Federal Reserve Bank of New York

This study seeks to gain a more complete picture about how the Earned Income Tax Credit program influences consumer expenditure and saving decisions. Based on 2003 tax year survey data collected from over 18,000 taxpayers participating at the Volunteer Income Tax Assistance (VITA) sites administered by FoodChange, a nonprofit organization in New York City, we find that a large proportion of lower-income taxpayers expect to use the majority of their refund for the purpose of paying debt and other more immediate expenses. Even so, 15 percent of the unbanked taxpayers who received a positive refund opened a savings account. The results from the empirical investigation determine that unbanked taxpayers are significantly more likely to open a savings account and that opening an account is positively related to the age of the taxpayer and the size of the refund. Having a prior relationship for tax preparation services with the nonprofit organization also significantly increases the likelihood that an unbanked taxpayer opens a savings account. This finding suggests that VITA sites sponsored by nonprofit organizations can play an important rol