for the fees of tax preparation and get cash in hand. Since refunds can generally be received within 10 days of filing electronically, the IRS decided that there was no longer a need for the debt indicator or RALS. As IRS Commissioner Doug Shulman explained at the time: “Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.” Then in October 2010, the Office of Thrift Supervision (OTS) issued a supervisory directive to Iowa-based MetaBank Financial stating that the bank was guilty of engaging in unfair and deceptive practices through its funding of Jackson Hewitt’s RAL products and requiring it to obtain written approval before entering into any new third-party relationship agreements. 

Shortly thereafter, in January 2011, the OCC prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever, thereby ensuring that H&R Block, could not offer RALs. The year prior, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, just as H&R Block was forced to leave the RAL market Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program for the 2011 tax season. Yet, in the midst of the 2011 tax season, the Federal Deposit Insurance Corporation ordered Republic Bank to stop providing RALs.

As soon as the Federal Deposit Insurance Corporation (FDIC) issued the cease and desist order to Republic Bank, the only two other banks funding RALS, fearing similar actions against themselves, announced that they would leave the RAL market. Since Republic charged on average $90 for a $1,500 RAL and earned over $44 million, or 69% of its net income, from providing loans to Jackson Hewitt and Liberty Tax in 2010, it quickly appealed the FDIC’s decision and the case resulted in the recently announced settlement agreement. Pursuant to the settlement agreement, Republic Bank while pay a fine of $900,000, but more importantly it must leave the RAL market by the 2013 tax season. In the meantime, federal regulators will closely monitor Republic’s tax-refund business. 

The death of RALs is a great achievement for consumer advocates and provides needed protection for low-income families. Yet, tax preparers are likely to begin marketing an alternative product, Refund Anticipation Checks (RAC), a less risky but still costly product to the consumer, instead. An RAC is a temporary bank account set up by a tax preparer on behalf of a taxpayer into which the IRS direct deposits a refund check. Consumers access that money through a check or prepaid card. When the money is gone, the account closes automatically. Consumers typically pay about $30 to set up the one-time use account. If they opt to get a paper check, they could end up paying a check-cashing fee, too. In 2009, about 12.9 million filers got refunds via an RAC, but this number is likely to increase now that RALs are gone.

Through generally cheaper than a RAL, enrolling in an RAC program doesn't make a lot of financial sense, either. Consumers would be wiser and save money by preparing their taxes themselves or going to an IRS Volunteer Income Tax Assistance (VITA) site and having their taxes prepared for free. The IRS Volunteer Income Tax Assistance Program (VITA) and the Tax Counseling for the Elderly (TCE) Programs offer free tax help for low- and moderate-income taxpayers. Trained VITA site volunteers also help those who are eligible receive the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), or credit for the elderly and disabled. Taxpayers should then open a low-cost or free checking and saving accounts with a BankOn affiliated bank so they can opt in for a direct deposit of their tax refund. VITA sites begin to open at the end of January, so begin preparing for tax season early to receive a tax refund for free.

Although RALs are dead, and no one will be at their funeral, consumers must remain vigilant and continue to avoid costly products at tax time.

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Public policy is about making choices. It is about making the best use of the scarce resources that are available to accomplish our desired policy result. Resources used one way cannot be used another; we have to make choices. Now, in the midst of the worst national economic crisis since the Great Depression, with meager rates of national economic growth and persistently high and extended periods of unemployment, the stakes riding on our policy choices have never been higher.

The Republicans’ consensus position is clear. Do not raise taxes. In Speaker Boehner’s words, “ It’s a very simple equation. Tax increases destroy jobs.” Grover Norquist’s pledge to oppose any and all tax increases has been signed by 236 of 242 Republican members of the U.S. House of Representatives (98%) and 40 of 47 Republican members of the U.S. Senate (85%).

The first question to ask about the Norquist no tax pledge is whether it is fair, that is, is it fair that the wealthy pay no more than they do now and that our budget deficit be reduced solely by decimating programs that most Americans need? Simply considering where the gains in wealth have gone over the past 30 years, the answer is hell no, that's not fair.

From 1979 to 2007, income grew by 95% among the wealthiest 20% of Americans while it grew by only 25% among the other 80% of Americans. Even more shocking, income among the top 1% of Americans grew by 281%. Put another way, for every dollar of real economic growth generated over the past 30 years, 58 cents has gone to the top 1% of households. Case closed.

But fairness does not end the inquiry. Indeed, if raising taxes on the wealthy would hurt the economy and destroy jobs, as Speaker Boehner contends, then while it might be fair it would not be good public policy. The fact is, however, that concentrating wealth in the hands of the few is not only unfair, it is ruinous to the economy. 

That is why the bipartisan Congressional Budget Office (CBO), in its January 2010 report, “Policies for Increasing Economic Growth and Employment in 2010 and 2011,” concluded that extending the Bush tax cuts for the wealthy, when compared to other policy alternatives, would be the worst possible way to spur economic growth and job creation. The reason, according to the CBO, is simple. When the economy is weak, spending is needed to stimulate it. But wealthy people, given an extra dollar, are much more likely to save it while lower income people are much more likely to spend it, and spending it is what increases demand, spurs economic growth and creates jobs.

The CBO report compared the impact on economic growth and job creation of various policy alternatives. The CBO found that compared with extending the Bush tax cuts for the wealthy:

• Extending unemployment insurance benefits would generate 5 times as much economic growth and create 4 times more jobs.
• Reducing employees’ payroll taxes would generate 2 times as much economic growth and create 1.5 times more jobs.
• Reducing employers’ payroll taxes would generate 3 times as much economic growth and create 3 times more jobs.
• Investing in infrastructure would generate 4 times as much economic growth and create 3 times more jobs.
• Providing aid to states for purposes other than infrastructure would generate 3 times as much economic growth and 2 times more jobs.

The jobs plan announced by President Obama on September 8 includes all of the elements that the CBO found would stimulate economic growth and create jobs. His proposal would extend unemployment insurance benefits for another year; halve the payroll tax paid by employees to 3.1% through 2012; create new reductions in payroll taxes for certain employers; invest in infrastructure including building, repairing and modernizing roads, bridges, railroads, airports and 35,000 schools; and provide aid to states to pay for teachers and first responders.

The deficit reduction plan proposed by President Obama on September 19 would largely pay for his jobs plan, and reduce our long-term budget deficit, by ending the Bush tax cuts for wealthy Americans.

Earlier this year, Congressman Paul Ryan proposed a long-term budget and deficit reduction plan. Ryan’s plan would have dismantled Medicare and turned it into a private insurance voucher program with massive cost shifts to beneficiaries. It also would have cut funding for the Supplemental Nutrition Assistance Program (formerly Food Stamps) by nearly 20% and converted it into a block grant completely unresponsive to increased need during a recession.

Ryan’s proposed budget was the first salvo in the new Congress’s economic mantra of achieving deficit reduction and stimulating the economy solely by cutting spending while abiding by their pledge to Grover Norquist never to raise taxes. This dogma, so misguided and destructive to restoring our country’s prosperity, was put in perspective by David Stockman, President Reagan’s leading economic adviser as his Director of the Office of Budget and Management, in his assessment of Ryan’s plan:

"I think the biggest problem is revenues. It is simply unrealistic to say that raising revenue isn't part of the solution. It's a measure of how far off the deep end Republicans have gone with this religious catechism about taxes."

The author wishes to thank Shriver Center policy intern Michael Elsen-Rooney for his research assistance.

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First the good news: last week’s agreement to raise the debt ceiling averted a catastrophic default on U.S. obligations that would have triggered a worldwide financial crisis. Now the bad news: the Budget Control Act of 2011 will immediately result in deep cuts to vital programs for vulnerable populations and will likely result in even greater cuts in the future, without balancing those cuts with increases in revenue. Indeed, it does not provide for any increase in revenue at all. Below is a summary of the main points of the accord, with analysis of what the resolution of this crisis bodes for the future.

The agreement raises the debt ceiling by $2.1 trillion, enough that it won’t have to be raised again until after the next presidential election in November 2012. The agreement also provides that the deficit will be reduced by more than $2 trillion over the next 10 years, with deficit reduction occurring in two steps.

Step one is a spending reduction of $900 billion over the next 10 years, accomplished with binding caps on annual appropriations bills. All of these cuts will be made to “discretionary spending”. Entitlement spending, including safety-net entitlement programs for low-income people, is exempt from being cut. In addition to the “big three” entitlement programs – Social Security, Medicare and Medicaid – other non-discretionary programs exempted from being cut include:

• child care mandatory assistance;
• child nutrition entitlement programs, e.g., school meals;
• Children’s Health Insurance Program (CHIP);
• child support enforcement and family support programs;
• Pell Grants;
• foster care and permanency programs;
• Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps);
• Supplemental Security Income (SSI);
• refundable tax credits, including the Earned income Tax Credit and Child Tax Credit; and
• Temporary Assistance for Needy Families (TANF).

Discretionary programs that are subject to the caps that will result in $900 billion in cuts over the next 10 years include:

• discretionary (non-mandatory) child care assistance;
• Head Start;
• Women, Infants and Children (WIC) nutrition program for low-income women, infants and small children;
• maternal and child health;
• Title X family planning services;
• low-income housing assistance;
• low-income energy assistance; and
• Older Americans Act congregate and home-delivered meals.

Step two is complicated. It begins with the congressional appointment of a 12-member deficit reduction super committee, with three members appointed by each legislative leader. The super-committee’s charge is to come up with a deficit-reduction package that saves at least another $1.5 trillion over the next 10 years. The super committee is free to consider all possibilities, including more cuts in discretionary spending, cuts in entitlement spending, and revenue-raising measures. If a majority of the super committee agrees on a proposal, then it will be submitted to Congress for an up-or-down vote by the end of this year.

If, as largely expected, the super committee does not reach an agreement on a deficit-reduction package -- or Congress does not approve the package or the President vetoes it -- then federal spending will automatically be reduced by $1.2 trillion over the next 10 years through a process called “sequestration.” Entitlement programs (listed above) would be exempt from cuts, and revenue would not be increased. Rather, all of the cuts would come from discretionary programs, with half of the reduction coming from domestic programs and the other half from defense spending. This would amount to a 9 percent decrease in both domestic discretionary spending and defense spending – an amount that many believe would seriously compromise national security. The cuts made by sequestration would not go into effect until January 2013.

Speaker Boehner has already announced that the U.S. House of Representatives will not approve any revenue increases that the super-committee may recommend. To understand what the impact of a “cuts only” proposal would be, it’s worth considering the deal that President Obama and Speaker Boehner recently discussed. That ultimately unsuccessful deal would have:

• raised Medicare’s eligibility age and cost-sharing charges;
• shifted significant Medicaid costs to states;
• modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code); and
• instituted other entitlement savings.

All of those steps would have saved $650-$700 billion over 10 years, representing only one-half of the cuts that the super committee will have to produce.

One other noteworthy provision in the Budget Control Act of 2011 is an agreement to allow an up-or-down vote of the House and the Senate this fall on a constitutional amendment to balance the budget, threatening to enshrine this popular but fiscally ruinous principle in the U.S. Constitution.

To sum up, the most disturbing aspect of the Budget Control Act of 2011 is that it achieves all of its savings through spending cuts despite polling that shows a large majority of Americans across all population sectors supports a balanced approach that includes increasing taxes on the wealthy and big corporations to help reduce the deficit. This cuts-only approach sets an extremely disturbing precedent for future budget and spending battles.

Second, although some of the most extreme proposals floated this year, such as a global spending cap or super-majority requirement to raise taxes or the debt ceiling, were not included in the final agreement, it does include the mandatory spending reduction mechanism of sequestration. And, while low-income entitlement programs are exempt from sequestration, discretionary programs on which low-income populations rely enjoy no such protection and are, in fact, under a direct threat to be heavily cut.

So what does the future hold? For one thing, it appears that Medicaid is now in the cross-hairs. Conservatives in Congress have consistently signaled a desire to scale-back Medicaid. They receive strong support for this agenda from conservative governors who seek the power to generate state budgetary savings if Medicaid is changed to allow them to cut the program and roll-back eligibility. It’s hard to see how any of this can be squared with implementation of the Affordable Care Act, whose health care reforms rely on expansion of the Medicaid program to insure 16 million currently uninsured people.

Now that the debt ceiling has been raised for the time being, the next flashpoint will be the adoption of a budget for the next federal fiscal year beginning October 1. Typically, no agreement is reached by that date, and the government continues to operate based on a series of “continuing resolutions” until a full-year budget is agreed upon. If one of these continuing resolutions runs out without an agreement to extend it, then the federal government shuts down. A sizable majority of the House Republicans just demonstrated their willingness to risk a global financial cataclysm to achieve their policy ends. There is little reason to doubt that they will be willing to engage in such brinksmanship again. Indeed, they may attempt to extract even greater concessions when all that is at stake is the continued operations of the federal government, since they will feel there is less to lose in provoking a crisis. The template for resolving such a crisis, as established by this debt ceiling deal–substantial spending cuts, no revenue increases, a mandatory mechanism to enforce deficit reduction–sets a bad precedent for future policy negotiations, unless different tactics are adopted by proponents of important spending priorities for struggling Americans.

Beyond that, there are a number of events that will be occurring in the lame-duck session just after the next presidential election in November 2012. The Bush tax cuts will be expiring; the January 2013 automatic sequestration cuts (assuming no super committee agreement that becomes law), including deep cuts in national defense, will be taking effect; and the debt ceiling will have to be increased again. The battles that were just waged thus are simply the prelude for many more to come. 

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Illinois’s fiscal year 2012 (FY12) budget saga ended last week, at least for the time being. Governor Quinn approved a final budget, exercising his amendatory veto to make some further spending reductions. The General Assembly will meet later in the year to take action to approve or reject the amendments. 

The general trend of this budget is both better and worse than it could have been. Illinois needed to take major steps in a balanced approach to solving the state’s immense fiscal crisis. It needed to generate significant new revenue while also getting control of the spending side. In January, the General Assembly passed and the Governor signed legislation that made major progress on the revenue side. Without that step, the carnage in the budget would have been unthinkable, and Illinois would probably be in default on many fronts. On the spending side, however, while austerity was needed and expected, the final budget includes far deeper cuts in programs that serve Illinois’s most vulnerable populations, and some of its most important priorities, than were needed.

The final state budget includes about $2 billion less in spending than Governor Quinn had proposed at the start of the FY12 budget process in February. Some of the most damaging cuts for low-income people and other vulnerable populations are:

• General State Aid to schools. The final budget is $400 million less than the Governor’s proposed budget. In addition, $400 million in federal funding that had been provided pursuant to the American Recovery and Reinvestment Act has ended. The greatest impact will be felt by school districts that rely more heavily on state aid because they are low-income and have lower local property tax revenues.
• Community mental health services – cut by $55 million, or 20%.
• Temporary Assistance for Needy Families (TANF) – 1/3 less funding allocated to TANF in FY12 than the amount needed to serve the current caseload, which has grown due to the recession, persistent high rates of long-term unemployment, and improvements in program access.
• Elimination of the Transitional Assistance program that provided a small amount of income support to 9,000 not employable adults in Chicago.
• Cuts of up to 50% in programs for very high-risk children, including teen after school and children’s mental health programs.
• Early Childhood Block Grant – cut $17 million, a 5% reduction on top of last year’s 10% reduction. Will result in 4,000 fewer three- and four-year-olds being enrolled in preschool for all and 1,000 fewer high-risk children aged 0-3 receiving developmental screenings and other services.

These severe cuts have been justified as necessary to “live within our means,” but the truth is that these cuts were not dictated by economics but rather were the product of political considerations.

The adoption of a temporary increase in the state income tax from 3% to 5% during the January “lame duck” session, just before the newly-elected legislators took office, triggered the series of events that led to these cuts. Speaker Madigan’s immediate concern in the wake of the Democrats’ decision to approve a tax increase was the size and strength of the backlash his members would face for that vote. He used the FY12 budget process to attempt to insulate them from this backlash.

The first thing the Speaker did was to make the budget process in the House bipartisan, a departure from past practice. Speaker Madigan and Minority Leader Cross collaborated closely throughout the budget process, and rank-and-file Republican members were included in budget deliberations.

The next step was to adopt a lowball revenue estimate that would necessitate bigger than needed cuts. The House ignored the revenue estimate of the General Assembly’s own bipartisan revenue-estimating agency and instead worked off an estimate prepared by the Governor’s Office of Management and Budget, making some downward adjustments. As a result of the lowball estimate it used, the House had $1 billion less to appropriate than the Senate. When, later in the session, the Governor’s office, based on more recent economic information about the performance of the Illinois economy, revised its estimate upward to the Senate level, the House did not come along.

Next the House locked itself into the lowball revenue estimate by passing a resolution that required any revenues collected in excess of the lowball estimate be solely devoted to paying off old bills, preventing such additional revenue from being used to ameliorate the effects of harsh budget cuts.

The House and Senate passed separate budgets based on different revenue estimates. There was no real effort to reconcile the two budgets, as House members adhered to their resolution and refused to apply any additional revenues to reduce the cuts. No compromise was offered as the May 31 deadline for adopting a state budget without needing a super-majority loomed. Rather than bring the Senate Republicans, who had earlier proposed a budget with several billion more in cuts, into the budget process, the Senate Democrats capitulated to the Speaker and passed the House budget.

Senate President Cullerton made a last-ditch attempt to restore about half of the House’s cuts by attaching an amendment to the bill authorizing the expenditure of funds on capital projects, e.g., roads. When Gov. Quinn announced that summer construction projects would be halted in mid-June if the capital bill was not passed by both Houses, it appeared that he and President Cullerton might have teamed up to exert leverage on the Speaker. But in the end, Gov. Quinn called on the Senate to give in and drop the amendment so that construction could continue as scheduled. 

How could deeper-than-necessary cuts have been avoided? The Responsible Budget Coalition and others championed a number of reasonable proposals to obtain the revenue needed to avoid devastating cuts without raising taxes. The most obvious one of these was to revise the revenue estimate upwards. Another recommendation was that Illinois “decouple” from a change in federal tax law that accelerated the depreciation schedule for big corporations that make large equipment purchases. Under Illinois’s tax code, absent action by the General Assembly, Illinois tax law would automatically provide this tax break as well. In the past, Illinois has de-coupled from similar changes in federal tax law to avoid major revenue losses. But this time around decoupling was falsely labeled and rejected as a “tax increase,” even though no one’s taxes would have gone up (they just wouldn’t have gotten a windfall reduction in state taxes). Decoupling would have saved the state $600 million in lost revenue and allowed the state to avoid making all of the painful cuts described above.

So what are the prospects for the future? We said above that the general trend was at least partially positive because the revenue increase balanced the state’s approach to the fiscal crisis. Now Illinois needs to return to policy considerations (instead of just political ones) before making any further cuts to vital programs and priorities. It needs to find better ways to deploy state revenues, so that more is dedicated to high priorities in the general revenue fund as opposed to lower priorities in special funds that are off budget. It needs to find a way to address the state’s $4 billion of unpaid bills.

What this budget also shows is that there was very little fat to cut. Much of what was cut was not fat at all, shortchanging wise investments like early childhood education and tragically abandoning vulnerable people. The income tax increase enacted in January is only temporary, with a large part of it phasing out after four years. The Illinois revenue problem was structural -- we did not have enough revenue to pay for the important priorities that Illinois residents rightly expect from their government. That problem was well known before the recession hit. This year’s budget includes the new revenue, makes the pension payment for the first time in years, was overly austere on the spending side – and STILL did not pay the bills. Illinois needs to reconcile itself to the fact that the revenue increase must be permanent. 

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This tax season one of the largest tax preparation sites, H&R Block, will not be offering refund anticipation loans (RALs) thanks to the Office of Comptroller of the Currency (OCC). The OCC has prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever.

H&R Block was the leader in providing these loans, and in 2010 H&R Block collected about $146 million in loan related fees from tax payers. Until recently HSBC Bank has been the financial backer for the H&R Block RALs. In August of last year, however, the Internal Revenue Service (IRS) announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As a result, HSBC, which began exiting the RAL business in 2007, attempted to break its long-term 2005 contract with H&R Block, its only remaining RAL customer.

H&R Block, on the other hand, contended that RALs can be done without the IRS debt indicator and filed suit against HSBC seeking to require the bank to perform its contractual obligations. Although the parties reached an agreement wherein HSBC would provide the loans for one more year, the OCC intervened and issued a regulatory directive prohibiting HSBC from funding the loans, leaving H&R Block with no financial partner to provide both RALs and some of its refund anticipation checks, "RACs." H&R Block shares also went down 7% as a result of this news.

Last tax season, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program. Upon this announcement Jackson Hewitt shares went up 35%.

H&R Block will continue to offer RACs which, though not an instant refund, provide a check to the tax filer in 7 to 10 days. In the meantime, its competitor, Jackson Hewitt, will be seeking to lure former H&R Block customers away. 

As discussed in previous Shriver blogs, this is just the latest RAL repercussion. It seems that consumer advocates’ and financial regulators’ continual push for stricter guidelines and policies regarding RALs have paid off. Today, with quick turnaround from electronic filing and direct deposit, many taxpayers can likely receive their tax returns within ten business days, reducing the need for RALs. Now is the time to demand that the OCC protect low=income families and prohibit all RALs.

This article was coauthored by Kelly Ward.

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The number of people living in poverty in 2009 was the largest in the 51 years for which poverty estimates are available. There were 43.6 million people in poverty in 2009, up from 39.8 million in 2008, and the nation's official poverty rate in 2009 was 14.3 percent, up from 13.2 percent in 2008. And the number of people experiencing asset poverty is likely much higher.

The federal government uses tax policy as one tool to encourage American families to build assets, such as savings and business ownership, that help families survive financial crises and strengthen the national economy. The U.S.’s current asset-building strategy focuses heavily on tax incentives. In 2009, close to $400 billion were spent on promoting asset growth, with the vast majority being through tax expenditures. Only $37 billion were spent on direct budget outlays, meaning that less than one percent of overall federal expenditures went to directly subsidize asset-building activities. Unfortunately, this tax-based approach to asset building disproportionately benefits individuals who already own significant assets.

A recent study of asset-building expenditures for 2009, Upside Down by the Corporation for Enterprise Development (CFED), reveals that America’s current asset-building strategy does little to help low-income families build assets. According to the CFED study, families that make less than $19,000 a year received only 0.04 percent of the benefits from asset-building tax expenditures in 2009, averaging out to about $5 per taxpayer. In contrast, those with incomes higher than $160,000 received an average of $5,109 per taxpayer. In order to reduce the number of Americans in poverty, federal and state asset-building tax policies need to target those most in need, not those who already have.

Take for example policies aimed at promoting homeownership. The federal government directly spends less than 1percent of the money used to encourage homeownership on financial support for housing subsidies and assistance, but spends 99 percent on tax expenditures that overwhelmingly benefit individuals with higher incomes. In 2009, 80 percent of the value of mortgage and property tax deductions went to individuals earning more than $80,000 a year. In fact, the government actually ends up discouraging low-income families from owning homes by making rental assistance more available than mortgage assistance.

The current debate over tax cuts for the wealthiest taxpayers is another reflection of tax expenditures that are upside down. As Congress seeks to reach compromise over these tax policies, we as Americans need to call attention to the fact that a continuation of current policies will further increase the ever-widening wealth gap in the United States. At some point a more equitable distribution of tax expenditures is needed to ensure that low- and middle-income families are not left in poverty while the more affluent continue to accumulate more and more benefits. 

This article was coauthored by Kelly Ward.

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It has become fashionable to attack President Obama for a perceived lack of leadership and resolve. These attacks have come from all directions. Undoubtedly the tax cut compromise brokered by the President will give new fodder to his implacable critics on the Right and the Left. The bottom line, however, is that President Obama succeeded in negotiating the best possible deal out there for the unemployed and those in working poverty, while adhering to his principles and deferring until the next presidential election cycle the debate between cutting taxes for the rich and reducing the deficit. 

First, here is the financial situation that the President faced:

1. The program extending unemployment insurance benefits beyond 26 weeks for up to 99 weeks had expired on November 1. Two million people were going to lose their unemployment benefits by Christmas if no agreement was reached.
2. The progressive tax cuts enacted under the President – expanding the earned income tax credit and the child tax credit, growing the college tuition tax credit, and the middle class make work pay tax cut – would have expired on January 1, and the average American’s taxes would have gone up $3,000.

Of course, the Right was faced with expiration of the tax cuts on the wealthiest 2% of Americans and reinstitution of the Estate Tax. Who was in a better position to hold out?

Second, here is the political situation that the President faced:

1. A new, very conservative Republican majority takes control of the U.S. House of Representatives in January.
2. Senate Republicans recently announced that they would block consideration of all other matters in the Senate until the tax cut extension issue was resolved.
3. Influential liberal Democrats had recently introduced legislation that would have extended unemployment insurance benefits for three months only.

The deal reached by the President:

1. Extends all Bush tax cuts, including the tax cut for the wealthiest 2%, for two years.
2. Preserves all of the progressive tax cuts enacted under President Obama (with a temporary reduction in the payroll deduction replacing the make work pay credit).
3. Makes slight concessions on the estate tax.
4. Continues eligibility for extended unemployment insurance benefits, which expired on November 1, for another 13 months, with no requirement that the cost be offset with cuts to other domestic programs.

In short, the deal reached by the President ensures that 2 million unemployed Americans will not lose their unemployment insurance benefits during the holiday season, that millions more will not lose their benefits next year, and that all of the progressive tax cuts for the working poor enacted during the Obama Administration will continue. It ends, on the most favorable terms available, a stalemate that is hurting low-income Americans every day it continues. The President got a lot more than other progressives were willing to settle for, while bringing the pain to an end.

The two-year extension of the tax cuts means that the issue of driving up the deficit by continuing tax cuts for the rich will be debated during the next presidential cycle. President Obama made it clear in his statement announcing the tax compromise that he strenuously opposes continuation of tax cuts for the rich. The President reached a political compromise, but there was no compromise on principle.

It’s time to move on.

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The Internal Revenue Service (IRS) announced last week that starting with the 2010 tax filing season they will no longer provide tax preparers with the mechanism they had been using to underwrite refund anticipation loans (RALs). Specifically, the IRS will no longer provide a “debt indicator” tool which gives tax preparers an indication of whether a client will have any portion of the refund offset for delinquent tax or other debts including unpaid child support or delinquent student loans. Preparers used this indication to decide whether or not to offer a customer a RAL as an incentive to immediately pay for the fees of tax preparation and get cash in hand.

RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refunds, yet at a cost of interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL.

Because refunds are now widely issued electronically within 10 days of filing, the IRS decided that there was no longer a need for the debt indicator or an instantaneous refund. As IRS Commissioner Doug Shulman explained: “Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

To replace the debt indicator, the IRS will begin exploring the possibility of providing a new tool to tax preparation sites. Instant access to cash and the ability to immediately pay for tax preparation services with RALs have been major selling points for consumers. The IRS is, therefore, investigating cost-effective and secure alternative product s to RALs.

Legislators and advocates alike have praised the decision to no longer provide the debt indicator. These high-cost loans, which are targeted at low-income families and those eligible for the earned income tax credit who need money quickly, are irrelevant given the speed at which federal tax refunds are now delivered. In eliminating these loans, taxpayers will no longer spend millions of dollars for a 10-day loan when they can receive the cash for the refund in approximately the same time period.

In recent blogs, the Shriver Center reported on the negative impact RALs have on low-income communities and the measures being taken to eradicate these product s from the tax preparation industry and from financial institutions. The Office of the Comptroller of the Currency (OCC), reacting to consumer advocacy including efforts by the Shriver Center, issued new requirements for tax preparers’ advertisement and sale of such loans earlier this year. Similarly, the FDIC mandated at least one cease and desist order and several RAL provided voluntarily agreed to stop proving such loans. The IRS’ recent investigation into RALS and the task force which it convened on this topic lead to its decision to eliminate the debt indicator tool. This latest development could spell the end for RALs, and the Shriver Center applauds the IRS’ action in ending this abusive practice.

Susan Ritacca coauthored this article.

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This fall Congress will be considering whether to extend the Bush Administration tax cuts for families earning more than $250,000 that are scheduled to expire this year. Proponents of extending these tax cuts for the wealthy argue that allowing the tax cuts to expire will place an enormous strain on the economy and result in higher unemployment.

The non-partisan Congressional Budget Office (CBO) has evaluated this claim and come to the conclusion that it is without merit. To the contrary, extending the Bush tax cuts for the wealthy will do far less to grow the economy and produce jobs than any alternative use of these funds.

Extending the Bush tax cuts would reduce the government’s revenues by approximately $40 billion in 2011. The CBO compared this tax expenditure with ten other potential uses for this money, including such things as extending unemployment insurance benefits, providing a jobs tax credit, or giving fiscal relief to the states. The CBO found that, at the same cost as extending the Bush tax cuts for the wealthy:

• A temporary jobs tax credit that reduced a firm’s payroll taxes on new hires would generate three times more economic growth and create four to six times more jobs.
  
• State fiscal relief would generate three to four times more economic growth and create two to three times more jobs.
  
• Extending unemployment insurance benefits, such as the extension approved by Congress last week, would generate five times more economic growth and four to six times more jobs.
  

Why do all of these alternatives spur so much more economic growth and create so many more jobs than extending the Bush tax cuts for the wealthy? The answer is simple. When the economy is weak, spending is needed to stimulate it. But wealthy people, given an extra dollar in income, are much more likely to save it instead of spending it. This simple principle explains why extending the Bush tax cuts for the wealthy is the worst alternative available if the goal is to stimulate the economy and create jobs.

In the long term, after the current economic crisis has passed, the revenue from allowing the Bush tax cuts for the wealthy to expire should be dedicated to reducing our nation’s unsustainable budget deficit. This would be only fitting since the mammoth loss of revenue resulting from the Bush tax cuts for the wealthy is what created the deficit mess in the first place.

This blog is based on Marr, “Letting High-Income Tax Cuts Expire is Proper Response to Nation’s Short- and Long-Term Challenges,” Center on Budget and Policy Priorities, July 26, 2010.


 

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The Sargent Shriver Center on Poverty Law joins advocates across the country in celebrating Chase Bank’s recent announcement that it will exit the Refund Anticipation Loan (RAL) industry.  Chase Bank was the largest provider of short-term, high-interest-rate bank loans, or RALs, contracting with over 13,000 independent tax preparers nationwide.  According to the Woodstock Institute, Chase provided 1.5 million RALs annually based on expected income tax refunds. 

As discussed in our previous blog, the Internal Revenue Service (IRS) is currently creating a task force to review RAL loans issued by tax preparation sites in order to regulate the industry.  While no rules, regulations, or recommendations have been issued yet, the formation of the task force and the increased scrutiny of such products by regulators appear to be having the intended effects. The Office of the Comptroller of the Currency (OCC) also issued new guidance on the delivery of RALs earlier this year.

Chase joins other banks and financial institutions that have recently left the market; Jackson Hewitt lost its RAL partner when Santa Barbara Bank & Trust was forced to stop selling RALs, and the Federal Deposit Insurance Corporation (FDIC) mandated a cease and desist order for Republic Bank & Trust’s RAL program until reforms were implemented.

Despite their history in the RAL industry, Chase claimed that its sale of RALs was no longer a “strategic fit” for their business model, and cited increased scrutiny and additional regulations as part of its decision to leave the market.  While we applaud Chase Bank for being responsible and exiting the RAL industry, its actions were the direct result of constant pressure from community organizations and consumer advocates, including the Shriver Center. In sum, Chase was forced to comply with the new OCC guidelines, or exit the RAL industry.  This withdrawal is another victory for working families and may mark the beginning of the end for refund anticipation loans.

This post was coauthored by Susan Ritacca.
 

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The General Assembly recessed on their planned adjournment date of May 7, having failed to enact a state budget for fiscal year 2011. May 7 was an artificial deadline. The real deadline is May 31, after which bills may not take effect before January 1, 2011 unless they pass by a 3/5 majority, which would require there to be Republican votes  to pass a budget bill. May 7 may have served a useful purpose for Senate President Cullerton and House Speaker Madigan, however, since it allowed them to determine exactly where the fault lines lie and determine what they must do to get a budget enacted before the May 31 deadline.

The failure of the General Assembly to agree on a budget is a temporary victory for the Responsible Budget Coalition since the only budgets that were on the table on May 7 were fiscally irresponsible and would have inflicted severe pain on our most vulnerable state residents. The House resoundingly rejected both proposed budgets – one that would have required massive cuts in services and the other that would have resulted in massive borrowing. Speaker Madigan did not allow a vote on the other option – raising revenue.   

In the waning days of the session before the May 7 recess, the General Assembly also gave serious consideration to enacting an Emergency Budget Act. The proponents apparently believed that putting all responsibility for budget cuts on the Governor would allow them to escape detection when the residents of Illinois dust for fingerprints on the elimination of services to the mentally ill, developmentally disabled, homebound elderly, infants and toddlers, and so on. The Emergency Budget Act would allow the Governor to implement emergency rules to cut programs, make all state programs “subject to appropriation” and thus optional instead of mandatory, and establish contingency reserves that could be used to eliminate budgeted state programs. In short, the Emergency Budget Act would give the Governor unilateral power to cut spending and eliminate programs as he sees fit, without legislative review.

Governor Quinn would exercise these extraordinary powers for the first six months of the fiscal year that begins on July 1. If Quinn were to lose the November election – and all the polls show him trailing -- then the power to eliminate any and all state programs would fall into the hands of Senator Bill Brady for six months until the emergency powers expire on July 1, 2011.  Brady has proposed cutting taxes by $1 billion in the face of Illinois’ $13 billion revenue shortfall, a position so extreme that it’s not even embraced by the radical free market Illinois Policy Institute.

So how do you close a $13 billion budget shortfall?  Here’s what the General Assembly was considering:

That's right--$4 out of every $5 used to "balance" the state budget would be either borrowed or obtained by not paying our bills.

Last week's action shows that the messages of the Responsible Budget Coalition are penetrating. There is growing momentum to find a real solution to our fiscal crisis and not simply to postpone the problem and, in the meantime, make it worse. Slowly the conventional wisdom that revenue increases are not possible during an election year is being whittled away. The game is far from over though and advocates for a responsible budget that raises the revenue needed to begin to dig us out of our deficit hole still face an uphill climb. Nor is there any sign that the leadership of the General Assembly is willing to seriously entertain a proposal to significantly increase state revenues. In the meantime, there will also be great pressure on the budget holdouts to end their resistance to the enactment of a bad budget. It's still all hands on deck for a responsible budget.

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“Act like leaders, not like fools,

Save our services, save our schools!”

So chanted 15,000 people gathered in front of the State Capitol on Wednesday, in the largest Springfield rally ever. The  demonstrators demanded that the General Assembly not return to their home districts on May 7 as scheduled, or at any other time, until they have enacted a responsible budget that raises the revenue needed to avoid the human catastrophe facing  Illinois in the form of draconian state budget cuts.

Reasonable minds do not disagree: a substantial increase in the state’s revenues is an indispensable piece of the fiscal puzzle if our state is to avoid financial collapse. Earlier this year, the Civic Federation, the voice of Chicago’s business community for over 100 years, released its report on the state’s fiscal crisis and called for an $8 billion tax increase, saying:

We do not enjoy advocating a significant tax increase in the middle of a difficult recession. However, continuing to do nothing would be by far a worse option.   

In jeopardy unless there is a revenue increase are programs that provide vital services to people in need – seniors, the disabled, low-income single parents, people with drug addictions or suffering from mental illness, children at risk of academic failure, adults with developmental disabilities. These same programs provide jobs for teachers, home health care workers, substance abuse and mental health counselors, child care workers, persons who work with adults with developmental disabilities, and others. 

Those who say that raising taxes will cost Illinois jobs are wrong.  The truth is that our continuing failure to raise the revenue needed to pay our bills will result in a devastating loss of the jobs described above as well as those of police, firefighters, and others. 

And let’s consider the private sector. The belief that businesses make decisions on where to locate based solely on tax rates is demonstrably wrong. Does anyone really believe that a crumbling infrastructure and an educational system in shambles create a favorable business climate?

Those who say we over-spend and over-tax have their facts wrong. The facts are that Illinois’ three percent state income tax rate is the lowest of all 41 states that have a state income tax, and Illinois is 43^rd in the country in general funds spending as a percent of the state’s gross domestic product.

Nobody likes to pay higher taxes. Nothing is politically easier than to say, “I didn’t raise your taxes.” But we cannot afford to remain on the path of expediency.

Franklin Delano Roosevelt said: “Taxes are the dues that we pay for the privileges of membership in an organized society.”

Oliver Wendell Holmes put it even more succinctly: “Taxes buy civilization.”

We’re not going to climb out of our $13 billion hole in one year, but we can’t wait to start.

“Show some guts,

Stop the cuts!”

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There is something almost purely ideological about opposition to the revenue reforms that knowledgeable analysts agree Illinois needs right now – not only to escape its fiscal crisis but to make its tax system more fair and sustainable.

I suppose ideological biases are fair enough among some anti-government zealots and politicians who hope to use them and lead them.  But somehow one would hope for a more balanced and dispassionate approach from mainstream media, such as the Chicago Tribune.

It can only be ideology that justifies the anti-tax position by reference to taxpayers “already devastated by the recession.”  In fact, under leading revenue-reform plans, many lower- and moderate-income households would pay no increased income tax or a modest increase; the lowest-income households would pay less. 

But for those who’d pay a few dollars more per paycheck in income tax – is that more weighty than maintaining state-assisted care for their elderly relatives, safe roads and bridges, schools with a full complement of teachers and educational programs, or the public health programs that protect us from epidemics?

This crisis demands a balanced approach that includes significant new revenues raised in a fair way. Polling and history show that, while nobody likes to pay higher taxes, people appreciate honest leadership in a crisis and understand and support a balanced approach.  We already are suffering from severe cuts; we are already borrowing; we will continue to seek as much help as possible from the federal government. But those measures are not enough. We need significant, new revenue to complete the balance and navigate out of the crisis with a sounder future in store.

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What are RALs?

The dreaded tax season is back and so are notorious refund anticipation loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and Liberty Tax. The problem with RALs, in part, is how they are advertised. To the consumer it appears that the refund is a service of the tax preparer rather than a loan from the bank. Yet, in actuality Chase Bank is the largest provider of RALs in the country and contracts with 13,000 independent tax preparers to supply RAL products. Following close behind is HSBC, provider to H&R Block; and Pacific Capital Bank, provider to Liberty Tax Service.

The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. However, customers are often not aware of the usuriously high interest rates and hidden fees associated with the loan. Triple digit interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL are not unheard of.

High Costs to Low-Income Families

RALs are particularly toxic because they are heavily marketed in low-income neighborhoods. According to a recent report by the National Consumer Law Center, recipients of Earned Income Tax Credits (EITC), the government’s largest anti-poverty program, constituted 63% of the 8.76 million Americans who took out RALs in 2007. EITC recipients receive an average credit of $1,600, yet they often spend $500 or more in interest, typically a third of their refund for RALs.

A separate report from the Woodstock Institute states RALs pose a threat to the opportunity of wealth building among EITC recipients. According to Woodstock, EITC recipients are driven to high cost tax preparation sites because of the complexity of filing for EITC and they purchase RALs to pay for the upfront costs of such tax preparation.

Reforming RALs

On the state level, New York, Arkansas, and Maine have enacted laws prohibiting tax sites from charging add-on fees to RAL products, while Michigan mandates specific disclosure requirements for RALs. Sixteen other states are regulating RALs through their general consumer protection laws. In Illinois, the law actually prohibits consumer installment lenders, or payday lenders, from originating RALs.

Nationally, the IRS is in the process of creating a task force to review loans issued by tax preparation sites in order to regulate the industry. No rules, regulations, or recommendations have been issued yet. Meanwhile, in 2007 the Office of the Comptroller of the Currency (OCC) acknowledged that RALs posed a considerable threat to consumers and therefore established banking requirements to monitor tax preparers’ advertisement and sale of such loans.  Monitoring by consumer advocates from 2007-2010, however, revealed that bank compliance with these OCC guidelines was negligible. Pressure from community organizations and consumer advocates, including the Shriver Center, recently resulted in the OCC issuing new guidance on the delivery of RALs in February of this year. As a result major banks and providers have revised their RAL programs: Jackson Hewitt lost its RAL partner when Santa Barbara Bank & Trust was forced to stop selling RALs, and the Federal Deposit Insurance Corporation (FDIC) mandated a cease and desist order for Republic Bank & Trust’s RAL program until reforms were implemented.

While the IRS, OCC, and FDIC should be applauded for these efforts, continued monitoring must occur. If no action is taken, RALs will continue to pose a threat to taxpayers and particularly diminish the possibility for low income families to save and pay down debt.

For more contact the Shriver Center’s Community Investment Unit.

This article was co-authored by Susan Ritacca.

 

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