Asset Building: A Smarter Way to Use Tax Refunds

With tax season recently passed, now is the time for state legislators to promote effective ways their constituents can establish and maintain financial success. One critical way is promoting asset building with tax refunds.

Asset building refers to the acquisition of assets, such as a home, a business, an education, or savings for retirement.(1) Asset building enhances the growth of financial resources, creates a financial foundation and results in stable futures for many low-income families in the United States. With a significant degree of wealth inequality in the United States among low-income, minority populations, asset building can improve the financial, psychological, and social wellbeing for these populations. Possession of assets is associated with economic stability for a household, a decrease in residential mobility, an increase in property maintenance, better long-term planning among individuals, an increase in personal efficacy, and creating a sense of social connectedness.

One of the most valuable financial assets in the United States is a retirement account; however only 10 percent of families in the lowest income quintile (families earning less than $18,500) have such savings and with amounts much lower than the average American family. On average, for a family in the bottom fifth, debt is greater than 40 percent of income. To help alleviate this, state legislators can hold town hall meetings talking to their constituents about the importance of starting a retirement account early and putting money away for a safe financial future.

Lack of assets also affects the financial future of our nation’s children. Research shows that families with assets: demonstrate an orientation toward the future; demonstrate a decrease in marriage dissolution; demonstrate an improved housing stability; experience improved health and well-being; experience increased civic and community involvement; and experience decreased rates of transfer of poverty to the next generation. (2)

According to the U.S. Department of Health and Human Services, however, a quarter of American households are "asset poor," meaning the individuals and families have insufficient financial resources to support them at the poverty level for three months (during a suspension of income). The intergenerational impacts of poverty are too important to ignore—42% of sons born to a father in the lowest income quintile remain in the bottom fifth when they grow up. (3)

Additionally, asset poverty affects children at a disproportionately greater rate. 47 percent of all American children live in households with no net financial assets. Rates for racial and ethnic minorities and minority children in the United States are even more severe. The relationship between financial stability of families and its impact on children is profound: lack of financial resources results in fewer opportunities for children to engage in social and academic settings.

With this staggering list of results, it is critical state legislators inform and empower their constituents this year to not merely spend their tax returns on wanted items, but invest and save their refunds towards larger asset building goals which may not only benefit themselves, but the financial futures of their children.

In the past, state governments have encouraged asset building with policy initiatives including home mortgage tax deductions, 401(k) plans, and IRAs. Currently, state legislators are promoting legislation that helps build educational assets for constituents. A primary example is Minnesota Representative Kim Norton’s proposed legislation focused on sponsoring Lifelong Learning Accounts (LilAs). This legislation seeks to build the level of education employees have by encouraging them to put money in a LilA account that their employer will then match.

With tax season coming to a close, now is the time this legislative cycle to focus on legislation that will promote asset building in the acquisition of new property, new retirement accounts, and new education. In sum, policymakers should focus legislative efforts on asset building in their respective states to assist low-income families “save” their way out of poverty.

1. Center for Social Development,
2. U.S. Department of Health and Human Services, Office of Community Services, Asset Building,
3. Asset Building and Low-Income Families, edited by Signe-Mary McKernan and Michael Sherraden, Urban Institute Press, 2008. Unless otherwise indicated, all statistics    are for 2004.

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