States Cracking Down on Tax Loans

March 21, 2006

As the tax 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 refund 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.

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A 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.