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“Magic” Money a Mere Illusion: Refund Anticipation Loans & the Earned Income Tax Credit in West Virginia

August 25, 2009
Consumer Finance
Research

This latest report by the West Virginia Center on Budget and Policy found that in 2007 nearly $13 million were lost by working West Virginians through refund anticipation loans. Out of the nearly 77,000 West Virginians that used a RAL in 2007, nearly 60 percent of them were recipients of the Earned Income Tax Credit, a federal program designed to help low-to-moderate income working families with their tax burden.

Despite the state's strong laws protecting consumers from other forms of predatory lending, the report also found that nearly 5 percent of the federal EITC funds coming into the state went toward paying fees associated with tax preparation and the purchase of RALs.

Recommendations

The report also offers a number of policy recommendations, which include:

  • An educational campaign
  • An increase in the number of free tax preparation sites
  • Actively encouraging taxpayers to set up bank accounts that would enable them to use the direct deposit service of the IRS
  • The collaboration of nonprofit organizations and financial institutions to develop lower-cost alternatives to refund loans.