Timing is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing?

One important feature of the Earned Income Tax Credit (EITC) is that many families receive a large lump-sum payment when they file their taxes each year. In this paper, we use the Survey of Income and Program Participation (SIPP) wealth topical modules from 1990 to 2008 to analyze the impact of the expansions of the EITC at the federal and state level over the last twenty years on household savings and unsecured debt. Results suggest that increases in tax credit generosity are associated with increases in both household savings and debt. Using the Consumer Finance Monthly survey (CFM), we then show a seasonal pattern of debt accumulation for low-income households that reflects the once-a-year timing of benefits structure: low-income households are much more likely to pay down their debt in the months surrounding tax filing compared to their higher-income counterparts, while there is little or no difference in their debt accumulation and payoff compared to higher-income families throughout the rest of the year. We estimate that the use of high-cost credit to finance consumption during non-EITC months results in approximately 8 percent of all EITC funds being paid in consumer interest payments. Direct correspondence to: Katherine Michelmore, Gerald R. Ford School of Public Policy, University of Michigan. 935 S. State St. Ann Arbor, MI 48109. Email: [email protected] Phone: 734-615-3802. Lauren Jones, The Ohio State University. Email: [email protected].