New Analysis Finds Debit-Card Tax Refunds Inefficient

July 17, 2013
By Jenny Li Fowler

Millions of Americans receive their tax refunds via pre-paid debit cards each year through private companies. Now the federal government is considering offering refunds on debit cards; several states already offer the option directly to taxpayers, and a few have eliminated paper checks entirely.

However, new research by John N. Friedman, assistant professor of public policy, suggests that government should think twice before going down this path -- both for cost and participation concerns.

“While it is cheaper for the government than cutting checks, it imposes user fees on taxpayers who receive the refunds that amount to much more on average,” writes Friedman in "An Economic Analysis of Government-Sponsored Debit-Card Tax Refunds.” “As a result, governments are increasing the costs of tax administration and imposing them directly on taxpayers.”

In addition, Friedman writes, current trends reflecting increased use of pre-paid credit cards for tax refunds may be misleading.

“The states that had high take-up of the debit-card program were those that did not permit tax refunds via check,” said Friedman. "This suggests that governments are not filling some large unmet demand for debit cards; rather they are forcing them on taxpayers who do not want them."

The lesson for policymakers, Friedman writes, is to "rethink these policies."

"An efficient solution to this problem is for governments to allow taxpayers to choose between receiving their refunds via paper check or debit card (as did Georgia, New York, and South Carolina), and to make taxpayers highly aware of this choice. In practice, however, this limits the ability of the government to provide cost reductions," Friedman concludes. "Many fewer taxpayers will choose debit cards under these conditions, reducing the ability of the government to achieve a more efficient scale or use increased bargaining power to achieve lower prices."

John N. Friedman is an assistant professor of public policy. His research has focused on tax, education, and healthcare policy, as well as the drivers and implications of redistricting. Before joining the Kennedy School, Friedman was a Robert Wood Johnson Scholar of Health Policy at the University of California at Berkeley. He is currently a faculty research fellow at the National Bureau of Economic Research.

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John N. Friedman, assistant professor of public policy

John N. Friedman, assistant professor of public policy

“The states that had high take-up of the debit-card program were those that did not permit tax refunds via check,” said Friedman.