This story is co-published with the Center for Public Integrity, a nonprofit investigative news organization in Washington, D.C.
In the wake of the COVID-19 pandemic, many states and local governments temporarily suspended debt collection to ease the financial burden on struggling businesses and families. But one little-known practice has continued mostly unabated: deducting money from tax refunds to collect delinquent debts.
In virtually all states that levy a personal income tax, this practice, known as the “garnishments,” has been deployed on thousands of tax refunds — along with lottery winnings and stimulus checks, among others — during the pandemic-driven recession.
Last year, seven of the most populous states in the country — California, Georgia, Illinois, Michigan, North Carolina, Ohio and Pennsylvania — collected more than $728 million combined from state tax refunds, according to garnishment data obtained by the Center for Public Integrity.
Michigan, which collected $136.5 million in 2020, had the highest garnishment rate of $13,546 per 1,000 residents — followed by Ohio, which collected $10,161 per 1,000 residents. In three states — Michigan, North Carolina and Ohio — more state tax refunds were garnished last year than in 2019, a Public Integrity analysis shows.
And the garnishments appear to have been hitting the poor and people of color the hardest, trapping them deeper in the cycle of debt.
A case in point: In 2020, the Illinois state comptroller’s office collected nearly $11.5 million from state tax refunds from Chicago residents at the request of the city. A Public Integrity analysis of census and Illinois tax refund data found that the garnishment rate was higher in ZIP codes with higher Black populations or more people living below the poverty threshold.
The garnishments take a huge toll on marginalized communities, said Shama Mounzer, executive director of integration at the Wayne Metropolitan Community Action Agency, a Detroit-based nonprofit that serves low- and moderate-income residents with financial needs.
“They look forward to their tax refunds every single year and already have plans for [how to use] them,” Mounzer said about many of Wayne Metro’s clients. “When they see the garnishments, it’s a big hit for them.”
Given its “regressive” impacts, the garnishments should be stopped, said Joanna Weiss, co-director of the Fines & Fees Justice Center, a New York-based nonprofit that calls for monetary sanctions reform in the criminal justice system.
“In the face of the pandemic, trying to collect money now from people — when this is the exact same population that has been harmed both in terms of COVID-19 and the economic crisis — is not just cruel but impossible,” Weiss said. “There simply is no more money.”
Struggling to make ends meet
Across the country, many states, local governments and courts have long turned to the fee-and-fine system as a handy revenue source that can help fill budget gaps, even in lean times.
Still, the trend has accelerated, especially in the aftermath of the subprime mortgage crisis in 2008. In the process, the garnishment of tax refunds has emerged as one of the most reliable ways to collect delinquent debts.
The bulk of the debts collected by the garnishments are owed to the states and, in some cases, to local governments and courts — ranging from unpaid taxes, child-support obligations and overpayments of unemployment benefits to parking tickets, traffic fines, and other court-related fees and fines.
With the court’s approval, private parties can also have tax refunds garnished on their behalf.
In Michigan, the garnishment of tax refunds has proved so popular and effective that a local court official has even created a step-by-step guide to help others request it from the state’s treasury department.
But the pandemic prompted officials in two states to rethink the whole idea.
In February, the California Franchise Tax Board announced it had suspended the practice, except for collecting child-support obligations. The move is similar to the temporary suspension the agency put in place at the beginning of the pandemic last year.
“The ongoing public health emergency continues to have a severe economic impact on many Californians,” State Controller Betty Yee said in a statement announcing the suspension, which lasts through July 31. “We hope this suspension will offer additional relief for taxpayers.”
In Illinois, State Comptroller Susana Mendoza followed suit in March with a limited suspension that applies to “working class” taxpayers who qualify for the state’s earned income tax credit — amounting to income of up to $56,844 a year for a family of four or $15,820 for an individual.
The suspension, which lasts until the end of this year, came after months of lobbying by local advocates — and stories by The Chicago Reporter and Type Investigations that examined the garnishments’ impacts in Illinois.
In announcing her decision, Mendoza noted the disproportionate impacts the garnishments have on the poor. “Although families qualifying for the state earned income tax credit are only about 15% of the state population, they account for 36% of the money withheld from income tax refunds,” she said in a statement. “So, yes, these fines and fees hit them harder.”
According to Mendoza’s office, the suspension would spare some 41,000 households an estimated $15 million this year.
Local advocates see the suspension as something to build on. “My initial reaction was, ‘This is a great place to start.’ And I emphasize ‘start’ because it’s just a start,” said Rose Grillier, co-president emeritus of POWER-PAC IL, a membership group organized by Community Organizing and Family Issues, a Chicago-based nonprofit that has spearheaded the efforts to reform the fee-and-fine system in Illinois.
“Our drive now is to make this permanent,” Grillier said. “The whole premise of this work is to not build municipalities’ budgets on the backs of people who are already struggling, particularly the poor or people in financially challenged communities.”
Advocates in other states are pushing for a similar suspension, but some see it as an uphill battle at a time when COVID-19 infection rates are down and the economy shows signs of recovery.
But Mounzer of Wayne Metro said many people are still as desperate as ever for help. “I do not see a decrease in needs. It’s an increase in needs for every program we’re running here,” she said. “We have a long list of applicants waiting to be processed every day. I’m talking about thousands of applications, just for rental assistance.”
Lorray Brown, co-managing attorney at the Michigan Poverty Law Program, said many of her clients are expecting tax refunds to help with their rent or mortgage.
“Those needs are probably even greater because what we’re now facing is the accumulation of debts,” said Brown, who lobbied state officials — albeit unsuccessfully — to prevent stimulus checks from being garnished in Michigan. “We have so many people who are behind in rent in our eviction diversion program. It’s unbelievable.”
But some officials say that, unlike their counterparts in California and Illinois, they have no authority to unilaterally suspend the garnishments in their states.
“In North Carolina, the Department of Revenue administers the tax law as enacted by the legislature and the governor and, as a matter of policy, does not take policy positions,” said Schorr Johnson, spokesman for the North Carolina Department of Revenue. “The department does not have the authority to suspend refund garnishments under current state law.”
Ron Leix, spokesman for the Michigan Department of Treasury, noted that many garnishments are based on court orders. “We don’t have the authority to decline to execute or enforce them,” he said. “So any relief from the garnishment process would have to come from the Legislature, and they’ve taken no action.”
If the garnishments must continue, there should at least be a system in place that takes into account people’s ability to pay, said Elisa Della-Piana, legal director at the Lawyers’ Committee for Civil Rights of the San Francisco Bay Area.
“With wage garnishments, at least here in California, there are some protections that people can get. Their money won’t be taken out of their wages if they need the money for basic life necessities — for housing, for food or for a family,” Della-Piana said. “But that inquiry is wholly absent from tax refund intercepts — which is a significant problem.”
Weiss of the Fines & Fees Justice Center wants to see alternatives to fees and fines, particularly in the criminal justice context, to reduce the debt burden. Community service, for instance, could be imposed in lieu of fines, she said.
“We have so many people who cannot afford these fines and fees that we have to do more and more draconian things to try to collect money from people who don’t have any,” Weiss said. “That makes no sense. We should be ending any collection practices that are causing more harm than good.”