April 21, 2016
Monday, April 18th was Tax Day. For many taxpayers, that meant the deadline for filing taxes—and also the end of one of the most prosperous times of the year for millions of working Americans.
Thanks to tax refunds and support payments like the Earned Income Tax Credit, many working families are able to use tax season to save, pay down debt, and get caught up on their finances. But the closing of this tax season also gives us the chance to look towards next season and consider how we can use tax time to make working families more financially secure.
Many working families are facing a savings crisis by setting very few dollars aside for a rainy day, which undermines their ability to make ends meet. And financial emergencies are more commonplace than many of us may have previously recognized: 60 percent of American households will experience a financial shock in the next year. Unfortunately, many of those families will not be prepared to handle such an emergency. Forty-one percent of U.S. households do not have enough money to cover a $2,000 expense (which, coincidentally, is also the typical amount families pay for their highest-cost emergency in the course of a year). For lower-income households, that number increases dramatically: Nearly 8 out of 10 families at the bottom of the income ladder do not have enough money set aside to cover a sudden $2,000-emergency. These problems disproportionately affect minorities. According to Pew, half of Hispanic, non-college-educated couples with children have $500 or less in liquid savings, which is less than rent for the typical family. Without adequate emergency savings, many families turn to high-cost alternative financial services like payday loans and auto title loans.
This is why encouraging savings at tax time is so important. Tax time, stressful for some though it may be, is an opportunity for working families to build for the future, and to prevent sudden emergencies from causing financial distress. Programs and policies to date show that working families can and will build savings at tax time. Through the Refund to Savings Initiative, for instance, a large-scale tax time savings experiment led by Dr. Grinstein-Weiss, we have learned that low-income families desire to save at tax time—and that they do so. Many lower-income households who choose to save at tax time are saving for emergency expenses. Encouragingly, the research finds that people who save some of their tax refund at tax time are better off financially six months later.
Current federal policy spends more than $150 billion each year promoting retirement savings, the majority of which goes towards encouraging higher-income households to save. Not addressed, but desperately needed however, are policies that promote opportunities for lower-income families to save, including saving for emergency expenses, by offering account opening and tax-advantaged saving during the tax filing process. Pieces of legislation like the Financial Security Credit Act and the Refund to Rainy Day Savings Act, propose to do just that.
Implementing tax time savings initiatives locally has shown great promise as well. The SaveUSA program, which was implemented in New York City and elsewhere over the past several years, found that working families, even those with extremely low incomes, can and will save some when incentivized to do so. Studies of the program found that participants, whose average income was only $19,000, were able to save more than their peers, and were more financially secure as well.
By studying the financial reality of working American families and learning how they apply their resources at tax time, those in positions of policy power can make it easier for hard-working families not just to do their taxes, but to build a stable financial foundation that meets their needs now and in the future. National initiatives like Refund to Savings and local endeavors like the SaveUSA program have proven extremely successful; it is time to replicate and build on this type of effort on a national scale to give every working American the opportunity to capitalize on tax season to achieve greater financial freedom and stability. Their financial well-being is our nation’s strength, and will continue to be long after tax time has passed.