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States Cracking Down on Tax Loans

2 min readBy: Gerald Prante

As the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code becomes more and more of a spectacle with respect to businesses looking to capitalize on the one-time (and illusive) income boost that taxpayers receive from their refund check each spring, some states are trying to crack down on certain loans that taxpayers are being offered by tax preparation firms. A story in today’s Wall Street Journal details the crack down:

A variety of companies are trying to get their hands on your tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. before you do, and state law-enforcement officials are cracking down on some of the practices.

As the April tax-filing deadline approaches, businesses from tax-preparation firms to auto dealerships are offering consumers the opportunity to put their expected refund checks to work weeks before the IRS sends them out — often by loaning them the expected amount for a high fee. Dozens of retailers, including Olive Garden restaurants and AMC move theaters, have begun offering gift cards in exchange for tax refunds to people who file using TurboTax, the popular tax-preparation software. H&R Block Inc. recently launched savings accounts for customers to channel their tax refunds. And hundreds of car dealerships will prepare your taxes if your refund is applied toward a down payment on a car.

But now, state officials are clamping down on some of these programs, claiming they saddle low and moderate-income families, recent college graduates and others with high fees. Last year about three of every four tax filers received a refund, according to the Internal Revenue Service. Those refunds totaled nearly $218 billion, or about $2,171 per household (Full Story, subscription required).

While state governments perceive this as a problem being caused by businesses like Jackson-Hewitt and H&R Block, the primary problem lies in Washington with the federal government continuing to implement a tax system that becomes more and more complicated every year. So while attorneys generals across the country seek to take on these businesses for what they label as deceptive business practices, Americans should instead put pressure on lawmakers in Washington to rid the federal tax code itself of deception, inefficiency, and distortions.

For more on tax reform, check out the Tax Foundation commentary on the Tax Reform Panel’s recommendation on simplifying the federal income tax system.