On a state level, and now on a national level, New Mexico’s elected officials are trying to protect the poor, as well as the financially irresponsible, through misguided legislation. This is the latest:
Millions of low-income American workers paid more than $690 million in unnecessary fees and excessive interest in 2003 to quickly collect their tax refunds, according to reports issued today by the Children’s Defense Fund.
Through the use of Refund Anticipation Loans (RALs), low-income taxpayers were burdened with interest rates that exceed as much as 700 percent-an unconscionable business practice that siphoned needed cash away from working families.
In 2003, about 6.9 million low-income workers nationwide purchased Refund Anticipation Loans- short-term, high-interest loans that commercial tax preparers push onto low-income tax filers as a way of receiving their tax refunds in a more expeditious manner. The loan is repaid from the tax refund, but the fees associated with the RAL end up costing the individual a large percentage of the refund. The appeal to many families is that, with the RAL, families can receive their tax refunds within two days.
Senator Jeff Bingaman has proposed a government solution:
[Children’s Defense Fund] is also working nationally and in states across the country to advocate for legislative reforms that will regulate the marketing of RALs to low-income families. To that end, CDF commended the efforts of Senators Daniel Akaka of Hawaii and Jeff Bingaman of New Mexico who have introduced into Congress the Taxpayer Abuse Prevention Act, which would limit abuses in the RAL industry and make it easier for working families to open low-cost bank accounts so they can receive quick electronic refunds without paying onerous fees.
No, no, no. As with so many proposed government solutions to government created problems, this is not the solution. First off, free checking accounts with no minimum balance are already available at any number of banks. Second, marketing is not the problem. People are not driven to a RAL decision by marketing, they are driven by the need for money. All the marketing does is help them choose one source over another.
Let’s talk about a solution that actually makes sense. As a member of the Taxpayer Advocacy Panel for the last two years, I endorsed a recommendation forwarded for better financial literacy and tax preparation education for our nation’s students. There is absolutely no reason that our kids are not being taught how to properly fill out a 1040 EZ tax return beginning in their middle school math classes and continuing every year until high school graduation. Why this isn’t done on April 15th in every classroom across America is a mystery to me.