During the tax season, beware of fast money

Mark Winston Griffith

During the tax season, beware of fast money

On my way home yesterday, with the wind blowing my long coat into the air like I was a caped crusader back from a long day of fighting economic injustice, I walked by a tax preparation joint that had sprung up on Nostrand Avenue. On the front window there was sign offering me and my hard working, ghetto-weary neighbors a quick financial fix: 'Why wait?" "Get your Money Now", or some crap like that.

I hadn't even taken off my cape yet and already the bad guys had won.

To the untrained eye, this advertisement would seem harmless enough. But for those of us sworn to fight these tax refund pimps, it's an affront, a brazen promise to loot the wealth of my Bedford-Stuyvesant/Crown Heights neighborhood.

Essentially, this place was one of thousands in New York offering refund anticipation loans (RALs), which are short term, high cost loans that customers secure and repay from the proceeds of their tax refund from the IRS. These products end up mostly in, you guessed it, cash-strapped, low-income areas where the evel of financial desperation runs high.

Many folks walk into tax preparation shops and think they're just arranging to get their refund sooner. Wrong. It's a loan with a hefty fee. So, for instance, according to research conducted by the Neighborhood Economic Development Advocacy Project (NEDAP), if you are getting a $2100 refund, you might end up paying $250 in fees. If you simply did a free electronic filing with the IRS it would only take you only a few more days to receive a full refund, with no fees taken out.

NEDAP will soon be issuing a report on the crushing impact of RALs on New York and will bring attention to legislation that could help reduce the abuse related to these loans. In the meantime, here are some teaser figures prepared by NEDAP staffer Chris Keeley that gives some context to the problem:

--- New York State has the highest number of tax returns filed at VITA (free tax preparation). It is also highest in terms of number of low-income returns at VITA and Earned Income Tax Credit (EITC is a refundable tax credit that supplements the income of low-wage earners) filers at VITA.

--- NYS is 2nd highest in terms of number of returns filed by paid tax preparers. It is 3rd highest for low-income filers using paid tax preparers.

--- 5% of RALs made in the US are made in NYS (672,000 of 13.8 million RALs; NYS is 8% of the US population.).

--- NYS is the state with the 4th highest number of RALs filed (behind Texas, Cali, and Florida).

--- RAL use is still heaviest in the south, as it was in years past (over 25% of all returns in Mississippi had a RAL!).

--- NYS is 5th highest in number of RALs to low-income filers, and 5th in number of RALs to EITC filers.

--- 18,693 elderly taxfilers in NYS got a RAL, 67% of those elderly taxfilers getting a RAL were low-income (12,571).

Mark Winston Griffith: Author Bio | Other Posts
Posted at 9:31 AM, Jan 20, 2006 in Economic Opportunity | Economy
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When I read David Cay Johnston's piece in the NYT 1/10/06 about people who filed for the EITC having their refunds frozen for possible fraud, I wondered whether those whose returns were filed through companies that issued RALs fared differently, because there was a profit-making company breathing down the IRS's neck. I'm guessing that many of the returns that came back faster were those where it was a company that was waiting for its money, rather than a low-income family. Just a guess.

So that may tend to push poor people toward these RAL firms, if the other choice is waiting 8 months and being called fraudulent. Would you pay 10% to have your money now rather than 8 months from now, if you had bills to pay?

Not a great way to do things, unless you are receiving contributions from the FIRE sector to help out their interests.

I am truly disguted by the market that has developed around preying on the poor. From the Rent-A-Center's in poor neighborhoods extracting enormous rental fees on furniture to poor people, to this tax return loan business. Considering this is New York City it's issues like this that a crusading public adovcate should be ready to throw down the gauntlet and tell the people about these practices, is there? It's so sad that that a market has emerged that instead of doing business with the low-income people of the city, they prey on them and steal the candy from the baby.

Yet there is something to notice here, and that is there is potential for a market to emerge that can help low income communities. In other countries you have banks that are engaging in micro-lending. Now why can't we have banks that provide low-interest loans to people that want to start up small businesses in the community? The banks would still make some profit, it won't be a lot but it would help the community. What if someone started up a discount store, a health clinic, or an employment center? What about people who would seek loans to repair dilapidated houses and apartments? What if these small businesses in turn started paying taxes that help fund local schools? The market is there and it's not being used the right way.