Abstract
The Earned Income Tax Credit (EITC) provides substantial financial support to low-income workers in the USA, yet around a quarter of EITC payments are estimated to be erroneous or fraudulent. Beginning in 2017, the Protecting Americans from Tax Hikes Act of 2015 requires the Internal Revenue Service to spend additional time processing early EITC claims, delaying the issuance of tax refunds. Leveraging unique data, this paper investigates how delayed tax refunds affected the experience of hardship and unsecured debt among EITC recipients. Results indicate that early filers experienced increased food insecurity relative to later filers after the implementation of the refund delay.
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Our paper uses proprietary administrative tax data and data from a survey of low-income households that include detailed information about respondents’ finances and individual-level tax data. Given the sensitivity of these data, we cannot make them publicly available. However, interested researchers can access these data by contacting the Washington University research team and formally receiving permission from the Washington University Institutional Review Board.
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The code used in this study is available upon request.
Notes
The data were collected through the Refund to Savings (R2S) Initiative, a research collaboration between Washington University in St. Louis, Duke University, and Intuit Inc., the makers of TurboTax.
The TTFE tax preparation and tax filing software is offered by Intuit, Inc. for free as part of the IRS Free File Alliance to qualifying LMI households (https://freefilealliance.org/).
Around 9% of the analytical sample appeared in both 2016 and 2017. There are several reasons why we do not observe the same households across study years: households may not have used TTFE across the years, they may not have been randomly selected to participate in the survey in both years, they may not have qualified for the EITC in both years, or they may not have completed two survey waves in both years.
To measure material hardship, we relied on survey questions administered six months after tax filing that asked respondents whether they “did not pay the full amount of the rent or mortgage because [they] could not afford it,” “skipped paying a bill or paid a bill late due to not having enough money,” and experienced food insecurity in the past six months. The six-item questionnaire to measure food insecurity was adopted from the U.S. Department of Agriculture (USDA) questionnaire (USDA, 2012) and indicated whether respondents experienced any food insecurity. For medical hardship, respondents were asked whether in the past six months they “needed to see a doctor or go to the hospital but did not go because [they] could not afford it” and “could not fill or postponed filling a prescription for drugs when they were needed because [they] could not afford it”.
A value of one was added when respondents reported no unsecured debt.
It is worth noting that similar—though more muted—trends in the comparison group are observed even when regressions do not include covariate variables.
While throughout the paper we refer to tax filing, this process consists of two parts: tax preparation and submission of tax returns. In most cases where filers use electronic tax filing software, the two actions happen close to each other—The filer prepares their taxes and then immediately files them using the software. However, in some cases, tax preparation dates may differ from tax return submission dates: Tax preparation dates refer to the period when software companies start accepting tax returns, while tax return submission dates refer to the time when tax returns are submitted to the IRS. Although tax filers can prepare their tax refunds through tax filing companies ahead of the official tax season, their tax returns will get transferred to the IRS only at the start of the tax filing season.
The analysis using 2015 and 2016 years relies on the simplified financial insecurity measure, which includes a binary yes/no measure of food insecurity rather than the USDA-based food insecurity scale.
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This paper received no direct financial support from any source. The broader initiative on tax-time savings and financial well-being, of which this research project is one component, received outside funding from these sources: the U.S. Department of Treasury, the Annie E. Casey Foundation, the Intuit Financial Freedom Foundation, and the JPMorgan Chase Foundation. These organizations provided grant funding that partially covered the authors’ salaries, the general collection of data (e.g., survey participation rewards), processing of data, and data analysis.
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Kondratjeva, O., Roll, S.P., Despard, M. et al. The Impact of Tax Refund Delays on the Experience of Hardship Among Lower-Income Households. J Consum Policy 45, 239–280 (2022). https://doi.org/10.1007/s10603-021-09501-4
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DOI: https://doi.org/10.1007/s10603-021-09501-4