Presto! Tax Return Becomes a Nest Egg

Americans can't save. They rank it right up there with -- oh, cleaning out the closet. Recent research confirms that the national savings rate in the United States dipped below zero percent in 2005 and stayed there for the better part of the year. The last time that happened was during the Great Depression.

For most of us to save money, someone else needs to do it for us. That's why so many of us have our employers deduct money from our paychecks to send to a 401k account. Saving needs to be easy and automatic for it to stand any chance of happening.

That's why helping people save their tax refunds makes sense. Refunds from federal income taxes average $2,100 -- about 5 percent of the national median income. For most people, these tax windfalls are a lot of money, likely the best shot they have to save each year.

If we could change tax forms to make it simple for people to save some of their refunds, they could save more -- perhaps much more.

This is what Assemblyman Johan Klehs' AB 2439 would do. Specifically, it would allow California tax filers to direct the Franchise Tax Board to split their state income tax refund into "money to save" and "money to spend." Right now, people can only direct their refund to one account. By allowing people to send their refund to more than one savings or checking account, taxpayers could split the return and send $500 to an IRA and the rest to their checking account to purchase that flat screen TV. That way, the temptation to spend it all would be eliminated.

Can we expect much from such a simple change? Yes, judging from a recent pilot project. Community tax preparation programs in Tulsa, Okla., offered this "splitting" option to 500 low-income tax filers in 2004. About one-third wanted to participate and deposited $649 on average -- 47 percent of their refunds -- into savings accounts. Three out of four of these filers had no prior savings. They got the rest of their refunds back in a check.

Klehs' bill has the potential to help those Californians who need it most. New research from the Corporation for Enterprise Development shows that California has the country's fourth-highest rate of "asset poverty." This means that about 8 million Californians don't have enough savings and assets to survive for three months at the poverty level if they lost their jobs. Too many families are one divorce, layoff or medical emergency from homelessness or government dependence.

When people have savings, they have an economic airbag that can cushion the blow against such tragedies. Also, research shows when lower income families have savings and assets, as distinct from income, they're more likely to stay married, work harder, enjoy better physical and mental health, and make education plans for their children.

Other proposals to help people save their tax refunds also show promise. At the national level, the IRS plans to allow people to split their federal income tax refunds by 2007. Others propose that tax filers be able to buy savings bonds right on their income tax forms by checking a box. This would be of great help to the majority of Americans who have neither an IRA nor a savings account already set up.

Klehs' proposal has been called "the little people's bill." Let's hope the Legislature and governor can put the financial well being of little people above partisan politics and move this important measure forward.