Atlanta's low-income families are more likely than their peers in other large cities to take out high-interest tax refund loans.

Nearly 58 percent of Atlantans whose tax refunds were pumped up by a federal anti-poverty program opted for such loans in 2002, according to a study to be released today by the Brookings Institution, a Washington, D.C., think tank.

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TAX LOAN LEADERS Cities with the highest percentage of families receiving the Earned Income Tax Credit who use tax refund loans: Memphis 64.5% Birmingham 60.5% Norfolk, Va. 58.5% Greenville, S.C. 58.2% Atlanta 57.7% Newport News, Va. 57.7% Little Rock 57.1% Columbia 55.9% Jacksonville 55.8% Charleston, S.C. 54.6% — Brookings Institution analysis of 2002 IRS data
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Atlanta ranked among the top five cities nationally with the highest share of low-income workers who borrowed against their tax refund money to get cash within a day or two.

Advocates for the poor say the tax refund loans — whose annual interest rates almost always exceed 100 percent — undermine the Earned Income Tax Credit, the federal program that adds as much as $4,300 to the tax refund checks of the nation's working poor. For residents of Atlanta, the average EITC recipient got a tax refund increase of $1,929 in 2002, the study found.

"Those were dollars that were intended to support low-income workers and their families," said Alan Berube, one of the report's authors. Instead, interest, fees and tax preparation charges from the loans take a significant bite out of a check that is the largest windfall of the year for many working families, Berube said.

Interest and fees for a tax refund loan can routinely cost the typical working family $130, according to the report; tax preparation charges often cost another $200 or more.

More than half of Atlanta's low-income families took out one of the high-cost loans in 2002, compared with less than 10 percent of Atlantans who did not qualify for the anti-poverty program.

No region outpaces the South when it comes to the popularity of tax refund loans. The top 10 cities in the study's rankings are all in the South. Low-income families in Atlanta were more than five times as likely to take out a tax refund loan as similar families in San Francisco.

"This is a much bigger problem in some places than others," Berube said.

Commercial tax preparers such as H&R Block and Jackson Hewitt, which heavily advertise the loans, are more concentrated in Atlanta and other Southern cities, especially in low-income neighborhoods, he said. Southern families tend to earn lower wages and therefore qualify for more benefits under the EITC program, which may give families more of an incentive to take out the loans.

Exempt from state law

The interest rates charged for tax refund loans exceed the 60 percent limit that Georgia places on most consumer loans. But because tax preparers partner with federally chartered out-of-state banks that act as the lenders, they are exempt from state laws governing interest rates.

People who want their refund money quickly sign loan papers after having their taxes prepared. The loans are usually repaid in less than two weeks, when the Internal Revenue Service issues a refund to a special account opened as part of the loan.

Those loans and related fees are costly. The $2,461 tax refund to Dana Williams of Atlanta, for example, was slashed to $2,158 after he paid loan fees of $99.95 and preparation fees of $203 to H&R Block in March.

Williams, a carpenter and single father who earned less than $20,000 last year, knew he was paying a hefty cost to get his money quickly. The annual interest rate on his loan was 104 percent. The bottom line, he said, was that he "needed the cash."

Tom Linafelt, a spokesman for H&R Block, said his company helps many working families by letting them know about the EITC program.

H&R Block, he said, makes sure every customer who is interested in a tax refund loan understands the costs and is informed of the alternatives. "The bottom line is, people want their money fast," Linafelt said.

But critics such as Allison Wall, executive director of Georgia Watch, a consumer organization, call tax season "feeding time for the loan sharks."

"We just really want to urge consumers to beware of tax-prep gimmicks like rapid taxes or fast refunds, because these gimmicks are really high-interest loans on money that is rightfully yours," Wall said.

Such warnings may be having an effect. The proportion of low-income families who took out a tax refund loan fell almost 5 percent nationally from 2001 to 2002, according to the Brookings study.