Refund Deferral Preferences Among Earned Income Tax Credit Recipients: Policy Implications

Background and Purpose. Low- and moderate-income (LMI) households lack sufficient liquid assets to address unexpected emergencies and dips in income (McKernan, Ratcliffe, & Vinopal, 2009; Pew Charitable Trusts, 2015). Receiving tax refunds is an opportunity for recipients of the Earned Income Tax Credit (EITC) to build emergency savings to help cope with these financial shocks. However, prior research has shown that 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 (Halpern-Meekin et al., 2015). The purpose of this study was to assess the hypothetical probability that EITC recipients would defer a portion of their refund for six months if offered savings bonuses like those proposed in bills recently introduced in Congress (H.R. 4236, S.2797), and to examine whether these savings preferences varied by the size of expected refunds.

Methods. The study sample was comprised of tax filers who were eligible for the EITC, expected to receive a federal income tax refund, and completed an online survey (N = 3,941) as part of a larger tax-time savings initiative during the 2016 tax season. To assess deferral preferences, survey respondents were asked whether they would be willing to defer 20% of their expected refund for six months (i.e., to ensure they had money to use later in the year) and were randomly assigned to see one of three deferral conditions – no deferral bonus, a 5% bonus, or a 10% bonus. Linear probability modeling was used to examine preferences as binary outcomes (Hellevik, 2009) across the three randomized conditions, controlling for age, income, filing status, number of dependents, race/ethnicity, gender, asset ownership, taxes withheld, budgeting habits, and economic circumstances. Preferences were also analyzed across refund quantiles.

Results. Only 21% of respondents in the no bonus condition said they would hypothetically defer a portion of their refund for six months, yet most respondents in the 5% (70%) and 10% (80%) bonus conditions said they would. Respondents had 49% and 59% increased probabilities of deferring 20% of their refunds for six months when hypothetically offered 5% and 10% bonuses (p < .001), respectively, compared to an offer of no bonus, all other things being equal. These probabilities rose steadily across refund quantiles.

Conclusions and Implications. Despite many intended uses of their tax refunds, EITC recipients are willing to save a portion of their refunds, which can help build emergency savings and help lower risk for material hardship. This willingness rises dramatically with the offer of modest savings bonuses, which supports key provisions of congressional bills and suggests that refund saving can be widely stimulated with modest incentives. Inter-quantile differences in deferral preferences are small, indicating that these modest incentives are likely to entice EITC recipients to save irrespective of the size of expected refunds.