Association for Public Policy Analysis & Management

The Earned Income Tax Credit is intended to lift low-to-moderate income earners (LMI) out of poverty, but it does not. This study explores the impact of tax refunds on LMI earners, evaluating the extent the EITC and other credits and the return of tax withholdings serve as asset-building mechanisms. Behavioral economic theory of mental accounts and savings, institutional theory of asset-building, and financial capability theory guided the research. The research study design used mixed-methods.

The quantitative analysis evaluated survey data from free tax-site users in Boston (N=119), who had their credit reports reviewed as part of the check-in process for tax preparation. The respondents’ income tax and credit report data were merged with the survey data. Regression analysis tested key variables which included credit card debt, EITC and overwithholding uses, and implementation of financial recommendations. The qualitative portion consisted of researcher conducted interviews with 17 survey respondents. Grounded theory and asset accumulation theory were used in organizing the codes and themes.

The quantitative findings show an association between LMI taxpayers with dependents and increased debt and the use of larger refunds to pay down consumer debt, but also EITC use for specific asset-building purposes. Tax overwithholding by LMI earners is a predictor of higher consumer debt. The findings also show that amounts from large as well as small refunds are allocated to savings. The qualitative findings illustrate the asset-accumulation framework and support behavioral economics, asset-building, and financial capability theories. The findings show low earnings, lack of an asset base and/or debt contribute to keeping the LMI taxpayer in a precarious financial position and limit the capacity to engage in asset-building. Receiving financial guidance at tax preparation can be useful but insufficient as a standalone asset-building policy.