Linking Tax Refunds and Low‐Cost Bank Accounts: Early Lessons for Program Design and Evaluation

This article describes a pilot program encouraging low-income workers to have their tax refunds directly deposited into low-cost bank accounts. Although the program did not lead to substantial saving in the short-term, it did seem to facilitate account ownership among the unbanked and to serve as a bridge to other financial services and products. Early lessons for the design and evaluation of related programs are discussed. ********** A growing body of research examines public and private programs designed to facilitate asset accumulation in low-income households (see, for example, Caskey 2001; Schreiner, Clancy and Sherraden 2002; Shapiro and Wolff 2001), and some scholars have begun to consider using the tax system to achieve this goal (Seidman 2001; Smeeding 2002). Use of the tax system has promise for at least two reasons (Beverly and Dailey 2003). First, federal income tax credits such as the Earned Income Tax Credit (EITC) and the child tax credit have expanded substantially in recent years, and it is now common for low- and moderate-income working families to receive tax refunds as large as $2,000 or $3,000. Second, research shows that many families view tax refunds as assets rather than income. For example, recent surveys suggest that families are more likely to use tax rebate checks (such as those associated with the 2001 and 2003 tax cuts) to increase saving or to pay off debt rather than to increase spending (Saad 2003; Shapiro and Slemrod 2002). Asset accumulation is probably difficult for the "unbanked," those without a checking or savings account. People without bank accounts are generally excluded from home ownership, a key route to asset accumulation. In addition, financial savings kept outside of formal financial institutions are less secure, are more susceptible to consumption pressures and temptations (Beverly, Moore, and Schreiner 2003), and do not earn interest or tax benefits. Thus, encouraging account ownership is a key step toward facilitating asset accumulation. The connection between account ownership and longer-term economic success has led banking regulators to encourage banks to better serve low-income, unbanked consumers. For example, at a conference co-sponsored by the Office of the Comptroller of the Currency and the American Bankers Association, Comptroller John D. Hawke Jr. called on banks to use technology to create basic accounts that meet the needs of the unbanked (U.S. Department of the Treasury 2002). National data suggest that about 10% of all American households are unbanked, a percentage that has declined in the past decade (Aizcorbe, Kennickell, and Moore 2003; Hogarth, Lee, and Anguelov 2003). Unbanked families tend to be younger than banked families and tend to have lower incomes. They are less likely to be married, white, or employed, or to own their own homes (Hogarth, Anguelov, and Lee 2003; Hogarth, Lee, and Anguelov. 2003). This article describes the Extra Credit Savings Program (ECSP), an innovative effort to encourage account ownership and saving among low-income working families by linking income tax refunds to low-cost bank accounts. Although the program did not lead to substantial saving in the short-term, it seems to have helped integrate families into the financial mainstream. Early lessons for the design and evaluation of related programs are discussed. This information is valuable because the Internal Revenue Service is actively seeking to replicate the program across the country, as are banking regulators and foundations. To our knowledge, the ECSP is the first such program to be evaluated. THE EXTRA CREDIT SAVINGS PROGRAM The Extra Credit Savings Program is a pilot program developed by ShoreBank, a community development financial institution, and the Center for Economic Progress (CEP), a non-profit organization seeking to improve access to public benefits for low-income families. This article uses data from the program's first 17 months, January 2000 to May 2001. …