Can EITC Recipients be Encouraged to Save at Tax Time? Findings from a Randomized Trial

Background and Purpose. The Earned Income Tax Credit (EITC) is one of the largest federal anti-poverty programs. In the 2013 tax year, the average EITC was over $3,000 for lower-income families with children and youth, offering many of these families the largest single payment they receive all year. Households with income in the two lowest quintiles have enough liquid financial assets to cover only 9 and 15 days’ worth of ordinary living expenses, respectively, increasing risk for material hardships when confronted with unexpected emergencies and dips in income. Thus, tax refunds represent an opportunity to build emergency savings to increase financial stability and avoid adverse events like evictions and utility cut-offs. However, EITC recipients use their tax refunds for several purposes, such as reducing unsecured debt and making large purchases, and save only small portions of their refunds.

Methods. Lower-income tax filers who expected to receive a federal income tax refund were randomly assigned into one of several treatment groups that received a savings message grounded in behavioral economics and embedded in online tax filing software, or a control group that did not receive a savings message. Inverse probability of treatment weights (IPTW) were used after re-sampling based on EITC eligibility status and used with logistic regression models for whether participants made a savings deposit, and Tobit regression models (left-hand censoring for zero values) for percentage of refund saved and deposit amounts. Using data from a household financial survey administered six months after filing taxes, we also assessed treatment-control group differences in any refund still saved, material hardship, and financial difficulty. We wished to determine whether savings messages positively impacted savings outcomes and the likelihood of financial problems six months after filing.

Results. EITC recipients exposed to savings messages were 39% more likely than EITC recipients in the control group to save all or a part of their refunds (p < .05) and saved a higher percentage (7% vs. 5%) of their refunds β = 0.26, t(5,606) = 1.98, p < .05. Also, EITC recipients receiving a savings message had higher average savings deposits ($254) than EITC recipients in the control group ($183) β = 918.14, t(5,606) = 2.18, p < .05. These results held after controlling for unsecured debt. However, there were no statistically significant differences between treatment and control group EITC recipients concerning the likelihood of having retained any portion of tax refunds as savings, experienced a material hardship, or experienced a financial difficulty six months after filing taxes.

Conclusions and Implications. Savings messages delivered in tax filing software that prompt filers to save for a particular purpose and/or save a particular amount or percentage of their refund promote modest tax-time savings outcomes among EITC recipients. However, these outcomes dissipate in the months following tax filing and do not appear to mitigate household financial problems. Lower-income families that receive the EITC may need additional opportunities and incentives to build emergency savings, such as a current policy proposal to provide savings matches for deferred portions of tax refunds.