With Tax Day come and gone, confusion over 1040s, 1099s, and W-2s has given way to enthusiasm for tax refunds. “Better than Christmas” is how one low-wage worker described her refund, and she’s hardly alone. Dozens of workers have compared tax season to Christmas, winning the lottery, and even an act of divine intervention.
That’s because for millions of Americans, tax time is a big boon—their refund is the single largest check they’ll receive all year. In fact, for lower-income tax filers, their annual refund can amount to 30 percent or more of their income for the entire year, providing a rare period of financial security in a year full of financial distress. These filers spend their refunds mostly on paying down debts, investing in their kids and their own future, and putting some savings away. For the rest of the year, though, a near majority of Americans are financially insecure, lacking even the most basic savings to deal with an emergency like reduced work hours or car trouble.
And that’s the problem with tax season: it’s just one short season. But life goes on and financial security shouldn’t end when that refund check is gone. A new bipartisan bill, the Refund to Rainy Day Savings Act, introduced by Senator Cory Booker (D-NJ) and Senator Jerry Moran (R-KS), aims to stretch out the positive impact of tax season by boosting emergency savings and year-round financial security.
The legislation tackles that goal in two simple ways. First, it allows all tax filers to opt in to a new Rainy Day Savings program at tax time. Under this program, when tax filers check a box on their 1040, a full 20 percent of their refund is saved for six months, accruing interest over the course of that period. Six months later, that deferred refund is put into their direct-deposit account. (Any account that is direct-deposit eligible can be used, including prepaid cards.) Filers would still get a sizeable refund at tax time, but they also get to set some aside for the year ahead and earn interest on it.
The second big component of the bill is designed specifically for low-income households. The Refund to Rainy Day Savings Act creates a new research and evaluation pilot program run by the Department of Health and Human Services to test out different models of savings matches for tax time. Driven by the needs of local anti-poverty practitioners and the populations they serve, this program will invest in innovative strategies to help lower-income households build savings and become financially secure. For example, as we’ve written previously, a pilot site could set up a 50 percent match for opting into the program. If the family saves $500 of their tax refund, they’ll receive $750 plus interest in six months. For reference, $750 is larger than the typical high-interest payday loan.
The legislation also provides research funding to evaluate what works and what doesn’t in the field of matched savings for low-income families and individuals, paving the way for future reforms that could scale up countrywide. This is what real evidence-based policymaking looks like.
Of course, the Rainy Day Savings program won’t eliminate financial insecurity. Families need adequate income to get by day-to-day, not just savings to weather emergencies. Low-wage workers who can’t claim children on their tax return in particular will continue to lose out under the current tax code unless Congress acts to stop taxing them into poverty. And a deferred refund won’t work for everyone. Some households will need immediate access to their tax refund. It makes sense—it’s their money and they should have access to it when they want and need it.
But the Refund to Rainy Day Savings Act takes a critical step in the right direction. It’s the first bipartisan bill of its kind aimed at expanding emergency savings and financial security. It creates a new tool that could help millions of low-wage workers take better control of their financial lives. And it will do that while simultaneously laying the groundwork for future large-scale reforms.
The good news is that it won’t take an act of divine intervention to boost financial security for millions of lower-income Americans—just an act of Congress. When two senators from two different parties can come together to announce something like this legislation, the rest of Congress should take notice and make it happen.