Association for Public Policy Analysis & Management

Panel: Tax Refunds and Household Debt

(Poverty and Income Policy)

The papers in this panel examine the interaction of the loan industry with state and federal income taxation. With the increase in generosity of the EITC over the last several decades, tax time has become a time when many low-income families receive their largest source of income. As of 2014, the EITC was worth up to 45% of household earnings, up to over $6,000. The three papers in this panel look at the loan industry and changes in household debt in response to tax refund generosity. Cui uses state variation to examine how state EITCs affect the likelihood of taking out payday loans. Comparing border metropolitan areas with different state EITC policies, she finds that consumers significantly reduce their use of costly credit when cheaper liquidity is available, indicating that EITC recipients might be liquidity constrained. Jones and Michelmore also use state variation in EITC generosity to examine how household credit card debt responds to changes in EITC generosity. They find evidence that EITC-eligible households pay down credit card debt in March, when tax refunds are typically received, but take on more credit card debt throughout the year in response to increases in state EITC generosity. Finally, Maggie Jones looks at how state regulations regarding refund anticipation loans affects the supply side of the loan industry and its impacts on taxpayers. She finds a decline in the provision of refund anticipation loans associated with stricter regulations regarding the provision of these loans by tax preparers. Together, these three papers make an important contribution to the EITC literature and the household finance literature in general. They suggest that tax refunds play an important role in household willingness to take on debt and that regulation of these various loan options has an impact on the supply of loans.