A $2 trillion, bipartisan relief package—the largest in U.S. history—was signed into law on March 27, 2020 to address economic downfall fueled by the COVID-19 pandemic. In addition to business loans and bailouts, this legislation, known as the Coronavirus Aid, Relief and Economic Security Act (CARES Act), will distribute one-time economic impact payments to individuals and families. This payment could offer a lifeline to American households as businesses shut down and unemployment skyrockets.
Will it help? We won’t really know until the dust has settled on the COVID-19 crisis, but research examining how households use similar payouts, like the tax refund, can help shed light on what households might do next.
In 2019, we surveyed low- and moderate-income tax filers to learn how they used their tax refund. One group we surveyed used TurboTax Free File Product (TTFFP)—offered by Intuit as part of the IRS’ Free File Program. Another group filed through the help of Volunteer Income Tax Assistance (VITA) sites. We found that most of these low-income households use the tax refund to pay for necessities such as rent, bills and groceries, followed closely by paying down debts (see, the graph in Figure 1).
Figure 1: Reported uses of the tax refund among TTFFP and VITA filers
In the same survey, we also asked both groups to describe the most important usage of their tax refund in their own words, as shown in the images below (see, Figure 2). Filers almost universally viewed the refund as an important tool for managing necessary expenses such as housing payments, healthcare, and other essential bills, as well as for strengthening their balance sheets by paying down debt and building savings.
Figure 2: The most important usage of the refund among TurboTax Free File filers (left) and VITA filersWhile economic impact payments are different than a tax refund, we can be fairly confident, based on this research, that in this moment of emergency, payments from CARES Act will be used on essential purchases. It is also possible households will allocate their economic impact payments to clear debt entirely or to make a minimum payment in order to keep some liquid assets in checking or savings.
As COVID-19 continues to unravel the economy, households facing historically high unemployment or a reduction in hours may take on more debt in the weeks and months prior to receiving economic impact payments. We see a similar debt repayment tactic with tax refunds. Because households can plan finances around the anticipated size and timing of their annual federal tax refund, households oftentimes take on debt in January and February with plans to repay it when their refunds arrives. Finally, some households with more financial flexibility or stability may choose to save what they can to withstand the economic volatility that could stretch several months.
COVID-19 is challenging everything about the global and local economy as we know it. For households already facing financial vulnerability, the economic impact payment will fill a critical income gap, but the long-term impact is unknown. Though unprecedented, we can glean information and strategies from history and existing research. In the coming weeks, the Social Policy Institute will share more insight from its tax refund research to help households make the most of their windfall payments during this trying time.
ABOUT THIS RESEARCH
The research referenced in this post is from “Evaluating Tax Time Savings Interventions and Behaviors,” written in partnership with Prosperity Now and SaverLife and funded by Intuit. The report looks at how refunds are used by low- to moderate- income tax filers, such as those using Intuit’s TurboTax Free File Product, which is part of the IRS’ Free File Program, or those filing through the help of Volunteer Income Tax Assistance sites.
DISCLAIMER: Statistical compilations disclosed in this blog relate directly to the bona fide research of, and public policy discussions concerning, financial security of individuals and households as it relates to the tax filing process and more generally. Compilations follow Intuit’s protocols to help ensure the privacy and confidentiality of customer tax data.