If you’ve watched TV (or been exposed to any online advertising) in the last couple of months, you’ve almost certainly seen one of my favorite actors (and fellow Mizzou alumnus) John Hamm serve as the pitchman for a series of commercial spots promoting the tax services of H&R Block. April 15th is just around the corner!
Using slick advertising (explosions, zombies, and period-costumes) that will remind viewers of the hit TV show he is best known for, Mad Men, Hamm urges the viewer: “Don’t just get your taxes done, get your taxes won!”
Normally, I would give Hamm a pass on his role as a product pitchman; after all what celebrity hasn’t tried to benefit from their status? However, my years on MDC’s economic security team have brought me face-to-face with tax preparation business practices that prey on low-income working families by charging exorbitant fees. Those questionable fees and practices have taken a large bite out of one of our country’s largest anti-poverty programs: the Earned Income Tax Credit (EITC).
Quick primer on the Earned Income Tax Credit
The EITC is one of the few federal programs that have received bi-partisan support since its initial passage. Signed into law under President Ford, and expanded by Presidents Reagan, Clinton, Bush, and Obama, the EITC has had a significant impact on reducing poverty. In fact, President Reagan referred to the EITC as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” Analysis by The Brookings Institution found that from 2009 to 2011, 2.2 million Southerners were kept out of poverty by the EITC alone.
For the 2016 tax year, as shown in the chart below from the Center on Budget and Policy Priorities, a single parent with two children that has gross household income between roughly $14,000 and $18,000 may be eligible for the maximum credit of $5,572. Similarly, a married couple with two children and income between roughly $14,000 and $24,000 may be eligible for that same maximum credit. For families living paycheck-to-paycheck, the promise of a significant cash infusion from the EITC each year too often masks the effect of the cut that paid preparers take for their services. The magnitude of the tax refund dollars (driven primarily by the refundable EITC) that are diverted from our country’s low-income tax filers is astounding.
Source: Center for Budget and Policy Priorities
In tax year 2014, 49 percent of North Carolina’s tax filers claiming the Earned Income Tax Credit used paid preparers. Using a conservative estimate for the average tax preparation fee of $200, over $91 million dollars were diverted from low-income households. Does $200 for tax preparation assistance sound egregious to you? Well, keep in mind that 60 percent of EITC-claiming tax households make less than $20,000 in adjusted gross income for the year. According to the NC Justice Center, the value of tax refunds diverted to paid preparers is equal to 85 percent of what the state of North Carolina spent on a state-based version of the EITC in 2014 before the General Assembly ended the program ($107 million).
While the tax preparation industry has shifted a good chunk of its advertising to its online products (which typically offer lower prices with fine-print caveats), brick and mortar stores are still where a large proportion of low-income households file their taxes. Most of the largest tax preparation firms operate a franchise model lending the weight of their corporate name to independent operators in communities across the country. These in-person locations typically charge consumers much higher rates to file their state and federal returns – and often charge extra for consumers claiming the EITC or to complete the necessary forms that to reconcile tax credits (financial assistance) received through the Affordable Care Act.
The high rates low-income households pay to meet their tax filing obligation isn’t the whole story. Consumer advocates have raised concerns about the lack of oversight and standards for the paid-preparer industry, but have not succeeded in securing protections against predatory practice. In testimony to the U.S. Senate Committee on Finance in 2014, Chi Chi Wu from the National Consumer Law Center noted that while CPAs, enrolled agents, and volunteers with the Volunteer Income Tax Assistance Program must complete testing and operate under strict regulatory oversight, private preparers can open businesses and operate without licensing or regulation.
Liberty Tax Service, recognized by the chain’s prominent use of contractors dressed up like the Statue of Liberty roaming strip mall parking lots and busy street corners, promises prospective business owners that with a $40,000 franchise fee (and other associated start-up and operations costs) in as little as 60-90 days anyone can begin helping consumers file their most sensitive and important financial documents. Last year, an article by The Virginian-Pilot highlighted dozens of lawsuits and forced closures of franchise locations between 2014 and 2016. In at least one these cases, a franchise owner with 50 locations had his e-filing privileges suspended in connection to reports of widespread fraudulent returns.
Another prominent national chain, Jackson Hewitt, was the focus of a recent local news story out of Knoxville, TN where a local independent contractor purportedly charged a mother of two who only earns a little over $25,000 roughly $600 to prepare a simple two-page return. According to the statement from the corporate office, the error was simply a lack of communication with its franchise operators about the fee caps on preparation services.
Strengthening our civic infrastructure for the low-income tax-filer
While the tax filing season is winding down, Southern communities should take the time to reflect on the important role that free tax preparation programs (both in-person and online) play in ensuring upward economic mobility for hard-working, low-income families. While large corporate tax-filing companies like H&R Block may have the most effective and beautifully crafted commercials (and John Hamm), they clearly don’t provide the best service for our region’s working poor. Instead, we should be looking to leaders in the South, like MDC’s Board Member Stephen Black of Impact America, that refuse to accept the current realities of the massive redistribution of the EITC to the paid preparer industry. In 2016, Mr. Black’s SaveFirst initiative supported a cadre of 675 IRS-certified student volunteers from universities across the South in completing nearly 16,000 tax returns and assisting clients in securing more than $20.4 million in tax refunds. Similar models of free tax preparation are offered by local volunteers (the majority of whom are retired CPAs) at VITA locations (the IRS Volunteer Income Tax Assistance Program). For consumers that prefer the independence of filing their return online, there are free tax-filing programs like The Benefit Bank or free programs that are verified by your state’s department of revenue. While programs like VITA and The Benefit Bank may be lesser known, and have much smaller marketing budgets than their commercial counterparts, they are providing valuable high-quality assistance to the working households in your community striving to achieve economic mobility.
In our last blog post on the recently announced changes to the Fair Labor Standards Act (FLSA), we discussed the financial security that a full-time, salaried job with benefits offers to families. Far too many low- and moderate-income Southerners who work full-time, however, do not fully benefit from the increased security of predictable and limited hours. One of the big reasons for this gap is that, until the new changes go into place in December, the intended overtime protections under the FLSA allow some industries to take advantage of outdated regulations, paying poverty-level wages to full-time workers who consistently work above and beyond the 40-hour work week. With the current salary test for exempting an employee from overtime protections ($455 a week in earnings), a single adult with three children is below the poverty line, and well below what it takes to make ends meet.
According to an analysis by the Economic Policy Institute, the groups most likely to benefit from the new overtime rules are predominantly women, workers under age 35, racial and ethnic minorities, and those with lower levels of educational attainment. Below, we examine the trends and current earnings gaps by gender, race, educational attainment, and occupations that are most likely to be affected by the new overtime rules.
FLSA changes in brief
The U.S. Department of Labor issued a final notice of rulemaking that will increase the share and number of workers eligible for overtime protections. Specifically, the ruling increased an outdated salary threshold used to determine eligibility for exemptions from overtime protections: the old threshold of $455 per week (last adjusted in 1975) was updated to a new threshold of $913 per week. The new salary threshold for an overtime-exemption will go into effect on December 1, 2016. In short, a portion of workers that make more than the $455 threshold and less than the $913 threshold will likely get an immediate wage bump. A large percentage of these workers live and work in the South and are likely to benefit from greater financial security and work-life balance that enables the pursuit of additional postsecondary education or training to meet the requirements for the jobs of the future.
Who is likely to benefit from these new rules? And how does educational attainment factor in?
Women: The gap in median, full-time, salaried weekly earnings for men and women is closing, but the need for progress remains. In 1979, women’s median weekly wages were only 62 percent of their male counterparts; in 2014, that figure was 83 percent. While women now account for a greater proportion of workers in professional occupations, continued growth and representation in occupations that offer a living wage is necessary to close the gender wage gap.
Young Adults: Nearly 36 percent of the workforce directly benefiting from the new FLSA rules are in the 16-34 demographic. An even higher share of the group’s salaried workforce is projected to benefit than other age groups: 33 percent of 16-24 year olds and 29 percent of the 25-34 years.
Adults with less than a college education: A postsecondary degree or credential has long been the strongest predictor of securing a full-time, salaried job in today’s modern economy—but when disaggregated by race and gender, the median weekly earnings for full-time salaried workers are either below or barely above the new threshold for blacks, Hispanics, and women. For workers with less than a bachelor’s degree, weekly earnings are well below the new $913 threshold, and for those with less than a high school diploma, right at the 1975 threshold of $455 per week.
As shown in the chart below, adults with some college or no college are disproportionately likely to benefit from the changes to the FLSA. Nearly 62 percent of directly affected workers have some college education or none, and the share of workers by educational attainment is highest among those with at least a high school education (38 percent).
Occupations: According to an analysis done by EPI, workers in a set of 13 occupations are most likely to directly benefit from the new changes to the FLSA. Leading the group are two white-collar categories: management, business, and financial occupations; and professional and related occupations. Also on the list is service-sector occupations—a segment of the Southern economy that is growing more rapidly than most.
A family-supporting wage is a critical element of the Infrastructure of Opportunity
Far too little of the South’s current workforce are earning family-supporting wages—a product of policies, funding, and systems that have continued to produce low educational attainment and employment opportunities in the region. The changes to the FLSA and overtime regulations are expected to largely benefit women, people of color, young adults, and those with lower levels of educational attainment. Changing how work is compensated in the South, however, is not a silver bullet for stalled economic mobility in the region. In order for the South to succeed economically, states and communities must prioritize the building blocks of an Infrastructure of Opportunity for their citizens. As the data above suggest, educational attainment is and always has been the best predictor of a family-supporting wage. For those workers who represent the working-poor, the new FLSA changes offer the potential for an immediate wage boost and the potential for the time and flexibility to pursue a valuable certificate or degree to take the next step in their career.
“No reasonable person seeks a complete uniformity in wages in every part of the United States; nor does any reasonable person seek an immediate and drastic change from the lowest pay to the highest pay. We are seeking, of course, only legislation to end starvation wages and intolerable hours…” ~ Franklin D. Roosevelt, State of the Union Address, 3 January 1938
A full-time, salaried job with benefits has long been held as a marker of a young person’s path to adulthood. For many, a full-time, salaried job comes with the increased security of predictable hours, predictable pay, and the first building blocks of a career—one that offers family-supporting wages. For far too many, however, the laws on the books designed to place reasonable limits on the work week and preserve the value of a salaried wage have been compromised—effectively compromising a working adult’s ability to achieve economic resilience and fulfill a meaningful social and civic life outside of work.
Last month, the Department of Labor issued a final notice of rulemaking that makes broad changes to the Fair Labor Standards Act (FLSA) to simplify existing regulations and increase the share and number of workers eligible for overtime protections. Specifically, the ruling increased an outdated salary threshold used to determine eligibility for overtime protections: the old threshold of $455 per week (last adjusted in 1975), was updated to a new threshold of $913 per week, which goes into effect December 1, 2016. Under the new rules, a salaried worker making less than the new threshold is eligible to be paid 150 percent of their base wage (time and a half) for work over the forty-hour full-time standard.
History of the FLSA
Originally passed in 1938 under the Roosevelt Administration, three of this country’s most important labor protections came out of the FLSA: tough restrictions designed to ban child labor; the minimum wage; and a set of overtime rules designed to curb the pervasiveness of work above and beyond a newly established 40-hour work week. As an accommodation to employers, however, the law provides certain “white collar” exemptions from overtime eligibility based on the salary an employee earns and the duties or job functions they perform.
Unfortunately, the original law left a number of critical terms and issues undefined, limiting its impact; for example, many industries and sectors of the economy were not covered during the first few decades. And without clear legislative language, the efforts to define job duties that met the exemption standards became increasingly difficult—especially as workplaces changed. Finally, with the significant inflation that occurred during the 20th century, the salary test became disconnected from any meaningful marker of wage strength, effectively allowing for the payment of poverty wages for a household of four (as shown on the chart below).
Impact for Workers
Previous research shows that the groups most likely to benefit from the changes are disproportionally women, workers under age 35, racial and ethnic minorities, and those with lower levels of educational attainment. The options available to employers responding to these new changes are nearly all positive, and will have the effect of increasing the overall economic security of low- and moderate-income households while providing more opportunities for a civic and social life outside of work:
- Employers could offer an immediate wage boost for those full-time salaried workers making more than the old $455 threshold, but less than the $913 threshold.
- Employers could reorganize labor that shifts responsibilities for work hours performed by overtime-eligible workers. Employees who remain under the threshold for the overtime exemption will now be compensated for their work above and beyond the 40-hour work-week at 150 percent of their normal wage.
Impact for Southern Workers
Usual weekly earnings of non-hourly, full-time workers by selected characteristics, fourth quarter 2015 averages.
Changes to the salary threshold for exempting workers from overtime projections have long been resisted—particularly by specific industries and in the South as a whole, where low wages have been a staple of the modern workforce. Even though the new salary represents only the 40th percentile for weekly wages in the South (a bit less than advocates were hoping for), many of the region’s workers will benefit both directly and indirectly from the new changes. Nearly 39 percent (or 4.8 million) of the newly covered workers under the new salary threshold reside in the South (See table below). While it is clear that the most populous states in the South will have the largest number of workers affected, it is notable that Arkansas, South Carolina, and West Virginia have the largest share of their current salaried workforce directly affected. Also notable among the list of states are Florida and Alabama, which represent a disproportionate amount of the increase in lawsuits under the FLSA since the early 1990s.
Fair employment practices are a critical element to the Infrastructure of Opportunity
The updates to the FLSA’s overtime rules will ensure that the extraordinary efforts of lower-wage workers, who are often juggling the demands of a more active family life and have traditionally been excluded from traditional workplace benefits, can no longer easily be devalued in the marketplace. Moreover, the changes to the FLSA are also likely to have a net-positive impact on health outcomes—which have long been poor in the South. In a recent meta-analysis by the CDC, 16 of 22 studies addressing general health effects found that overtime was associated with poorer perceived general health, increased injury rates, more illnesses, or increased mortality. As communities evaluate their own Infrastructure of Opportunity, businesses and community leaders should take note of how laws and systems like the old overtime scheme have disproportionally benefited largely white and well-educated workers. Without addressing the legal and structural barriers in place for low-wage workers, the South will continue to have an underpaid and undervalued citizenry.
More than one million Southerners benefit from free tax prep assistance with VITA, commonly known as the Volunteer Income Tax Assistance Program, and today is VITA Awareness day, as we are one month away from the tax filing deadline of April 15, 2016.
VITA is the nation’s largest volunteer free tax-preparation program. Each year volunteers from across the country mobilize to provide in-person assistance to low- and moderate-income tax filers in navigating our complicated tax code.
VITA preparers offer free tax help to people who generally make $54,000 or less, persons with disabilities, elderly, veterans, and limited English speaking taxpayers.
Each year, thousands of volunteers (many of whom are retired CPAs) gather at public libraries, community colleges, community centers, and local nonprofits to assist people—many who benefit greatly from claiming the Earned Income Tax Credit. The most recent data from the VITA program reveals that more than 1 million Southerners secure refunds of more than 1 billion dollars with roughly 30 percent of the refunds coming from the EITC.
The VITA program and other free-file self-serve options like The Benefit Bank® save taxpayers money during tax time. The average fee for a paid professional tax payer is costly—with services targeted towards individuals least able to bear the cost.
In fact, a recent estimate in Durham, NC found average fee of about $200. Some firms go even further in offering predatory products marketed towards individuals who are in dire straits, and are willing to lower their overall refund in the hopes of getting their deposit just a few days earlier.
A conservative estimate (around $200 for the average cost of a return) would suggest that VITA saves low- and moderate-income Southern tax filers more than $208 million dollars a year in paid-preparer fees.
Not only is VITA saving taxpayers money, the program has also continuously demonstrated low error rates compared to many self- and paid-tax preparation services. For the relatively small investment (around $12 million went to 213 nonprofit organizations for the 2012 filing season) in the program, VITA preparers are providing a high quality resource to many of our country’s most marginalized citizens.
So today, give a big shout-out to your local VITA tax preparer—chances are you can find them at your local library—and share this information and resource with your family and friends.
This post written by Scott Edmonds, Program Manager for MDC. Scott primarily supports MDC’s employment security portfolio by providing project management, policy research, data analysis, and program design expertise for projects that seek to eliminate the underlying barriers to an individual or family’s success in securing postsecondary education and employment.