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Debit Cards Replace Paper Tax Refunds in Some States

At least six states this year issued their tax refunds on debit cards, in a move they say will save money for both the taxpayer and the government.

This tax season, many Americans who were owed refunds didn’t receive a familiar check in the mail. They got a prepaid debit card instead. At least six states this year issued their tax refunds on debit cards, in a move they say will save money for both the refund recipients and the government. Residents who have bank accounts can still have their refunds deposited directly to their accounts.

For those who don’t, however, states say there are many advantages of plastic cards over paper checks. For one, residents will be spared hefty check-cashing fees often imposed by banks or check-to-cash storefronts. And state revenue offices say the move will save them anywhere from $300,000 to $1 million every year, because they’ll no longer have to print checks. (The bill for managing and shipping debit cards is typically footed by the banks contracted by the states.) Connecticut, Louisiana, New York, Oklahoma and South Carolina all launched debit card programs this year, and Georgia continued a program it launched in 2011.

Banks make money off the cards by earning interest on the funds before they’re spent by taxpayers, charging merchants each time the cards are swiped, and levying various fees on the consumers who use the cards. In most cases, the debit card fees are structured so that, with some planning, taxpayers can avoid most or all of the associated fees. In South Carolina, for example, there’s no fee for using the card to make purchases from merchants that accept Visa debit cards, and taxpayers don’t pay a fee when they withdraw cash from Bank of America ATMs.

But if a taxpayer isn’t careful, the fees can add up. In South Carolina, recipients who lose a card must pay $15 for a timely replacement. Withdrawing cash from a teller costs $10 after the first trip. Fees such as those have prompted some criticism from consumer advocates, who say residents shouldn’t have to pay to access money they’re owed by the state. After all, those who receive debit cards because they lack bank accounts are the same people who can least afford to be nickel-and-dimed with fees, says Ken Edwards, vice president of federal affairs at the Center for Responsible Lending. Some state legislators are speaking out too. In Louisiana, lawmakers have noted that residents in rural areas don’t have easy access to ATMs for Chase, the bank hired by the state to handle debit card disbursement. There’s also been some criticism from elderly residents who aren’t accustomed to using debit cards and online banking to access their money.

Still, state tax officials say the majority of residents will benefit from the switch. And at a time when most state governments have already switched to plastic payments for unemployment benefits and food stamps, it’s a natural trend, say observers like Verenda Smith of the Federation of Tax Administrators. “This is going to be such a norm that nobody’s going to remember what a paper check is.”

Caroline Cournoyer is GOVERNING's senior web editor.
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