When unexpected costs arise before tax returns come in, workers are faced with a dilemma and many workers turn to predatory payday loans to make ends meet. These loans – which can carry hidden fees and can have annual interest rates more than 500 percent – often trap borrowers in a cycle of debt. There are more payday lending stores in the United States than there are McDonald’s and Starbucks combined. These operations are thriving at the expense of low-income Americans.
Come tax time, many of these same Americans have money waiting for them in the U.S. Treasury through the Earned Income Tax Credit (EITC), one of the most effective anti-poverty programs working to help Americans today. The EITC provides tax relief for low-income workers, encouraging work while reducing poverty. In 2012, more than 940,000 Ohioans received more than $2.1 billion worth of tax credits through the EITC. The credit serves as a lifeline that allows families to pay for necessities they might not otherwise be able to afford.
With an average EITC in Ohio of more than $2300 and the average payday loan being less than $400, it’s clear that many Ohioans would prefer to get the refund owed to them early as opposed to paying exorbitant fees.
We need to provide an alternative to payday loans so that people in need can avoid paying hundreds in additional fees and interest. Three-quarters of payday loan borrowers are employed, and many of those workers earn average salaries that could make them eligible for the EITC. My plan, the Early Refund EITC Program, would give these workers an interest-free avenue to access emergency funds.
The Early Refund EITC Program would allow workers to obtain an advance upon a portion of their EITC, helping them to avoid taking out a payday loan. The advance – which is capped at $500 so workers can retain the majority of their EITC funds after they file their tax returns – will only be available to claim in the second half of the year, after workers have already demonstrated their eligibility for the EITC.
Family priorities like groceries, dentist appointments, and utilities shouldn’t go unmet and Ohioans shouldn't be trapped with a lifetime of debt from predatory loans. This program will help protect low-income workers, allowing them to better provide for themselves and their children.