Paul Thissen: Innovation in Action

The Earned Income Tax Credit (EITC) is among our most effective tools for helping lift people out of poverty and supporting local and regional economies.  But in recent years, Refund Anticipation Loans (RALs) offered by commercial tax preparers and financial institutions have undermined the benefits of the EITC.

RALs — sometimes marketed as “Instant Money” or “Rapid Refund” — offer a way for a tax payer to get her tax refund more quickly.  But the “instant money” comes at a high cost.  With high interest rates (as much as 200% annualized or higher) and hidden costs, RALs divert money meant to help low-income working families and the local economies that benefit. Instead of going into the hands of the intended beneficiaries, this tax credit ends up in the hands of commercial tax preparers and financial institutions.

What can we do?

1.  The US Department of Defense characterizes RALs as predatory loans. Congress passed legislation in 2007 that prohibits a tax preparer or lender from charging more than 36% for a RAL to military families.   This protection for military personnel and their families should be extended to all Minnesotans.

2.  Minnesota should authorize and support the efforts of free tax preparation centers, known as VITA sites, to offer alternative RALs (A-RALs).  A-RALs offer the speed of RALs without the high interest rates and hidden fees.

In addition, A-RALs are a great tool to help families on the path to building wealth and assets.  Where commercial RALs discourage savings, alternative RALs actually encourage people to open new accounts, build a positive credit history, and begin long-term financial relationships with mainstream banking institutions.

Resources

• Rapid Refunds Can Be Costly
• Tax Refund Loans Come at a Heavy Cost
• Building Better Refund Anticipation Loans