Step in the Right Direction: Recent Declines in Refund Loan Usage Among Low-Income Taxpayers


An analysis of IRS data from tax years 1999 through 2002 reveals that:

  • After climbing between tax years 1999 and 2001, usage of refund anticipation loans (RALs) declined nationwide in tax year 2002. While the overall number of EITC recipients who used RALs declined only slightly (1.9 percent), strong overall growth in EITC claims meant that the share of EITC recipients purchasing RALs declined significantly, by 4.6 percent.

The percentage of EITC recipients using RALs declined in every region between TY 2001 and TY 2002, most dramatically in the Midwest. The South continues to dominate the RAL market, as more than half of all EITC recipients who purchased a RAL lived in that region. The largest declines at the state level occurred in Wisconsin, Michigan, Illinois, Nebraska, Arizona, Oklahoma, West Virginia, and Delaware.

Among large cities, Milwaukee, WI boasted the sharpest decline in the share of its EITC recipients purchasing RALs between tax years 2001 and 2002. The trend was less positive in and around New York City, where RAL usage among EITC earners remained steady over that period. Despite drops in most places, more than half of EITC recipients continue to use RALs in several southeastern cities.

Most of the change in RAL usage among EITC earners across cities cannot be explained by the changing income profile of credit recipients or the relative presence of paid versus volunteer tax preparers. However, there is some evidence that cities with greater concentrations of commercial preparers witnessed smaller declines in RAL usage, and that cities with a greater presence of volunteer low-income tax preparation saw larger declines in RAL usage.

The nationwide decline in RAL usage among low-income working families is a promising trend, one that will hopefully accelerate as consumers learn more about the high costs of these products and alternatives for receiving their refund dollars. At the same time, in a number of cities where as many as 60 percent of EITC recipients continue to use refund loans, greater efforts are needed to heighten local awareness of the problem and to monitor the RAL marketplace more closely.