Federal Policies to Encourage Savings and Accounts at Tax Time

1. Federal Policies to Encourage Savings and Accounts at Tax Time New America Foundation Melissa Koide

2. Why are Federal Policies Needed? • Lack of reasonably priced financial products that meet lower-income households’ transaction needs, while also enabling them to build savings • By depositories • By nonbank firms • Limited savings and asset building policies targeted at lower-income

3. Key Components to Account • Simple and easy to use • Reasonably priced and transparent • Consumer Protections • Disclosures • FDIC • Opt-out vrs Opt-in • Support short-term savings • Convenience and accessibility • Able to function as a pipeline for the delivery of federal assets/savings funding • Ubiquitous: Education and Awareness

4. Why Focus on Tax Time? • This is a annual time when billions of dollars flow to low and middle-income tax filers. • $80 billion annually in tax refunds to tax filers with AGIs of $30K or less.  This is annual occurrence when middle and lower-income households receive a significant lump sum payment.  Research shows that tax filers use the tax filing time and the refund to do financial planning for the rest of the year.

5. Assets and Transaction AccountPolicy Proposal • Proposal to provide a transaction and savings product on the tax form • Tax filers, who do not direct their refund into another account or opt-out to receive a paper check, would be automatically defaulted into the ATA • 3-5% of refund defaulted into savings • ATA would be eligible for deposits throughout the year, with wages and salary at a minimum • Provide security, convenience, and the capability to manage and track spending

6. Assets and Transaction AccountPolicy Proposal • Consist of a prefunded, electronic account,; includes a network-branded (MC/VISA) card for transactions • Cash Withdrawal (ATM and Point of Sale Terminals) • Point of Sale Purchases (PIN or Signature) • Phone and web based bill pay • Web based purchase capabilities • Direct Deposit • Savings • No ChexSystems or credit checks • Offered by FDIC/equivalent depository institutions on behalf of the IRS • All consumer federal protections

7. Treasury POS IRS Verifies tax filer’s data Verifies tax refund amount Relays tax filer data to FI (KYC) Electronically transmits refund amount to financial firm, specifying how much to transaction and how much to savings ATM Tax Return Forms Option for direct deposit or ATA (or opt out) Provides ATA description and functions and any fees Specifies 2-5% default to savings and means for accessing savings Timing: when ATA card will arrive and when funds will be available Identifies the financial institution that will hold the account Online Purchase ATA-1 TAX REFUND to be deposited into the ATA Online Bill Pay Money Orders/ Remits • Financial Firm • Generates ATA Card Mails ATA Card to individual tax filer Includes: - Account number - specifications regarding card activation - details regarding card’s functions and fees - customer service information/number - Specifics how much is in each ATA component WAGES DEPOSITS Federal Savings Match

8. Tax filers: Who are They? Data from 2005 Tax Year • 134.3 million total returns filed • 50% - tax filers with AGIs of $30K or less • 25% - tax filers with AGIs between $30-60K • 26% - tax filers with AGIs of $60K and over • 104.7 million returns with refunds (78% of all returns) • 52% - tax filers with AGIs of $30K or less • 25% - tax filers with AGIs between $30-60K • 22% - tax filers with AGIs of $60K and over • 59.9 million returns with refunds were not direct deposited (48% of returns with refunds) • 56% -- 27.8 million -- were tax filers with AGIs of $30K or less • 23% -- 11.2 million -- were tax filers with AGIs between $30-60K • 22% -- 10.6 million -- were tax filers with AGIs of $60K and over

9. What Does this Mean for the ATA? Based on Data from 2005 Tax Year • Dollars • $Almost $70 billion in refunds that were not direct deposited by tax filers of $60K or less • Volume • 39 million tax filers who could be prime for an ATA • Cost Savings • $31 million each year to the federal Treasury

10. ATA: Appeal to Financial Service Providers • Scale, to generate volume • $70 billion in potential deposits, annually • 39 million tax filers • Ongoing revenue: Interchange • Volume to generate systems change • Product uniformity, efficiencies, staff competencies, portability • “Safe” and “scaleable” approach to underbanked market

11. ATA: Appeal to Federal Government • Millions saved by the federal government • $30 million saved each year • Facilitates more people “on the grid” • Provides operational efficiencies for the IRS • Positive PR for the IRS

12. Precedents for Government toProvide Accounts with Benefits and Payments • Federal Government • Social Security Entitlement Payments, Direct Express • States • More than 30 states use prepaid debit cards to disburse child-support and welfare benefits • Food Stamps, Heating Assistance, Child support payments, etc. • City • Opportunity NYC Savings Accounts • 8 financial institutions providing savings accounts or prepaid cards for families participating in the Opportunity NYC Family Rewards program

13. Legislation • ATA: Treasury interested; Congressional interest • Saver’s Bonus Act • New Saver’s Act

14. The Saver’s Bonus ActSenator Menendez • Up to $500 match for tax filers who save in a designated savings account • Eligible savings products: IRAs, 401(k)s, 529s, U.S. Savings Bonds, Savings vehicles designated by the Treasury Department • Eligibility: Incomes with incomes equivalent to up to 120 percent of the EITC eligibility thresholds • Enables tax filers to open an account on the tax form - could be ATA • Enables tax filers to purchase a U.S. Savings Bond on the tax form

15. The New Saver’s Act Senators Smith and Clinton • Opening of Accounts on Tax Returns to Facilitate Savings • Purchase of United States Savings Bonds on Tax Returns • $25 Million for VITAs • $25 Million for Low-Income Taxpayers Clinics

16. New America Foundation Melissa Koide 202.986.2700 koide@newamerica.net