The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the Benefits of the EITC

Alan Berube,
Alan Berube Interim Vice President and Director - Brookings Metro

Anne Kim,
Studio portraits for Anne Kim. Photo by Louis Tinsley/DC Corporate Headshots.
Anne Kim Contributing Editor - Washington Monthly, Author, - “Abandoned: America's Lost Youth and the Crisis of Disconnection"
Benjamin Forman, and Megan Burns

May 1, 2002

This new report, co-authored by the Brookings Urban Center and the Progressive Policy Institute, details for the first time, how the use of tax preparation services and “fast cash” refund loans is concentrated among working poor families and neighborhoods. In the Washington, D.C. area, the report finds that a typical recipient of the federal Earned Income Tax Credit (EITC) for low-income workers pays roughly $200 for commercial tax preparation, electronic filing and a “rapid refund” loan.

The authors estimate that nearly $2 billion in EITC refunds nationwide were diverted to pay for these services and products in 1999, with more than half of all low-income families purchasing refund loans in some of the nation’s largest cities and suburbs. The authors outline a policy agenda that would help to preserve the full value of the Earned Income Tax Credit, including: simplifying tax credits for low-income families; broadening the availability of free and affordable tax prep assistance and electronic filing of returns; and expanding access to low-cost bank accounts to promote direct deposit of EITC refunds.