Study: ‘Ghetto tax’ means higher prices for the poor

Dan Devine

It won’t come as a shock to anybody who has ever had to eat a five-dollar fee to cash a paycheck, but the findings of a recent report might wake the rest of America up to a sobering reality: stuff costs more when you’re poor.

The report, released last week by the nonprofit research organization the Brookings Institution, claims that government, nonprofit and business leaders “have a substantial, and widely overlooked, opportunity today to help lower income families get ahead by bringing down the inflated prices they pay for basic necessities.”

Titled “From Poverty, Opportunity: Putting the Market to Work for Lower Income Families,” the Brookings study analyzes national data and information collected from 12 metropolitan areas, concluding that lower income families generally pay more than families with higher incomes for the same products and services — added costs often referred to as a “ghetto tax” — due in large part to their reliance on alternative service providers like check cashers and rent-to-own stores.

According to the report, authored by Brookings researcher Matt Fellowes, lowering the costs lower income families pay for essential items such as basic financial services, groceries and insurance by just one percent would free up over $6.5 billion, which could be used for buying a home, saving for retirement or defraying education and health care costs for children.

The report sets forth three reforms that public and private leaders should implement to improve the situation for lower income families.

First, they must encourage mainstream businesses to serve lower income markets, where there is still a great demand for services and products. Such efforts are underway in several areas. In New York, the state has agreed to deposit government money in new branches of major banks opened in lower income neighborhoods, hoping to give residents increased opportunity to open personal accounts and reduce their dependence on check cashers and lenders. San Francisco Mayor Gavin Newsom and city Treasurer Jose Cisneros are working on a similar program intended to lure banks into competing for the customers currently served by check cashers. A Pennsylvania program earmarks state and private financing to build supermarkets in areas where few exist, which forces residents to either travel long distances for groceries or shop at smaller, costlier stores.

The report also calls for leaders to crack down on high-priced alternative providers by making it harder for them to continue setting up shop in poorer neighborhoods and limiting the high fees and interest rates they often charge. Last year, the city of Oakland banned new check cashing and payday loan businesses from locating within 1,000 feet of one another or within 500 feet of schools, churches and liquor stores.

Finally, the study cites the need for leaders to better educate lower income citizens about the potential consequences of their purchases and provide them with the best possible information to help them make better decisions.

“Ultimately, consumers need to take responsibility to make smart bets on getting ahead, which means knowing which companies to buy from, what goods and services to stay away from, and how to manage day-to-day budgets,” the report said.

Among the report’s findings:

• Check cashing customers, most of whom earn less than $30,000 per year, pay an extra fee of between $5 and $50 to cash a $500 check. Among the 50 states, check cashing service fees range from 1 percent in West Virginia to unlimited in 19 states. Massachusetts is one of the 19.

• About 81 percent of customers who buy short-term “payday loans” earn less than $50,000 per year. The fees for these loans — in which borrowers write personal checks payable to a lender for the amount they want to borrow plus a fee, the lender loans the amount of the check minus the fee and the debt generally must be repaid within five to 15 days — range from zero, because the practice is banned in some states, to 15 percent or more of the check’s face value in Colorado, Delaware, South Dakota and other states. According to the state Office of Consumer Affairs and Business Regulation, there are currently no payday lenders licensed or based in Massachusetts.

• The average store in the study’s sample of lower income neighborhoods was 2.5 times smaller than the average store in higher income areas. Access to only small grocery stores results in higher food prices for lower income shoppers — the study analyzed the prices of 132 different products, finding that 67 percent of them were more expensive in small stores than in larger ones.

• Lower income consumers are almost three times more likely than higher income households to buy refund anticipation loans (RALs) to get their tax returns more quickly. Interest rates on RALs can range from 70 percent to more than 1,800 percent.

• 4.2 million lower income homeowners earning less than $30,000 per year pay higher than average prices for their mortgages.

• At least 1.6 million lower income adults pay excessive fees for furniture, appliances and electronics, and nearly 60 percent of customers who shop at rent-to-own stores earn less than $25,000 per year.

• 4.5 million lower income consumers pay, on average, two percentage points more in interest for an automobile loan than the average higher income consumer.

• Drivers from lower income neighborhoods in the study’s 12 metropolitan areas pay between $50 and $1,000 more annually than their higher income counterparts in increased premiums for their auto insurance.

• Homeowners in lower income neighborhoods can pay as much as $300 more to insure their homes than those in higher income neighborhoods.

While advocates for lower income families have generally praised the Brookings report’s findings, they acknowledge that it’s not a perfect assessment of the situation.

John Taylor, president and CEO of the National Community Reinvestment Coalition (NCRC), took issue with the assertion that the decisions of lower income citizens are the primary sticking point.

“It’s not a choice that these people make,” Taylor told reporters. “It’s a reliance on what’s available to them.”

Betsy Leondar-Wright, communications director of United for a Fair Economy, applauded the expansive nature of the research, but called an the absence of race as a mitigating factor a “weakness of the study.”

“We know it to be true — it’s been documented for decades that prices are higher for poorer people,” said Leondar-Wright, co-author of the recent book “The Color of Wealth: The Story Behind the U.S. Racial Divide.”

“But I do think that you’re missing part of the story if you only look at income and not race, because … it’s also true that working class and poor people of color pay more than their white equivalents.”