U.S urban poor still pay 'ghetto tax'

Stat house
August 2006

U.S urban poor still pay 'ghetto tax'
A new study from the Brookings Institute confirms yet again what lower working class people living in U.S cities have known for decades: It costs a lot to be poor in urban America.

Forty years after the phenomenon was first tracked by urban economists, the so-called ghetto tax remains in force. According to Brookings' "From Poverty, Opportunity: Putting the Market to for Low Income Families," in general, lower income families tend to pay more for the exact same consumer products, services, and financial instruments than families with higher incomes. Some examples:

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

• About 4.5 million lower income households pay higher than average prices for auto loans.

• At least 1.6 million lower income adults pay excessive fees for furniture, appliances, and electronics. And, countless more pay high prices for other necessities, such as basic financial services, groceries, and insurance.

Together, these extra costs add up to hundreds, sometimes thousands, of dollars unnecessarily spent by lower income families every year. Reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for these families. This would enable lower and modest-income families to save for, and invest in, income-growing assets, like homes and retirement savings, or to pay for critical expenses for their children, like education and health care, according to the report.

Lower income families tend to pay higher than average prices for a wide array of basic household necessities—often for the exact same items—than higher income households. For instance:

Check Cashing and Short- Term Loans: Lower income consumers are much more likely than higher income consumers to pay high prices to cash checks and take out shortterm loans. Most customers of check-cashing businesses earn annual incomes of less than $30,000. To cash a $500 check in one of these businesses, customers would pay an additional $5 to $50 in the selected 12 metro areas. Among the 50 states, the check cashing fee ranges between 1 percent of the face value of a check in West Virginia to no limit (in 19 states). Similarly, about 81 percent of the customers that buy highpriced payday loans earn less than $50,000 a year. The fees for short-term loans range from zero (because the industry is banned in some states) to more than 15 percent of a loan’s value in Colorado, Delaware, South Dakota, and other states.

Tax Refund Services: Lower income consumers are more likely than higher income consumers to pay high fees to get their tax returns quickly. In 2003, lower income tax filers were just as likely as all others to use professional tax preparation services (approximately 60 percent). But, lower income tax filers are nearly three times more likely than higher income households to buy refund anticipation loans. These advance payments on tax refunds are accompanied by interest rates between 70 percent to more than 1,800 percent.

Remittance Services: Lower income consumers are likely to pay fees to wire funds to foreign countries, fees less likely to be incurred by high-income households. About 80 percent of remittance clients sending money to Latin America earn an annual income of less than $30,000. To send $200 every other week to Mexico for one year, a customer would be assessed an additional $320 in fees, on average.

Car Prices: Nationwide, consumers from lower income neighborhoods pay between $50 and $500 more, on average, to buy the exact same car as a consumer from a higher income neighborhood.

Car Loans: Nationwide, 4.5 million lower income consumers pay, on average, two percentage points more in interest for an auto loan than the average, higher income consumer. In 2004, auto-loan customers earning less than $30,000 a year paid an average APR of 9.2 percent for their loan, while the average APR for customers earning $60,000 to $90,000 was 7.2 percent.

Car Insurance: Drivers from lower income neighborhoods in the 12 sample metropolitan areas pay between $50 to over $1,000 more per year in higher premiums for auto insurance than those living in higher income neighborhoods. In New York, Hartford, and Baltimore, drivers living in lower income neighborhoods paid $400 more, on average, for 12 months of auto insurance to insure the exact same car and driver risk as those in higher income neighborhoods.

Home Loans: Nationwide, 4.2 million lower income homeowners pay, on average, a percentage point more than higher income households in interest for their mortgage. In 2004, the average APR on a first mortgage for lower income households was about 6.9 percent. By contrast, households earning between $60,000 and $90,000 paid an average rate of about 6.0 percent.

Home Insurance: Holding other factors constant, homeowners in lower income neighborhoods can pay as much as $300 more for home insurance than those in higher income neighborhoods. For instance, in Chicago, the average quote for a year of home insurance in the city’s lowest income neighborhoods was about $1,043, while the quote for households living in neighborhoods with a median income between $30,000 and $60,000, was approximately $755.

Furniture, Appliances, and Electronics: Lower income consumers tend to pay more for furniture and appliances because they are much more likely than higher income households to shop at highpriced rent-to-own establishments. Nearly 60 percent of rent-to-own customers earn less than $25,000 a year. In Wisconsin, it is estimated that a $200 television might cost as much as $700 at one of the rent-to-own businesses in the state, after interest.

Grocery Prices: Grocery stores in lower income neighborhoods tend to be smaller and more expensive than in higher income neighborhoods. The average grocery store in our sample of 2,384 lower income neighborhoods is 2.5 times smaller than the average grocery store in a higher income neighborhood. Also, there is about one mid- or large-sized grocer for every 69,055 residents in lower income neighborhoods, half the availability found in other neighborhoods. Access to only small grocery stores results in higher food prices for lower income shoppers. In particular, over 67 percent of the same food products in our sample of 132 different products are more expensive in small grocery stores than in larger grocery stores.

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