Yesterday, we examined how expansions in the Earned Income Tax Credit (EITC) at the federal, state, and local levels can improve life for the working poor in the five boroughs and beyond.
Unfortunately, it is not enough to simply boost the EITC. We need to make the credit real by addressing the scourge of tax refund services that offer fast cash in exchange for significant fees associated with filing taxes.
We can do this in two ways. First, we need to partner with non-profit community organizations to expand successful PR campaigns to highlight the fact that NY provides FREE tax filing to people who earned less than $58,000 (adjusted gross income) in tax year 2013 (that’s nearly 60 percent of NYC households), both online and in person at dozens of locations throughout the five boroughs. Refunds for e-filing are usually issued within 30 days.
Second, we need legislation to limit predatory behavior that siphons EITC and other credits from those most in need. Currently, the vast majority of tax return advance companies aren’t actually committing fraud. All that means is that people can be ripped off and have no recourse.
In 2013, the Federal Government largely banned regulated banks from offering “refund anticipation loans” (RAL), which for years had swindled millions of low-income Americans (7.2 million in 2009) out of a significant portion of their tax returns in exchange for getting fast cash a few weeks in advance (in other words, it was a payday loan in disguise).
To give you a sense of just how usurious RALs are, consider that the last bank to offer an RAL in 2012—Republic Bank & Trust Company of Louisville, Kentucky—charged individuals $61.22 for a $1500 tax refund advance, the equivalent of an APR of 149 percent.
However, while the RAL is now technically a thing of the past, it lives on in a variety of guises—most notably the “refund anticipation check” (RAC) which is not a loan, but which carries fees of around 30 dollars and can include “add-on” surcharges running into the hundreds of dollars. The elimination of the RAL has led directly to growth of RACs—from 12.9 million in 2009 to 18.3 million in 2011.
Consumer champions in Congress—including Senator Elizabeth Warren (D-MA)—should work with the Consumer Financial Protection Bureau and state/federal law enforcement to prosecute fraudulent actors and identify gaps in existing law.
But New York shouldn’t wait for D.C. to act. Legislators should pass existing legislation in Albany that seeks to improve transparency of RACs and set limits on the usurious loan rates they currently impose.
The Empire State has one of the toughest payday loan laws in the nation— any non-bank lender who charges more than 16 percent interest in New York is subject to civil prosecution; charging above 25 percent can subject lenders to criminal penalties up to a Class C felony—and as the financial capital of the world, we should continue to lead the nation in progressive regulatory policy that protects consumers while permitting legitimate actors in the banking industry to offer a wide variety of services.