WASHINGTON, D.C. – With millions of Americans turning to payday loans to make ends meet, U.S. Sen. Sherrod Brown (D-OH) outlined a plan to provide short-term cash advances through their employers while bypassing high interest rates that keep consumers trapped in a cycle of debt. During a news conference call today, Brown announced a bill that would create an Early Refund Earned Income Tax Credit (EITC) as an alternative to payday loans – which can carry hidden fees and annual interest rates as high as 500 percent.
“Ohioans shouldn't be trapped with a lifetime of debt from predatory loans – particularly if they have tax refunds waiting for them,” Brown said. “Three-quarters of Americans who turn to costly, high-interest payday loans may have money that they can claim each tax season – in the form of the Earned Income Tax Credit. My proposal would provide many people who work hard and pay their taxes with an alternative to the vicious cycle of debt we so often see with payday loans.”
The EITC is a refundable tax credit for low-income Americans that encourages work and helps families make ends meet. In 2012, more than 26 million taxpayers received a lump sum refundable credit through EITC after filing their taxes. Throughout that year, however, more than 12 million Americans used payday loans – with the average loan amounting to less than $400. Meanwhile, the average EITC – which is available to three-quarters of Americans who turn to payday loans – is nearly $3,000 for families with children.
"Senator Brown's proposal to allow Americans to access a portion of their Earned Income Tax Credit ahead of tax time means that many workers--some of whom live paycheck to paycheck--aren't forced to turn to predatory lending products, like payday loans, just to make ends meet," said Rebecca Vallas, associate director of the Poverty to Prosperity program at the Center for American Progress. "The EITC is already one of the nation's most effective anti-poverty tools, so strengthening this program is a common-sense proposal that should win support among Democrats and Republicans alike in the new Congress."
The Early Refund EITC is an alternative to costlier, predatory lending options. Brown’s plan would allow working Americans to draw upon already-earned EITC benefits before tax day. Instead of receiving traditional lump sum payments at tax time, workers who are eligible for EITC could opt to receive the Early Refund EITC – a zero-interest, zero-fee advance on the tax credit for which the worker has already qualified.
To participate, workers would enroll in the program through their employers mid-year and request an advance payment. The size of the Early Refund EITC would be capped at $500 – well above the size of the typical payday loan but far below the average EITC payment – and would be deducted from the EITC lump sum the worker receives at tax time.
If the EITC remains unchanged, 833,000 Ohioans and 23.6 million Americans would be able to access a substantial Early Refund EITC – $500 for families with children and $133 for workers without children – according to the Center for American Progress. In December, Brown released a county-by-county report on Ohioans who benefited from the EITC in 2012, many of which could benefit from the early refund option.