Cash-less State Governments

Cash-less State Governments:

Electronic Collections & Benefit Disbursements

Dwight V. Denison, Ph.D. Martin School of Public Policy and Administration University of Kentucky Saerim Kim, Ph.D. Department of Politics, Philosophy, and Public Administration, Columbus State University

Research for The Council of State Governments Financial Service Working Group

EXECUTIVE SUMMARY With the rapid growth of electronic payment options, including Automated Clearing House, or ACH, processing, credit, and debit cards, the number of transactions conducted with credit and debit cards has grown steadily, from 27 billion in 2001 to 105 billion in 2016, an annual increase of about 19 percent. In addition to credit and debit card transactions, ACH has recently seen rapid growth due to its various advantages including its low cost per transaction and the adoption of same-day ACH credit processing. Given these national trends, U.S. governments tend to encourage cash-less payment systems through more electronic payments, while still accommodating cash or check payments; yet, many studies have given less attention to the state-wide analysis.

This study aimed primarily to determine the current volume of cash-less collections of state taxes and fees as well as the volume of cash-less disbursements of tax returns and welfare benefits. A related purpose was to conduct an analysis of the policies and procedures that have been implemented by states to more effectively facilitate the benefits of cash-less options and adequately manage the transaction costs associated with them. Such information is useful to state policymakers who may be planning changes to their states’ policies regarding cash-less state collections and disbursements, which ultimately influence the welfare of taxpayers—both citizens and businesses.

To conduct this study, a state-level national survey was written based on a review of previous federal, state, and local government studies on both electronic collections and disbursements and implemented with the support and assistance of CSG staff and an advisory committee to assess current state policies and practices.

Thirty-two states responded to the survey on cash-less collections for their taxes and fees and twenty states responded to cash-less disbursements for state tax returns and welfare benefits. Some of the key findings are: •

•

Regarding cash-less collections of taxes and fees, states use the ACH and credit cards as the most commonly accepted forms of payment for both individual income taxes and business-related taxes, while cash and paper checks remain the dominant payment options that states offer to taxpayers and businesses. For cash-less disbursements, states mainly used the ACH for tax refunds and welfare distributions over cash, checks, pre-paid debit cards and e-checks. However, the usage varies depending on the tax or fee.

In terms of the number of transactions for state cash-less collections, the ACH has been used more frequently than credit

cards for major state taxes, including the individual income tax, business related tax, and excise, sales, and usage taxes.

On the other hand, credit cards have been frequently used for their fee payments (licenses, permits, and agency-use fees).

•

Individuals and businesses showed distinct patterns in credit and debit card use for their state tax and fee payments.

Individuals used credit and debit cards to pay their individual income taxes below $5,000. On the other hand, corporations and businesses used credit and debit cards for medium or large payments.

•

States accept credit and debit cards using diverse venues and options. For tax payments (individual income tax, business/ corporate tax, and excise, sales and usage taxes), handling by third-party vendors is the most common payment channel for credit and debit cards. For fee payments (agency user fees, licenses and permits), internet payments predominate over other channels, such as third-party services, telephone payments, in-person payments and mail payments.

•

Cost savings were identified as the major reason for accepting more cash-less payments and fewer paper-based payments, although the estimated cost savings varied considerably among the states that responded to this inquiry.

•

Major plans that states are considering to improve cash-less payment systems include: •

Expanding the use of ACH, credit, and debit card payments as well as adopting new payment channels, e.g., PayPal or digital wallets;

•

improving fraud prevention and security;

•

increasing financial inclusion and technology accessibility, and;

•

initiating or expanding the use of third-party service providers.

These and other results of this study are described throughout this report. It appears that states, like private businesses, are becoming increasingly supportive of the use of electronic media for the receipt of payments from citizens. This trend is supported by citizens as well as by state governments, as such payments improve the efficiency of the transactions and increase the accountability associated with various sources of state revenues.

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CHAPTER 1 INTRODUCTION & OVERVIEW Many government organizations have attempted to improve the efficiency of their revenue-collection and benefit-distribution systems. One way to improve the efficiency of these systems is encouraging the use of cash-less payments by moving away from traditional payment methods such as cash and checks and toward electronic-based payments such as credit and debit cards and the ACH. Studies have suggested that citizens and businesses realize the benefits associated with electronic payments for products and services, including the convenience and security of such transactions. At the same time, governments appreciate the benefits associated with using electronic transactions, such as: (1) reduced transaction-processing costs; (2) better availability of funds due to prompt revenue receipts and payments; (3) greater transparency and a clearer payment trail; and (4) improved financial inclusion. Over the past decades, many government agencies have explored electronic-transaction options for collecting their taxes and fees as well as for distributing tax returns and welfare benefits.

1.1 R E S E A R C H O V E R V I E W Many studies have focused on electronic payments in the general U.S. market, at the federal government level, or through comparison among countries, but a lack of studies on the use of electronic payments at the state government level was a major concern. This study, the 2018 national report, therefore specifically addresses both the acceptance of electronic payments by state governments and the distribution of electronic payments to individuals (benefit payments).

Background. The Council of State Governments, or CSG, has been developing a national report on the acceptance and use of electronic payments by U.S. governments. In 2007, CSG established a Financial Services Working Group to develop a study focused on the acceptance and use of electronic payments for state taxes and fees. The present report extends the research conducted in the previous national report in 2007.

In 2017, CSG convened an advisory working group to review the existing (2007) report and make recommendations on areas where the report could be refreshed and updated to the benefit of state leaders from both the executive and legislative branches. The advisory group consisted of about 12 to 15 state officials with expertise on this issue, including executive branch officials and legislators. Its members included leaders from relevant committees (finance, appropriations, technology, etc.) as well as from agencies that are particularly involved in electronic payments (unemployment, revenue, etc.). A small number of select private-sector representatives were asked to serve on the working group as non-voting advisors. By means of a survey, we requested that each state provide its current data and information on the acceptance, use, and processes of payment via credit cards and other electronic media.

Objectives. The purpose of this research was to examine the use of cash-less electronic payments for both state collections and disbursements in order to obtain evidence regarding the extent, advantages, and disadvantages of electronic payments.

Specifically, the goal was to assess current and future state policies and practices regarding the use of cash-less payments as well as the financial implications of states’ accepting electronic 4

payments.

Therefore, the survey addressed two areas: (1) the electronic collection of state taxes or fees and (2) the electronic disbursement of state income-tax refunds and welfare benefits. One survey was constructed to gather information on the acceptance of electronic payments for state fees and taxes. State fees and taxes in this survey included individual income tax, business/corporate tax, excise, sales, and usage taxes, licenses, permits, and vehicle-registration fees. The primary objective of the survey was to investigate the following key questions: 1. Which state taxes or fees can be (and are) paid via an electronic medium?

2. How extensive is the use of electronic payment of state taxes and fees?

3. What are the benefits of allowing electronic payment of state taxes and fees?

4. Who pays the transaction fees associated with credit card payments, and how are they paid?

5. What are the future directions or policies for state electronic collections?

A second survey was constructed to gather information on states’ electronic disbursements of tax refunds and welfare benefits. State benefits include SNAP, TANF, worker’s compensation, child support, unemployment insurance, personnel payroll, expense reimbursement, adoption/foster care payments, and lottery payments. This survey investigated the following key questions: 1. Which state tax refunds or welfare benefits can be (and are) distributed via an electronic medium?

2. How extensive is the use of electronic media for state tax refunds and benefit disbursements?

3. What are the benefits of allowing electronic payment of tax refunds and welfare benefits?

4. Who pays the transaction fees associated with credit card payments, and how are they paid?

5. What are the future directions or policies for state electronic disbursements?

Research Approach. The principle component is a national survey of the states. Eighteen survey questions about state electronic collections were divided into four categories: (1) acceptance and use of credit card payments for taxes and fees; (2) acceptance and use of check payments; (3) card-payment fees and charges; and (4) future policy directions for improved electronic-payment systems.

Ten survey questions about state electronic disbursements were grouped into three categories: (1) acceptance and use of electronic disbursements for tax refunds and welfare benefits; (2) benefits and costs of electronic disbursements; and (3) future policy directions for improved electronic-disbursement systems.

The draft survey was reviewed by the Study Advisory Committee, a CSG working group of state officials, and subsequently revised to incorporate their feedback. The appropriate survey respondents for each state were identified with the help of the advisory committee and CSG resources. The appropriate contact person was then identified, and the contact information was verified through telephone follow-up.

CSG’s executive director sent a letter to potential respondents in late March 2018 to introduce the study. The survey was distributed via SurveyMonkey or email a few days later. Respondents

were originally asked to respond by May 15, 2018. By the end of April, CSG had received 26 survey responses (nine anonymous) for state electronic collections and 14 (one anonymous) for state electronic disbursements. The nonresponding states were contacted again and encouraged to complete the survey.

At the end of June 2018, a total of 32 states had responded to the state electronic-collections survey. In addition, a total of 20 states responded to the state electronic-disbursements survey.

1.2 R E P O R T S T R U C T U R E This report is structured to address the study’s key research questions in the following manner. Chapter 2 provides an overview and background of the electronic-payment instruments available to consumers. It provides a discussion of the various payment options, paying particular attention to the growth trends in electronic payments. Chapter 3 provides a review of the existing literature on the extent of acceptance and use of electronic payments as well as the benefits and challenges associated with electronic payments. This national survey is discussed, with its key findings highlighted, in Chapters 4 and 5. Chapter 6 concludes the report with a summary of the study’s findings.

C H A P T E R 2 E V O LU T I O N O F C A S H - L E S S STAT E S The major electronic payment options in the United States are credit and debit cards, electronic checks—or e-checks—and Automated Clearing House—or ACH—payments. Cash-less payment systems of various forms have been replacing traditional payments such as cash and paper checks since the 1900s. Beginning in the 1950s, credit cards became increasingly accepted as a payment type, particularly for personal travel. The use of debit cards began in the 1980s and gained popularity in the 1990s and early 2000s.

In addition to the fast growth of credit and debit card markets, the ACH payment joined mainstream payment systems in the 1970s.

It was perceived to be an efficient, electronic alternative to checks.

While the growth of these electronic payments continued in the consumer market, governments increased their use of cash-less payments for collecting taxes and fees and expanded the use of electronic disbursements for tax refunds and welfare benefits.

2.1 E V O L U T I O N & G R O W T H I N C A S H - L E S S PAY M E N T S 2.1.1 Origin and Growth of Credit/Debit Cards. Credit cards are one of the most frequently used electronic payment options in the U.S. market. Beginning in 1914, Western Union, department stores, oil companies, and hotels began offering cards as a means for customers to pay for their services. Around 1950, various companies entered the credit card market and Mastercard and Visa emerged as successful market leaders. Bank of America introduced the first revolving credit card in 1959 (Mandell,1990).

Debit card usage increased in the 1980s and 1990s and encouraged growth in automated teller machines, or ATMs, across the country, enabling 24-hour access to cash and account information (Hayashi, Sullivan, & Weiner, 2003). Consumers began having their

paychecks deposited into their bank accounts in order to conveniently pay bills electronically. The debit card became a popular replacement for cash and checks (Federal Reserve Bank of St. Louis, 2011). As a result, the pattern of credit card use has changed such that credit and debit cards are now used for all types of purchases.

The major difference between credit and debit cards is whether the card transactions rely on a line of credit or not. For instance, credit cards enable the holder to make purchases and/or withdraw cash up to a prearranged limit. The credit granted can be paid back in full by the end of a specified period or partially repaid, with the balance left as extended credit. Interest is charged on the amount of any extended credit. The holder is sometimes charged an annual fee for the use of the card.

Unlike a credit card, when a debit card is used, funds are withdrawn directly from the purchaser’s checking or savings account at their bank. While a credit card is a way to pay later, a debit card is a way to pay now. Debit cardholders authorize debit card transactions either by entering a personal identification number, or PIN, directly into a merchant’s online terminal or with a signature. Debit cards look like credit cards but operate more like cash or personal checks.

Consumers in the U.S. have significantly increased credit and debit card transactions, according to a study from the Committee on Payments and Market Infrastructure (2017). Specifically, Figures 1 and 2 show increasing usage of credit and debit cards over the past 15 years. Figure 1 shows that the number of transactions conducted with credit and debit cards have steadily grown from 27 billion in 2001 to 105 billion in 2016, an annual increase of around 19 percent. The growth rate of debit card transactions has exceeded the growth of credit card use. The volume of debit card transactions has grown by 36.6 percent annually, while the number of credit card transactions has grown by 7.9 percent annually.

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FIGURE 1 NUMBER OF CREDIT & DEBIT CARD TRANSACTIONS IN THE U.S. MARKET (MILLIONS)

120000

Source: Committee on Payments and Market Infrastructures (CPMI). (2017). Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries: Figures for 2016. In. Basel, Switzerland: Bank for International Settlements. Retrieved from https://www.bis.org/cpmi/publ/d172.pdf

100000

80000

60000

40000

20000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Volume of of Card Transactions

Debit Card Transactions

Credit Card Transactions

FIGURE 2 VALUE OF CREDIT & DEBIT CARD TRANSACTIONS IN THE U.S. MARKET ($BILLIONS)

6000 5000 4000 3000 2000 1000 0

2001

2002

2003

2004

2005

2006

Total Volume of of Card Transactions

6

2007

2008

2009

2010

2011

Debit Card Transactions

2012

2013

2014

2015

2016

Credit Card Transactions

Source: Committee on Payments and Market Infrastructures (CPMI). (2017). Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries: Figures for 2016. In Basel, Switzerland: Bank for International Settlements. Retrieved from https://www.bis.org/cpmi/publ/d172.pdf

Figure 2 summarizes the total value of credit and debit card transactions from 2001 to 2016, which has grown by 16.7 percent annually. The approximate total value of card transactions in 2001 was $1.7 trillion but has increased to $5.9 trillion in 2016. This growth is driven mostly by the addition of debit card transactions rather than increased credit card use. Specifically, the total value of debit card transactions has grown by 38 percent annually, while the total increase in credit card use is 10.4 percent.

2.1.2 Origin and evolution of ACH. The Automated Clearing House is a processing and delivery system that provides for the distribution and settlement of electronic credits and debits among financial institutions. It usually processes large volumes and low dollar transactions in batches. Since the cost per transaction is low relative to other forms of electronic payments, ACH, is used for payroll, expense reimbursement, and routine vendor payments.

The ACH form of payment has grown into one of the major electronic payment systems in the U.S. since the National Automated Clearinghouse Association, or NACHA, was formed in 1974 within the American Bankers Association. NACHA oversees ACH by providing legal foundations, enforcing operating rules, and updating payment operation systems (NACHA1, 2018). NACHA

2000

largely expanded the accessibility of their networks through several events such as the launch of the Payments Institute and professional programs in the 1980s and 1990s and the start of international ACH transactions in 2009. As the network has grown, the NACHA has seen payments expand from just over one billion annually in 1988 to 25 billion in 2016 (NACHA2, 2018).

NACHA adopted the rule of same-day ACH credits in September 2015, which improved ACH processing speed and capacity for next business day processes. With this recent rule adoption, same-day ACH payments equaled more than 13 million credit transactions totaling nearly $17 billion in value in 2016 (NACHA3, 2018) (see Figure 3). In addition to the change in trend of ACH rules toward faster procedures, the ACH transactions in government continuously increased. The volume of government ACH transactions increased by 33 percent—continuously from 1.2 billion in 2009 to 1.6 billion in 2016 (Capgemini Financial Services Analysis, 2017).

FIGURE 3 NUMBER OF ACH TRANSACTIONS: GOVERNMENT TRANSACTIONS (MILLIONS), 2009-2016

1500

1000

500

0

2009

2010

2011

2012

2013

2014

2015

2016

Number of Government ACH Transactions (Million) Source: Capgemini Financial Services Analysis. (2017). World Retail Banking Report 2017. Retrieved from https://www.worldpaymentsreport.com

2.1.3 Origin and evolution of prepaid cards. The prepaid card initially appeared as prepaid phone cards in the late 1980s and became popular as merchant-specific gift cards in the mid1990s. Prepaid cards are like credit and debit cards but are not linked to a bank account and are considered "pay as you go," or PAYGO. For instance, the Direct Express card is an example of a prepaid debit card for federal benefit recipients to receive their benefits electronically. The card has a zero value until it is purchased and loaded with a specific amount of money. When a purchase is made, the amount of the purchase is subtracted from the card's balance. Once the balance reaches zero, the card is empty and can't be used unless it is reloaded.

Prepaid cards comprise a relatively small portion of total noncash payments but are the fastest growing electronic option.

According to the 2010 Federal Reserve Payments Study (2011), consumers conducted six billion transactions with prepaid cards for a total of $140 billion during 2009. From 2006 to 2009, the use of such cards increased 20 percent and the value of these transactions increased by 22.9 percent per year. Also, the prepaid card saves the government about $0.93 on each electronic transfer (Federal Reserve Bank of Philadelphia, 2010). In addition to the prevalence of prepaid cards in the U.S. market, the use of the prepaid card became more prevalent because the government replaced paper-based food stamps with Electronic Benefits Transfer, or EBT, cards in the early 1990s (Federal Reserve Bank of Philadelphia, 2010).

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CHAPTER 3 FINDINGS OF PREVIOUS STUDIES ON C A S H - L E S S STAT E G O V E R N M E N T C O L L E C T I O N S & DISBURSEMENTS While many studies have researched cash-less transactions in the U.S. and international market, there have been limited empirical studies that focus on the issues relevant to the U.S. government sector, such as accepting cash-less payments for state collections and disbursements. Information from existing studies on both U.S. government cash-less collections and disbursements were used to develop preliminary answers to the following research questions: 1. How extensive is the acceptance of cash-less payments for state collections and disbursements?

2. What state collections and disbursements can be (or are) paid by an electronic medium?

3. What are the benefits of allowing cash-less payments for state collections and disbursements?

4. Who pays the transaction fees associated with cash-less payments? How are they paid?

To answer these questions, the analysis included in this chapter is based on several major studies and research efforts. These studies include an assessment of electronic collections and disbursements through annual reports by the Federal Reserve Board, international studies, or congressional reports. The studies reviewed are discussed below.

The Federal Reserve Payment Study (2016), the sixth study conducted by the Federal Reserve System since 2001, estimates trends in non-cash payments in the U.S. The study covers the total number and value of all non-cash payments made in 2015 by U.S. consumers and businesses, including for-profit and not-for-profit enterprises, and federal, state, and local government agencies. Secondly, the Report to the Congress on Government-Administered, General-Use Prepaid Cards (2017) discusses the use of general-use prepaid cards in the U.S. Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which added section 920 to the Electronic Fund Transfer Act, or EFTA, requires the Federal Reserve Board to report annually to Congress on the prevalence of the use of general-use prepaid cards in federal, state, and local government-administered payment programs, including the interchange transaction fees or merchant discount rate (MDR) and cardholder fees charged with respect to the use of such cards. The Federal Reserve Board collected 2016 data from 18 bank issuers, three non-bank financial institutions, and two federal government agencies regarding use of prepaid cards to disburse funds by the U.S. Treasury and the U.S. Department of Agriculture. The data collected represents programs from all 50 states and the District of Columbia.

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3.1 H O W E X T E N S I V E I S T H E

AC C E P TA N C E O F C A S H - L E S S PAY M E N T F O R STAT E CO L L E C TIONS AND DISBURSEMENTS? According to the Federal Reserve Payment Study in 2016, U.S. non-cash payments are estimated to have totaled more than 144 billion with a value of almost $178 trillion in 2015, up almost 21 billion payments, or about $17 trillion, since 2012. Total noncash payments increased at an annual rate of 5.3 percent in number or 3.4 percent in value from 2012 to 2015.

In general, U.S. consumers have increased their use of credit cards, debit cards and ACH transactions and decreased their use of checks. In 2015, the number of card payments, including debit and credit card payments, accounted for over two-thirds of all non-cash payments and increased over time to 103.3 billion with a value of $5.72 trillion in 2015, up 19.9 billion or $1.07 trillion since 2012. Debit card payments grew at an annual rate of 7.1 percent by number or 6.8 percent by value from 2012 to 2015 with most of the growth occurring in non-prepaid debit card payments. The number of debit card payments grew to 69.5 billion in 2015 with a value of $2.56 trillion, up 13 billion or $0.46 trillion since 2012 (Figure 4). This was the largest increase in number of payments among the payment types considered.

Credit card payments grew at an annual rate of 8 percent by number or 7.4 percent by value from 2012 to 2015, the largest growth rates among the payment types considered. The number of credit card payments reached 33.8 billion in 2015 with a value of $3.16 trillion, up 6.9 billion or $0.61 trillion since 2012. Total ACH payments are estimated to have grown at an annual rate of 4.9 percent by number or 4 percent by value from 2012 to 2015. The number of total ACH payments is estimated to have reached 23.5 billion in 2015 with a value of $145.30 trillion, up 3.1 billion by number or $16.29 trillion since 2012.

Check payments were estimated from data gathered through the Depository and Financial Institutions Payments Survey, or DFIPS. The decline of checks from 2012 to 2015 was slower than declines in previously documented periods since 2003.

The number of check payments fell to 17.3 billion with a value of $26.83 trillion, down 2.5 billion or $0.38 trillion since 2012.

Check payments fell at an annual rate of 4.4 percent by number or 0.5 percent by value from 2012 to 2015. The decline of checks over the period was slower than previous studies had shown for periods prior to 2003.

100

FIGURE 4 DISTRIBUTION OF CORE NONCASH PAY M E N T S B Y TY P E , N U M B E R , A N D VA LU E , 2 0 1 5

80

60

40

20

0

Debit Cards

Number (Billions)

Credit Cards

Checks

ACH Transfers

Dollar Value (Trillions)

Source: Federal Reserve Board. (2016). The Federal Reserve Payments Study 2016. Retrieved from https://www.federalreserve.gov/newsevents/press/other/2016-payments-study-20161222.pdf

Prepaid cards and government disbursements. Total funds disbursed through prepaid cards varied widely by program type, as shown in Figure 5. State agencies administering Supplemental Nutrition Assistance Program, or SNAP, disbursed $66 billion to EBT cards in 2016, accounting for just under half of prepaid funding across all reported programs. The Social Security Administration distributed approximately $32 billion though

80 70

prepaid cards. Unemployment insurance, child support, and cash assistance programs largely accounted for the remaining one-third of funds disbursed. In contrast, payments for Women, Infants, and Children, or WIC, Veterans Affairs, tax refunds, and payroll programs each accounted for less than 1 percent of total prepaid disbursements (Board of Governors of the Federal Reserve System, 2017).

F I G U R E 5 F U N D S D I S B U R S E D T H R O U G H P R E PA I D CARDS IN 2016 ($BILLIONS)

60 50 40 30 20 10 0

SNAP

Social Unemployment Child Security Support

Cash Assistance

Other

WIC

Veterans

Source: Board of Governors of the Federal Reserve System. (2017). Report to the Congress on Government-Administered, General-Use Prepaid Cards. Retrieved from https://www.federalreserve.gov/publications/files/government-prepaid-report-201707.pdf

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According to the Report to the Congress on Government-Administered, General-Use Prepaid Cards (2017), disbursements through prepaid cards decreased 3 percent between 2015 and 2016, from $150 billion to $146 billion. The decrease mainly came from the reduction in state and local card funding—around $3 billion between 2015 and 2016. SNAP beneficiaries declined by 2 million and declines were expected to continue among unemployment insurance beneficiaries. The declines in state and local prepaid card funding were partially offset by modest increases in child support and cash assistance programs.

Furthermore, the Report to the Congress on Government-Administered, General-Use Prepaid Cards (2017) noted that state disbursement programs tended to use prepaid cards more than federal programs. For instance, state agencies disbursed a relatively high proportion—65.6 percent—of unemployment insurance payments through prepaid cards. However, prepaid card disbursements represent only 3.6 percent of the $898 billion in benefit payments made under federal Social Security programs.

Similarly, the Department of Veterans Affairs disbursed only 1.2 percent of program funds through prepaid cards.

3.2 W H AT S TAT E C O L L E C T I O N S AND DISBURSEMENTS CAN BE ( O R A R E ) PA I D B Y A N E L E C TRONIC MEDIUM? State cash-less collections. Governments use electronic payment systems such as credit and debit cards or ACH networks to collect tax payments and registration fees from citizens and businesses. There are two different types of government collections: payments made by people and payments made by businesses.

Person-to-government, or P2G, and business-to-government, or B2G, payments include payments made by consumers and businesses to government and/or public organizations in the form of tax payments and payments for obtaining services from these agencies (licenses, permits, etc.). The person-to-government payments tend to be of small-value but involve a very large of number of transactions. On the other hand, business-to-government payments deal with average payment size and transactional volumes because they vary in size and include many payments.

At the U.S. federal level, Financial Management Services, or FMS, collects more than 96 percent of funds on behalf of federal agencies (in 2012). FMS collects the funds through several different collection options including electronic checks, a collection portal (Pay.gov), or the Electronic Federal Tax Payment System, or EFTPS, a system for paying federal taxes electronically via the Internet or telephone. Taxpayers may also make their tax payments through a batch or bulk filer, or with a debit or credit card, with or without e-filing the tax return while the taxpayer absorbs the cost of the associated merchant fee.

In 2012, FMS launched a Centralized Receivables Service, or CRS, program, which assists federal agencies in managing their accounts receivable. Since CRS focuses on managing pre-delinquent debt and debt in the early stage of delinquency, the system can increase the amount of collections, reduce costs, and improve its visibility for agency users (The World Bank, 2012).

Most state governments have already been using cash-less services for collecting tax payments from citizens and businesses. States have card acceptance programs for both individual income taxes and some types of business taxes (Master Card, 2014), except for states that do not have an income tax such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Only a few states, such as North Dakota, Maine, and Massachusetts do not have a card acceptance program as of 2014 (see Figure 6).

F I G U R E 6 C R E D I T / D E B I T CA R D ACC E P TA N C E O N STAT E I N D I V I D U A L I N C O M E TA X Accepting Credit/Debit Cards No instate income tax Not Accepting Credit/Debit Cards

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Source: Master Card. (2014). Find where to pay state taxes online or by phone. Retrieved from https://www.Mastercard.us/en-us/consumers/get-support/pay-taxes/tax-payments-by-state.html

According to a 2007 report by The Council of State Governments (Denison, Hackbart, Yusuf, & Song 2007), electronic payments are accepted for various state taxes and fees. ACH is the most commonly accepted form of payment for business-related taxes (86 percent of responding states accept ACH for business/ corporate taxes and 92 percent accept ACH for excise, sales, or usage taxes). Credit cards are the most commonly accepted form of electronic payment for individual income taxes (78 percent of the states). Fees such as licenses or permits are paid with credit cards 57 percent of the states and agency user fees 41 percent of the states.

Cash-less government disbursements. Cash-less government disbursements can be classified into two categories: government-to-person, or G2P, and government-to-business, or G2B, payments. Government-to-person payments are typically associated with social benefits—such as incentives, subsidies, or Social Security benefits—government employee salaries, pensions and tax refunds among other payments. Government-to-person payments are normally characterized by a very large number of transactions with relatively small value.

EBTs were adopted early for government-to-person payments.

In 1984, the state of Pennsylvania initiated a pilot program for EBTs for the food stamp program administered by the U.S. Department of Agriculture. The 1996 Personal Responsibility and

Work Opportunities Reconciliation Act, or PRWORA, mandated that states convert to EBTs for food stamp distribution by October 2002. By June 2004, EBTs had been implemented nationwide for food stamps.

Several government offices now mandate electronic disbursements of program funds through either a prepaid card or direct deposit. As of March 2013, the U.S. Treasury Department requires electronic disbursements of funds under all federal benefit programs, such as Social Security and Veterans Affairs programs. All 50 states disburse SNAP benefits exclusively through EBT cards, and each of the 50 states offer a prepaid card option for child support programs. In addition, 46 states offer a prepaid card option for unemployment insurance and 47 states offer Temporary Assistance for Needy Families, or TANF, programs (Federal Reserve Board, 2016).

For WIC program, 20 states are currently offering prepaid card funding options. All states are required to replace paper vouchers with an EBT card system for the WIC Supplemental Nutrition Program by Oct. 1, 2020. As of May 2017, 20 state WIC agencies have completed the conversion to EBT cards, and most of the other states are either in the planning or implementation phase of the conversion process (See Table 1).

TA B L E 1 F U N D S D I S B U R S E D T H R O U G H P R E PA I D C A R D S I N 2016 BY PROGRAM TYPE Program Type

Funding ($)

% of Total

Tax refund

127,439,503

0.1%

Payroll

415,382,423

0.3%

Veterans

993,356,477

0.7%

WIC

1,023,999,380

0.7%

Other

2,346,896,889

1.6%

Cash assistance

8,498,404,664

5.8%

Child support

13,618,699,399

9.3%

Unemployment

20,795,308,198

14.3%

Social Security

32,218,424,114

22.1%

SNAP

65,659,922,795

45.1%

Source: Board of Governors of the Federal Reserve System. (2017). Report to the Congress on Government-Administered, General-Use Prepaid Cards. Retrieved from https://www.federalreserve.gov/publications/files/government-prepaid-report-201707.pdf

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3.3 W H AT A R E T H E B E N E F I T S

O F A L L O W I N G C A S H - L E S S PAYM E N T S F O R STAT E C O L L E C TIONS AND DISBURSEMENTS? The prompt, safe, convenient, and cost-effective transfer of fi­ nancial value to and from the government, depends on the pay­ ment means used. Traditionally, citizens have been using cash and checks to pay taxes and fees, and to reimburse states for services. Paper-based payment options such as cash and checks can be convenient in some circumstances but lack most of the features or characteristics that are desirable from a safety and efficiency perspective. For instance, such options entail larger overhead expenses and significant operational risks because of the intensive manual procedures involved in their handling.

The use of electronic forms of payments, on the other hand, offers inherent advantages to all stakeholders involved in the government payments value chain. For governments, their use is likely to result in lower transaction costs, lower overhead expenses, reduced internal fraud and leakage, and improved transparency and accountability. These benefits of electronic payments are also relevant for recipients of government payments. Because of these benefits, ACH transactions have primarily been used for payment of state collections and disbursements, especially large amounts made by corporations and other major employers. The use of credit and debit cards also has been growing quickly.

Cash-less payments for government taxes and fees generally offer many benefits to government agencies and citizens whether in the form of ACH, credit card, or debit card. These include: • reduced processing costs associated with paper-based processing; • reduced transaction processing time and costs; • improved payment verification and auditing through real-time authorization and verification; • reduced accounts receivables and payment delinquencies, and fewer need for debt collection activities; • improved fund availability by reducing check float and enhancing cash flow; • improved ability to control sensitive information that could be used to commit payment fraud; • eliminated occurrence of lost or stolen checks and the cost of check reissuance; • enhanced internal control of high volume, small dollar procurement, primarily when purchase and prepaid cards are utilized; • added convenience for citizens.

Financial inclusion for the unbanked and underbanked. Not only do cash-less payments improve efficiency and convenience for users, but the electronic payments can also support unbanked and underbanked populations. An important public policy goal for many governments, at present, is to increase and improve financial inclusion of population segments that remain unbanked or otherwise underserved on accessing their funds. According to the 2015 National Survey of Unbanked and Underbanked Households (Federal Deposit Insurance Corporation, 2015), around 7 percent of households in the U.S. were unbanked in 2015 (approximately 9 million households). Nearly 20 percent of U.S. households (24.5 million) were underbanked, meaning the household had a checking and savings account but also obtained financial products or services outside the banking system.

Tax refunds and welfare benefit disbursements through prepaid 12

cards are more relevant to people without bank accounts or bad credit, or people experiencing income volatility.

3.4 W H O PAY S T H E T R A N S A C -

T I O N F E E S A S S O C I AT E D W I T H C A S H - L E S S PAY M E N T S ? H O W A R E T H E Y PA I D ?

While electronic payments provide several benefits and cost savings, the acceptance of electronic payments also involves several costs. If decisions are made to accept electronic payments, policies must be established to address how and by whom such costs will be covered. These include legal and legislative challenges, cost challenges, and technology challenges. From a legal or legislative perspective, issues that affect the acceptance of credit and debit card payments include credit and debit card transaction fees, interchange transaction fees or merchant discount rate (MDR), or cardholders’ fees as well as legal and regulatory costs. Specifically, the costs associated with electronic payments relate to: • inadequate integration with accounts payable systems; • updating internal controls imbedded in the production cycle of physical checks (emphasizing information technology controls); • inadequate level of sophisticated services necessary for electronic payments by many smaller banks; • increased need to protect sensitive financial account information stored in a government’s computer system from unauthorized internal and external access; • equipment expenses including specialized software, keypads, computers, etc.; • administrative expenses including employee training, process streamlining, marketing activities, and user education programs; and • social costs associated with electronic payment media such as lack of access to electronic payment options by certain categories of citizens or misuse of electronic payment options causing increased debt burden due to increased use of credit cards.

The primary costs associated with credit and debit card payments are the initial costs, including activation fees and the cost of equipment, marketing and education as well as the recurring transaction fees, including monthly maintenance, ATM withdrawals, reloading, replacement and monthly statements. Competition among card issuers and increased volume has helped lower card fees and simplify card terms even though prepaid cards are exempt from federal consumer protection laws that apply to bank debit cards (Federal Reserve Bank of St. Louis, 2011).

States have generally used two ways to pay for such fees collected by card issuers including the use of interchange fees and cardholder fees. The fees paid by government agencies for credit card processing can vary by their contractual relationship with their bank and/or service provider, and are based on many factors, including total and average volume, total and average dollar amount, association fees, etc. Figure 7 illustrates the various sources of fee revenue collected by bank issuers in 2016.

Banks reported collecting $328 million in interchange fees, $158 million in cardholder fees, $24 million in Payment Card Network, or PCN, incentives, and $8 million in fees assessed to government offices in 2016 (Figure 7). For EBT card programs, states generally pay an issuer or processor based on the number of beneficiaries enrolled in a program per month, in part because

there are no interchange fees associated with these card programs. Certain cardholder fees, such as for card replacement, may also apply to EBT programs.

Interchange fees. As shown in Table 2, the interchange fees from prepaid card purchase transactions have been relatively stable for the last six years. Across all programs from 2015 to 2016, the average interchange fee per purchase transaction decreased by one cent (from $0.35 to $0.34). The average interchange fee as a percentage of purchase transaction value declined from 1.1 to 1 percent for federal programs and from 1.3 to 1.2 percent for state and local programs in 2016 (Board of Governors of the Federal Reserve System, 2017).

FIGURE 7 ISSUER REVENUE BY SOURCE ($MILLION), 2016

Government fees

CPCN incentives

Cardholder Fees

Interchange fees

Revenue ($million)

Source: Federal Reserve Board. (2016). The Federal Reserve Payments Study 2016. Retrieved from https://www.federalreserve.gov/ newsevents/press/other/2016-payments-study-20161222.pdf

TA B L E 2 AV E R AG E P U R C H A S E T R A N S AC T I O N VA LU E , AV E R AGE INTERCHANGE FEES, 2011—2016 Item

2011

2012

2013

2014

2015

2016

Average value of purchase transaction ($)

30.94

29.99

29.94

29.16

29.5

30.29

Federal programs ($)

36.82

38.11

44.83

38.53

38.41

38.61

State and local programs ($)

29.81

28.41

25.58

24.85

25.07

25.68

Average interchange fee per purchase transaction ($)

0.33

0.34

0.36

0.34

0.35

0.34

Federal programs ($)

0.4

0.4

0.48

0.41

0.41

0.4

State and local programs ($)

0.32

0.33

0.33

0.31

0.32

0.31

Average interchange fee as % of purchase transaction value (%)

1.1

1.1

1.2

1.2

1.2

1.1

Federal programs (%)

1.1

1.1

1.1

1.1

1.1

1

State and local programs (%)

1.1

1.2

1.3

1.2

1.3

1.2

Source: Board of Governors of the Federal Reserve System. (2017). Report to the Congress on Government-Administered, General-Use Prepaid Cards. Retrieved from https://www.federalreserve.gov/publications/files/government-prepaid-report-201707.pdf

13

Cardholders' fees. According to the Government-Administered, General-Use Prepaid Card Survey—Issuer Survey (2017), a cardholder refers to an individual, household, or other category used for recipients receiving payments on government administered, general-use prepaid cards. Cardholder fees include purchase transaction fees, ATM fees, over-the counter at-bank (teller) cash withdrawal fees, account servicing fees, routine monthly fees, customer service inquiry fees, overdraft fees, penalty fees, and other fees. Among those fees, the account

servicing fees are the most expensive type of cardholder fee, at an average of $3.10 per occurrence in 2016 whereas the customer service inquiry fee was the cheapest at $0.40. In addition, fees on ATM cash withdrawals constituted the largest source of revenue issuers received from cardholders in 2016. Account servicing fees and customer service inquiry fees account for the next largest sources of cardholder fee revenue, at $42.9 million and $17.2 million, respectively.

C H A P T E R 4 S U R V E Y F I N D I N G S O F STAT E ELECTRONIC COLLECTIONS AND DISBURSEMENTS Our review of previous studies suggested a need for research to (1) address current and future policies regarding electronic collections for state fees or taxes and electronic disbursements for state income tax refunds and welfare benefits, (2) identify agency procedures for accepting and processing electronic payments, (3) document the benefits and costs of utilizing electronic payments, (4) identify effective practices for credit card acceptance and processing, and (5) determine how states currently, or plan to, address electronic transactions. In addition to electronic collections for state fees or taxes, the review of existing studies pointed out the growing trend of electronic disbursements for state income tax refunds and welfare benefits. This chapter addresses these issues related to state electronic transactions through a survey of the states. The surveys, therefore, consist of two parts including electronic payments for state collections and disbursements. Both surveys (included in Appendix A) were sent to the states in March 2018 and aggregated responses were received until June 2018. Thirty-two states responded to the state electronic collection survey and 20 states to the state electronic disbursement survey.

14

4.1 S U R V E Y O V E R V I E W A N D METHODOLOGY

This survey is composed of two parts, (1) the electronic collection of state taxes or fees and (2) the electronic disbursement of state income tax refunds and welfare benefits. A survey was constructed to gather information on the acceptance of electronic payments for state fees and tax collections. State fees and taxes in this survey included individual income tax, business/corporate tax, excise, sales, or usage tax, licenses or permits, and vehicle registration fees. The primary objective of the survey was to investigate five key questions: 1. What state tax or fee collections can be (and are) paid by an electronic medium?

2. How extensive is the use of electronic payment of state taxes and fees?

3. What are the benefits of allowing electronic payments for state tax or fee collections?

4. Who pays the transaction fees associated with credit card payments and how are they paid?

5. What are future directions or policies for state electronic collections?

A total of 18 survey questions for state electronic collections were divided into four categories: (1) acceptance and use of credit card payments for taxes and fees; (2) acceptance and use of check payments; (3) card payment fees and charges; and (4) future policy directions for improved electronic payment systems. The complete survey is included in Appendix A. A second survey was constructed to gather information on states’ electronic disbursements for state tax refunds and welfare benefits. State benefits include SNAP, TANF, worker’s compensation, child support, unemployment insurance, personnel payroll, expense reimbursement, adoption/foster care, and lottery.

The primary objective of this survey was to investigate five key questions: 1. What state tax refunds or welfare benefits can be (and are) distributed by an electronic medium?

2. How extensive is the use of electronic payment of state taxes and fees?

3. What are the benefits of allowing electronic payments for tax refunds and welfare benefits?

4. Who pays the transaction fees associated with credit card payments and how are they paid?

5. What are future directions or policies for state electronic disbursements?

A total of 10 survey questions for state electronic disbursements were grouped into three categories: (1) acceptance and use of credit card payments for taxes and fees; (2) benefits and costs of electronic disbursements; and (3) future policy directions for improved electronic payment systems. The complete survey is included in Appendix A. The draft survey was reviewed by the Study Advisory Committee (a working group of state officials working with The Council of State Governments) and subsequently revised to incorporate

their feedback. The appropriate survey respondents for each state were identified with the help of the advisory committee and The Council of State Government resources. The appropriate contact person was then identified, and the contact information verified through telephone follow-up.

A letter to potential respondents was sent in late March 2018 from the executive director of The Council of State Governments to introduce the study. The survey was distributed via SurveyMonkey or email a few days later. Respondents were originally asked to respond by May 15, 2018. By the end of April, we received 26 survey responses (nine anonymous) for state electronic collections and 14 (one anonymous) for state electronic disbursements. The nonresponding states were contacted again and encouraged to complete the survey. At the end of June 2018, a total of 32 states had responded to the state electronic collection survey. In addition, a total of 20 states responded to the state electronic disbursement survey. The responding states are shown in Figure 8 and 9. It is noteworthy to mention that some states, such as Georgia, Louisiana, North Dakota, New Mexico, Nevada and Vermont, provided multiple responses from different agencies (e.g., Departments of Revenue) whereas others provided one representative response across the state. It was difficult for some states to provide a comprehensive response across the state because the noncash systems are decentralized among the state agencies. All respondents discussed in this report are state-level representatives, and the unit of analysis is not at the agency level. No effort was made to verify comprehensiveness of state survey responses.

The results and findings of both surveys are discussed next and are organized into four broad categories. There are two categories for electronic payments for state taxes and fees: (1) acceptance of state electronic collections and (2) policies and practices of state electronic collections. There are also two categories for electronic disbursements of state tax refunds and benefits: (1) acceptance of state electronic disbursements and (2) policies and practices for state electronic disbursements.

F I G U R E 8 STAT E S T H AT R E S P O N D E D TO T H E STAT E ELECTRONIC COLLECTION SURVEY

Responding States

15

F I G U R E 9 STAT E S T H AT R E S P O N D E D TO T H E STAT E ELECTRONIC DISBURSEMENT SURVEY

Responding States

4.2 S TAT E E L E C T R O N I C C O L L E C T I O N S F O R TA X E S A N D FEES Which state tax or fee collections can be (and are) paid by an electronic medium?

Acceptance of state electronic collections. Electronic payments are accepted and used for various state taxes and fees. ACH and credit card transactions are the most popular way states collect their taxes or fees through electronic payments. Of the 32 states that responded to the survey, ACH and credit card (used by approximately 84 percent of responding states) are the most commonly accepted form of payment for individual income taxes and fees such as licenses or permits and agency user fees, while ACH is the slightly more dominant (used by 94 percent of responding states) method of paying for business-related taxes such as business/corporate taxes and excise, sales, or usage taxes. However, paper check is the most commonly accepted payment medium among all of them. Debit card is the least commonly accepted for every tax and fee category (see Table 3).

16

How extensive is the use of electronic payment of state taxes and fees?

In addition to the accepted forms of state electronic collection, the survey asked how states are accepting electronic payments for state tax or fee collection. Tables 4 and 5 summarize survey findings regarding the dollar amount and volume of electronic transactions. Table 4 shows the total number of tax or fee payments as an average percentage of responding states for individual and business-related taxes. ACH is the predominant electronic payment option when compared to credit and debit cards. For individual income taxes, the number of ACH transactions (38 percent out of 100 percent transaction volume) is five times more than the number of credit and debit card transactions (7 percent). For business-related taxes—business/corporate tax and excise, sales, or usage tax – states tend to receive payments more frequently using ACH rather than credit and debit cards or other forms of payments such as paper checks and cash. Paper check, however, is the most popular form. Individuals most frequently use check for payment of individual income taxes (50 percent).

TA B L E 3 F O R M S O F PAY M E N T S AC C E P T E D F O R STAT E TA X A N D F E E CO L L E C T I O N S ACH

Credit Card Debit Card

Cash

Check

Individual Income Tax

84%

84%

69%

75%

84%

Business/Corporate Tax

94%

81%

63%

78%

94%

Excise, Sales or Usage Tax

97%

91%

72%

88%

97%

Licenses or Permits

78%

75%

56%

84%

91%

Agency User Fees

44%

47%

38%

47%

53%

Overall (average)

79%

76%

59%

74%

84%

Note: 32 states responded to Question 2. What form of payment does your state accept for taxes or fees?

TA B L E 4 TOTA L N U M B E R O F TA X O R F E E PAY M E N T S B Y PAY M E N T M E D I U M ( E AC H R O W A D D S U P TO 1 0 0 % ) ACH Credit/Debit Card Check Cash (State Average, %) (State Average, %) (State Average, %) (State Average, %) Individual Income Tax

38%

7%

50%

4%

Business/Corporate Tax

42%

7%

48%

3%

Excise, Sales or Usage Tax

67%

7%

23%

3%

Licenses or Permits

25%

31%

40%

4%

Agency User Fees

6%

40%

50%

4%

Miscellaneous Others

47%

10%

40%

2%

Table 5 shows the dollar value of tax or fee payments per transaction. Among the electronic collection forms, ACH deals with the largest dollar value per transaction for taxes while credit cards, debit cards and cash take care of the smaller dollar value transactions. On average, each respondent state received $1.19 billion of individual income taxes through ACH, $1.25 billion of business/corporate tax, and $1.96 billion of excise, sales, or usage tax. Combining both tables also suggests that ACH and checks are frequently used for large payments (larger percentage of transactions and larger dollar value) while credit and debit cards and cash are used less frequently and for smaller payment amounts.

The survey asked states how they determine acceptable payment methods. Responding states followed the decisions of upper-level administrative regulations, agency or department discretion, or legislation. Of the 32 responding states, most states (96.8 percent) noted that the acceptable forms of elec-

tronic payments are determined at the discretion of the agency or department. They also followed either decisions of upper-level administrative regulations or legislation. However, nine states use a decentralized approach—Alaska, Georgia, Louisianan, Michigan, Minnesota, Nebraska, New Mexico, South Carolina and Wyoming—solely follow the decisions of agency or department discretion without intermediation of upper-level administrative regulations or legislation.

Acceptance of credit card payments. The survey asked whether residents in the state could use credit or debit cards to pay state taxes or fees. Of the 32 responding states, more than half accept credit and debit cards for their tax and fee collections—individual income tax (88 percent), sales tax collection remittance (81 percent), corporate/business income tax (78 percent), personal payment of sales and use tax (66 percent), income tax withholding transfers (63 percent), vehicle sales or usage tax (53 percent), and vehicle registration fees (50 percent) (see Table 6).

17

TA B L E 5 P E R T R A N S A C T I O N D O L L A R V A L U E B Y PAYMENT MEDIUM (MILLION$, FISCAL 2016) ACH (State Average)

Credit/Debit Card (State Average)

Check (State Average)

Cash (State Average)

Total

Individual Income Tax

1,192

226

1,575

132

3,125

Business/Corporate Tax

1,250

214

1,419

84

2,967

Excise, Sales or Usage Tax

1,964

211

669

75

2,919

Licenses or Permits

539

690

874

98

2,200

Agency User Fees

89

561

703

63

1,416

Miscellaneous Others

1,177

251

1,009

60

2,497

Total Value

6,211

2,153

6,249

512

15,125

TA B L E 6 STAT E S ’ AC C E P TA N C E O F C R E D I T / D E B I T CA R D PAY M E N T S State Taxes or Fees

Accepting States (% of Responded States)

Individual income tax

88%

Sales tax collection remittance

81%

Corporate/business income tax declarations

78%

Personal payment of sales and use tax

66%

Income tax withholding transfers

63%

Vehicle sales or usage tax

53%

Vehicle registration fee`

50%

Alcohol or liquor license

47%

Driver’s licensing fee

47%

Fishing or hunting license

41%

Park admission/recreational fees

38%

Park lodging fees

34%

Occupational license fees

34%

Property tax

25%

18

Individuals and businesses showed different patterns of using credit and debit cards (see Table 7). Individuals used credit and debit cards to pay their individual income taxes below $5,000.

Specifically, for individual income tax, a total of 22 states out of 24 responding states (92 percent) accepted credit and debit cards. Most of the individual income tax payments made by credit and debit cards were below $500.

On the other hand, corporations and businesses use credit and debit cards for medium or large payments. States tend to receive taxes and fees of medium or large sizes from corporations or businesses. At least 21 states (88 percent) received

corporate/business tax declarations. Among them, 30 percent (seven states) received their corporate/business tax over $1,000 via credit and debit card. In addition, most states either do not accept credit and debit cards or receive a small amount of payments for some fees and taxes. For instance, around 58 percent of states (14) do not accept credit and debit cards or collected small amounts less than $100 for driver's licensing fees, fishing or hunting licenses, and park admissions and recreational fees (see Table 7).

TA B L E 7 STAT E R E S P O N S E R AT E F O R AV E R AG E AMOUNTS OF CREDIT/DEBIT CARD TRANSACTION BY TA X O R R E V E N U E C AT E G O R I E S Not applicable (card not accepted)

Less than $100

$101 $500

$501 $1,000

$1,001 $5,000

More than $5,000

Responded States (%, out of 24)

Individual income tax

0%

4%

54%

17%

17%

0%

92%

Corporate/business income tax declarations

4%

0%

29%

29%

17%

13%

92%

Income tax withholding transfers

8%

0%

21%

33%

8%

4%

75%

Sales tax collection remittance

8%

4%

17%

25%

25%

8%

88%

Personal payment of sales and use tax

13%

25%

17%

13%

4%

0%

71%

Driver’s licensing fee

21%

38%

4%

0%

4%

0%

67%

Fishing or hunting license

25%

33%

4%

0%

0%

0%

63%

Park admission and recreational fee

25%

33%

0%

0%

0%

0%

58%

Park lodging fee

25%

25%

8%

0%

0%

0%

58%

Alcohol or liquor license

38%

4%

21%

8%

4%

0%

75%

The states that do not accept credit and debit cards for their taxes and fees list a variety of reasons including a lack of cost effectiveness and taxpayers’ preferences. For instance, Illinois mentioned that its reasons for not accepting credit and debit cards included a lack of information about implementation and administrative approval and support. Rhode Island does not accept credit and debit cards due to the lack of consensus on legislative authorization and who pays the merchant fee. Some states also commented that processing fees, administration costs, and handling their party service provider or Payment Card Industry, also known as PCI, hinder agencies’ acceptance of credit and debit cards.

States accept credit and debit cards using different venues and options. Table 8 shows that payments handled by third-party

vendors and internet payments are the most accepted payment channels for credit and debit cards. Credit and debit card payments made through third-party service providers range from 66 percent of the states’ accepting payment through third- party providers for individual income tax payments to 25 percent for licenses or permits via internet and telephone payments. Table 8 also shows if the state accepts credit and debit card payments made over the internet. Of 32 responding states, more than half collect individual income tax, business/corporate tax, excise, sales, or usage tax, and agency user fees through the internet.

On the other hand, responding states use mail the least for their state taxes and fee collections. Some states do not accept credit and debit cards for agency use fees and licenses or permits.

19

TA B L E 8 STAT E R E S P O N S E P E R C E N TAG E O F T Y P E S O F PAY M E N T S B Y STAT E TA X A N D F E E C O L L E C T I O N S Individual income tax

Business/ corporate tax

Excise, sales or usage tax

Agency user fees

Licenses or permits

Payment handled by third party vendor

66%

63%

59%

47%

25%

Payment by Internet

56%

53%

59%

59%

34%

Payment by Telephone

31%

31%

31%

41%

25%

In-person payment

19%

13%

25%

47%

31%

Payment by Mail

9%

9%

13%

31%

25%

Credit/Debit Card Not Accepted

3%

9%

6%

16%

13%

*% out of 32 responding states

4.3 S TAT E E L E C T R O N I C D I S B U R S E M E N T S F O R TA X R E F U N D S A N D W E L FA R E BENEFITS Use of state electronic disbursements. States often distribute their income tax refunds and welfare benefits using electronic mediums. To investigate the use of electronic options for state disbursements, the survey asked the states about the extensive

use of various disbursement options. Figure 10 shows that both state income tax refunds and benefit disbursements heavily rely on ACH transactions. Additionally, prepaid debit cards are largely used for benefit disbursements (25.7 percent of total benefit transactions) rather than income tax refunds (3.5 percent). Connecticut ended its prepaid debit card program for income tax refunds in December 2015.

The survey asked how states determine acceptable forms of electronic disbursements. Of the 20 states that responded, all followed the discretion of agency or department whereas around half of the states also followed upper-level administrative regulations or legislation.

F I G U R E 1 0 P E R C E N TAG E O F STAT E D I S B U R S E M E N T B Y PAY M E N T TY P E 60 50 40

Income Tax Refunds (%)

30 20 10 0 20

Check

ACH

Pre-Paid Card

E-Check

States used ACH for 54.8 percent of their total tax refund transactions and 40 percent of their benefit disbursements. For total income tax refunds, it is about $1,670 million and 2,078,000 transactions (see Table 9). Most states used checks and ACH

for income tax refunds—only a small amount was transferred through pre- paid debit cards—but rarely used cash or electronic check (Table 9). For benefit disbursements, it is about $2,174 million and 8,964,000 transactions (see Table 10).

TA B L E 9 P E R C E N TAG E A N D VA LU E O F STAT E TA X R E F U N D T R A N S AC T I O N S B Y PAY M E N T T Y P E

Cash

Check

ACH

Pre-paid Debit

Electronic Check

Total DOLLAR value of state tax refunds (million$)

Total VOLUME of state tax refund transactions (1000)

CO

0%

65.01 - 70%

30.01 - 35%

0%

0%

1,080

2,017

CT

0%

50.01 - 55%

45.01 - 50%

Less than 5%

0%

1,200

1,200

DE

-

-

-

-

-

397

371

IA

0%

65.01 - 70%

25.01 - 30%

0%

0%

759

1,105

IL

0%

20.01 - 25%

75.01 - 80%

Less than 5%

0%

2,136

4,173

IN

0%

45.01 - 50%

50.01 - 55%

0%

0%

1,126

2,284

KS

0%

35.01 - 40%

60.01 - 65%

0%

0%

432

1,003

LA

0%

65.01 - 70%

30.01 - 35%

Less than 5%

0%

1,864

1,564

MI

0%

20.01 - 25%

70.01 - 75%

0%

0%

1,194

2,455

MN

0%

30.01 - 35%

65.01 - 70%

0%

0%

2,000

3,000

ND

0%

35.01 - 40%

60.01 - 65%

0%

0%

247

356

NE

0%

15.01 - 20%

80.01 - 85%

0%

0%

1,059

-

NH

-

-

-

-

-

40

11

NJ

0%

30.01 - 35%

65.01 - 60%

10.01 - 15%

0%

2,800

3,100

NM

0%

45.01 - 50%

5.01 - 10%

0%

0%

-

-

NY

0%

25.01 - 30%

70.01 - 75%

0%

0%

11,300

8,100

RI

0%

30.01 - 35%

0%

0%

65.01 - 70%

254

436

VA

0%

30.01 - 35%

65.01 - 60%

5.01 - 10%

0%

-

2,397

State Average

0%

39.1%

54.8%

3.7%

4.2%

1,670

2,078

State

*AZ, NC responded to the survey but did not respond to this question; CT-The pre-paid debit card program for income tax refunds ended in December 2015; IL-For tax refunds in 2016, 77.5% of refunds were issued electronically, 22% were by checks and .5% were through debit cards.; NE-Tax Refund is for Individual Income Tax only.; NHTax refunds are not issued electronically. Each row should add up to 100%).

21

TA B L E 1 0 P E R C E N TAG E A N D VA LU E O F STAT E B E N E F I T D I S B U R S E M E N T S T R A N S AC T I O N S B Y PAY M E N T T Y P E

Electronic Check

Total DOLLAR value of state tax refunds (million$)

Total VOLUME of state tax refund transactions (1000)

Cash

Check

ACH

Pre-paid Debit

AZ

0%

25.01 - 30%

30.01 - 35%

35.01 - 40%

0%

3,267

59,202

DE

30.01 35%

30.01 - 35%

0%

30.01 - 35%

0%

-

-

MI

0%

45.01 - 50%

45.01 - 50%

0%

0%

-

-

MN

10.01 15%

10.01 - 15%

50.01 - 55%

25.01 - 30%

0%

6,000

31,000

NC

0%

20.01 - 25%

75.01 - 80%

0%

0%

20,865

34,306

ND

Less than 5%

5.01 - 10%

35.01 - 40%

45.01 - 50%

0%

632

1,306

NY

0%

35.01 - 40%

50.01 - 55%

5.01 - 10%

0%

-

-

RI

0%

30.01 - 35%

30.01 - 35%

35.01 - 40%

0%

635

3,063

VA

0%

15.01 - 20%

15.01 - 20%

35.01 - 40%

15.01 - 20%

1,213

5,581

5.5%

26.1%

40.0%

25.7%

1.8%

5,435

22,410

State

Average

*CO, CT, IA, IN, KS, LA, NJ answered as N/A for total dollar value and volume of benefit disbursements; DE, IL, NC, NH, NM, NY did respond to the survey and did not provide a value for this question.

22

CHAPTER 5 CHALLENGES AND FUTURE DIRECTIONS What are future directions or policies for state electronic collections? The final point of emphasis in the survey and this study was to identify effective policies and practices for electronic collections of state taxes and fees. Several questions were included in the survey to determine which states are considering changing policies or procedures for improving electronic payment systems. Most of them focused on the expansion and security of its electronic payment system. For instance, 88 percent of states definitely/very probably have future plans for improv-

ing security/fraud prevention and expanding the electronic collection system for ACH transactions and credit and debit cards.

In addition, states also definitely/very probably have a plan to increase financial inclusion/technology accessibility (75 percent) and expand the use of third-party service providers (63 percent).

On the other hand, states definitely/probably do not have any plans to change policies such as expanding paper-based payments, eliminating convenience fees or transaction surcharges paid by residents or state agencies (see Figure 11).

FIGURE 11 FUTURE PLANS TO CHANGE POLICIES OR P R O C E D U R E S F O R I M P R OV I N G E - PAY M E N T SY ST E M S F O R STAT E TA X E S A N D F E E S Eliminating convenience fees or transaction surcharges paid by residents Expanding paper-based payments

(e.g. cash or check)

Eliminating convenience fees or transaction surcharges paid by state agencies Adopting new payment methods

(e.g. PayPal, digital wallets, apple payments, or Venmo)

Improving unclaimed money processes Initiating/expanding the use of a third party service provider

Probably

Expanding credit/debit card payments Expanding ACH payments Improving security/fraud prevention

0%

20%

Moving away from paper-checks. There are several reasons that states are more likely to move away from check payments for their tax and fee collections. One of the major reasons is reducing costs associated with the processing and collection of checks. For instance, 72 percent of responding states (23) pointed out that the cost of collecting and processing payments, such as cashing checks, could be the main reason for accepting fewer checks. Also, 50 percent of responding states claimed that accepting fewer checks can reduce the costs of recordkeeping and delayed payment processing. (see Table 11). In fact, New Jersey reported “the time to process paper checks is significantly longer than the electronic payment.”

In addition, states specified that reducing check payments became a goal of state policy. Fifty-nine percent of states that responded are planning to reduce check payments to follow legislative authorization or mandates. Additionally, 44 percent are more likely to move away from check payments due to tax-

40%

60%

80%

100%

payers’ preferences. In addition to the purpose of cost reduction and state decision, 22 percent consider that reducing check payments eases concerns related to security (Table 11).

States made comments on several strategies regarding the move away from paper checks: • Alaska responded that they are considering accepting credit card payments for taxes.

• California is currently considering making their mandatory electronic payments threshold amount lower to encourage electronic payments and reduce checks.

• Illinois Department of Revenue is discussing expanding the acceptance of credit cards for a variety of online applications.

• Montana mandates electronic payments through the next legislative session.

• Georgia is looking for new payment options that provide alternatives for taxpayers.

23

TA B L E 1 1 R E A S O N S F O R AC C E P T I N G F E W E R C H E C K S Responded States (%) To reduce costs of collecting and processing payments (e.g. fee for cashing checks)

72%

Legislative authorization or mandates to reduce check payments

59%

To reduce costs of delayed payment processing

50%

To reduce costs of paper-based recordkeeping

50%

To reduce costs of bounced or bad checks

44%

Taxpayer preference

44%

•

Nevada plans to expand ACH transaction options and implement EMV chip-equipped cards.

• The New York Department of Environmental Conservation is currently looking to expand the acceptance of electronic payments across all fee types.

• The New York Liquor Authority is in the process of updating its backend systems and will be making electronic payments available for all transactions as the new system comes online in approximately two years.

• The New York State Department of Taxation and Finance continues to develop new web applications that support ACH debit payments.

• South Carolina is looking to broaden the types of credit cards accepted and allow more tax payments to incorporate the use of ACH, and credit and debit cards.

• Washington state is considering expanding credit card acceptance at the front counters. Currently, the state only accepts cash or paper checks at the front counter.

• Wyoming is looking into accepting more diverse forms of electronic payments.

Legal and regulatory environment. Adequate legal and regulatory framework for government electronic payment options is essential, yet there is no consensus on established rules and

guidelines. The lack of adequate rules and standards makes all participants feel confused with an unnecessary multiplicity or lack of standardization for collection/payment options, inadequate transparency on the way government payment programs are executed, and even legal liability for public officers and/or their institutions for executing payment programs in such a way that is not properly supported in laws and/or regulations.

In fact, several states in the survey stated that survey questions were difficult to answer because each state agency required different fees and oversight structures. Also, there is no one place to gather the information about electronic payments. Each agency possesses different standards and rules for their legal and regulatory framework, including third-party service providers, fees or surcharges.

For instance, of the 32 responding states, 70 percent reported using a third-party provider. Table 12 shows that the use of these service providers varies by the type of tax or fee. Contracts with third-party providers were most common in electronic collections for business/corporate tax and excise, sales, or usage tax (81 percent), and the least commonly used for agency user fee collections (47 percent).

TA B L E 1 2 STAT E S ’ U S E O F T H I R D - PA R T Y P R O V I D E R B Y TA X T Y P E Yes (Number of States)

No (Number of States)

Yes (% of states)

No (% of states)

Individual Income Tax

25

0

78%

0%

Business/Corporate Tax

26

1

81%

3%

Excise, Sales, or Usage Tax

26

1

81%

3%

Licenses or Permits

20

4

63%

13%

Agency User Fees

15

4

47%

13%

Average

22.4

2

70%

6%

To reduce security concerns

22%

*The total observations are 32. States answered yes or no; Otherwise, tax or fee categories are not applicable or missing.

24

Of the states that contract with third-party providers for credit card acceptance and processing, more than half have an exclusive contract with only one provider (56 percent), compared to 44 percent that have non-exclusive contracts with multiple third-party service providers (see Table 13). Only two states, Delaware and Nevada, did not use a third-party service provider.

Many states cited having a central state agency responsible for negotiating with and selecting the third-party service provider.

These agencies included the department of administration or administrative services; office of the treasurer or treasury department; department of finance or financial services; office of the comptroller; or agency of digital services (SoS).

TA B L E 1 3 E XC LU S I V E CO N T R AC T W I T H T H I R D PA RTY SERVICE PROVIDERS Number of States

% of Responded States

Exclusive contract with only one third-party service provider

15

56%

Non-exclusive contract with multiple service providers

12

44%

*The total observations are 32. States answered yes or no; Otherwise, tax or fee categories are not applicable or missing.

Given the many types of fees associated with accepting credit card payments, some states charge citizens or taxpayers convenience fees and/or transaction surcharges for payments made by credit card. Table 14 shows, for different types of taxes, the percentages of states that have adopted different fee or surcharge approaches. For most tax types, more states address the problem of credit card fees by levying a fee through the third-party service provider that accepts or processes the

credit card payment. On average, 26 percent of the responding states deal with fees or surcharges through a third-party provider whereas around 15 percent of states do not have fees or surcharges. If the state itself charges a fee or surcharge, they are more likely to take the form of percentage-based fees or surcharges (9 percent) than fixed dollar amount fees or surcharges (3 percent).

TA B L E 1 4 F E E S O R S U R C H A R G E S F O R C R E D I T / D E B I T CARD TRANSACTIONS Fee or surcharge through third-party provider

Fixed-dollar amount fee or surcharge

Percentage-based fee or surcharge

No fee or surcharge

Alcohol or liquor license

28%

3%

9%

25%

Income tax withholding transfers

50%

0%

13%

13%

Sales tax collection remittance

56%

3%

13%

9%

Driver’s licensing fee

6%

0%

9%

22%

Fishing or hunting license

6%

3%

9%

16%

Individual income tax

66%

3%

13%

13%

Park admission and recreational fee

9%

3%

6%

16%

Park lodging fee

9%

3%

6%

16%

Personal payment of sales and use tax

44%

3%

13%

16%

Property tax

13%

3%

3%

6%

Vehicle registration fee

13%

6%

9%

19%

Vehicle sales or usage tax

22%

3%

9%

16%

Occupational license fees

13%

0%

9%

16%

Average

26%

3%

9%

15% 25

What are future directions or policies for state electronic disbursements? Like tax and fee collections, the use of third-party service providers varies by types of disbursements. The majority of responding states either did not use third-party service providers or make contracts with third-party service providers exclusively. Of 20 states, 11 states responded that they were in a non-exclusive contract with multiple service providers whereas only two states responded that they had an exclusive contract with only one third-party service provider. Seven states, however, did not use third-party service providers. Some states cited having a central state agency responsible for negotiating with

and selecting the third-party service provider. These agencies included the department of administration or administrative services; office of the treasurer or treasury department; and department of finance or financial services.

For state benefit disbursements, few states charge convenience fees or transaction surcharges made through prepaid debit cards. For instance, only Arizona and Minnesota currently charge fees or surcharges for SNAP disbursements made through prepaid debit cards whereas six states do not have fees or surcharges.

TA B L E 1 5 F E E S O R S U R C H A R G E S F O R P R E PA I D D E B I T CARD TRANSACTIONS Fee or surcharge through third-party provider

No fee or surcharge

SNAP

AZ, MN

ND, DE, VA, NC, NY, RI

TANF

AZ

MN, ND, VA, NY, RI

Workers' Compensation

-

AZ, ND, NY, MI

Child Support

-

AZ, ND, MI, MN, VA, RI

Unemployment Insurance

AZ

ND, MI, MN, VA, RI, NY

Tax Refund

CT

ND, VA, RI, CO, IA, LA, KS, NE, NJ, NM, IL

Personnel-payroll and expenses reimbursement

-

ND, VA, RI, AZ

Adoption/Foster Care

-

ND, RI, AZ, NY

Lottery

-

RI, AZ, NY, MI

Service opt-out. Lastly, the survey asked whether the state offers residents the choice to opt-out of electronic payments for state disbursements. For tax refunds, all responding states have an opt-out option for electronic transfers. For benefit disbursements, the opt-out choice can vary by state. For instance, Minnesota provides the opt-out option for electronic SNAP disbursements; North Dakota and Minnesota provide the opt-out choice for electronic TANF disbursements; and four states provide the opt-out option for electronic disbursement for workers' compensation.

TA B L E 1 6 C H O I C E T O O P T- O U T O F E L E C T R O N I C PAY M E N T S F O R STAT E D I S B U R S E M E N T S No

Yes

Not applicable - no e-payment options available

SNAP

AZ, NY, ND, NC

MN

RI, DE

TANF

AZ, NY, NC

ND, MN

RI

MI

AZ, NY, ND, MN

NC, VA

MI, ND, RI

NC, VA, AZ, MN

MI, ND, RI, MN, NY

VA, AZ

NC

-

MI, ND, RI, MN, NY, VA, DE, CT, IA, LA, KS, NE, NM, IL, IN, NM

NC, CO, NJ, NH

NC, VA, DE, AZ

MI, RI, MN

ND

NC, MN, NY

RI

AZ, ND

-

NY, DE, MI

NC, MN, AZ, RI

Workers' Compensation Child Support Unemployment Insurance Tax Refund Personnel-payroll and expenses reimbursement Adoption/Foster Care Lottery 26

F I G U R E 1 2 TOTA L D O L L A R VA LU E A N D V O LU M E O F STAT E TA X R E F U N D S B Y STAT E S 12000

10000

8000

6000

4000

2000

0

CO

CT

DE

IA

IL

IN

KS

LA

MI

MN

ND

NE

NH

NJ

NM

NY

RI

VA

Total VOLUME of state tax refund transactions (number of transactions) (1000) Total DOLLAR value of state tax refunds (million$) * Among the responding states, Virginia did not provide total dollar value of state tax refunds; and Nebraska and New Mexico did not provide total volume of state tax refund transactions.

27

CHAPTER 6 SUMMARY AND CONCLUSION The increased use of the various electronic payments is a rapidly emerging trend for the U.S. market and state governments. In fact, the development of efficient and secure electronic payment methods is continually expanding the use of cash-less payments.

The number of transactions conducted with credit and debit cards has significantly risen at an annual increase of around 19 percent, from 27 billion in 2001 to 105 billion in 2016. This total growth in electronic transactions is driven predominantly by debit card rather than credit card transactions; the total use of debit card transactions has grown by 38 percent annually, while the total increase in credit card use is only 10.4 percent.

In addition to credit and debit card transactions, the Automated Clearing House has recently observed rapid growth due to its various advantages, including its low cost per transaction and the adoption of same-day ACH credit processing. The volume of government ACH transactions has increased by 33 percent, from 1.209 trillion in 2009 to 1.609 trillion in 2016 (Capgemini Financial Services Analysis, 2017).

Along with the rapid evolution of electronic payments in the U.S. market, citizens and businesses expect governments to adopt and expand these electronic collection methods for state taxes and fees as well as implement electronic distribution for state tax returns and welfare benefits. Such rapid advancement from the traditional payment system of cash or check toward the electronic payment methods, including ACH and credit and debit cards, imposes benefits for both governments and citizens. The rapid transformation of the payment system has enhanced the efficiency of fund collections with reduced transaction-processing costs and delinquent payments as well as improved the efficiency of fund disbursement with greater fiscal inclusion and clearer payment trails.

Given these national trends, existing studies have focused on electronic payments in the general U.S. market at the federal government level and in comparison to other countries, but a lack of studies on the use of electronic payments at the state government level remains worrisome. The initiation of The Council of State Governments in 2018 therefore specifically provides an update on current policies and practices regarding the acceptance of both cash-less state collections and disbursements.

Following a review of previous studies, the research team conducted a national study of current state policies and practices and developed a survey of the 50 states with the support and assistance of CSG staff and an advisory committee. The draft survey questions were reviewed by the Study Advisory Committee and were subsequently revised to incorporate their feedback.

The survey was distributed via SurveyMonkey or e-mail. Respondents were originally asked to respond by May 15, 2018.

By the end of April, we had received 26 survey responses (nine anonymous) for state electronic collections and 14 responses (one anonymous) for state electronic disbursements.

The survey contains two areas: (1) the electronic collection of state taxes or fees and (2) the electronic disbursement of state income tax refunds and welfare benefits. The first part of the survey was constructed to gather information on the acceptance of electronic payments for state fees and taxes, which includes individual income taxes, business/corporate taxes, excise taxes, sales taxes, usage taxes, licenses, permits, and vehicle-registration fees. Eighteen survey questions about state electronic collections were divided into four categories: (1) acceptance and use of credit card payments for taxes and fees, (2) acceptance and use of check payments, (3) card payment fees and charges, and (4) future policy directions for improved electronic payment 28

systems. A total of 20 states responded to the state electronic disbursements survey.

A second survey was constructed to gather information on states’ electronic disbursements of tax refunds and welfare benefits. State benefits include Supplemental Nutrition Assistance Program, or SNAP, Temporary Assistance for Needy Families, or TANF, worker’s compensation, child support, unemployment insurance, personnel payroll, expense reimbursement, adoption/ foster care payments, and lottery payments. A total of 20 states responded to the state electronic disbursements survey. The major findings related to the research questions are summarized below.

6.1 C A S H - L E S S S TAT E COLLECTIONS

Which state taxes or fees can be (and are) paid via an electronic medium?

• With regard to cash-less collections of taxes and fees, the states utilize ACH and credit cards as the most commonly accepted forms of payment for both individual income taxes and business-related taxes. Of the 32 states that responded to the survey, ACH and credit card (used by approximately 84 percent of responding states) are the most commonly accepted form of payment for individual income taxes and fees, such as licenses or permits, and agency user fees. On the other hand, ACH is the slightly more dominant (used by 94 percent of responding states) method of paying for business-related taxes, such as business/corporate taxes, excise taxes, sales taxes, and usage taxes (see Table 3).

How extensive is the acceptance of cash-less payments for state collections?

• Among the electronic collection forms, ACH deals with the largest dollar value per transaction for taxes while credit cards, debit cards and cash take care of the smaller dollar value transactions. On average, each responding state received $1,192 million in individual income taxes through ACH, $1.250 billion in business/corporate taxes, and $1.964 billion in excise, sales and usage taxes (see Table 5).

• Not all states currently accept taxes and fees through credit and debit cards. Of the 32 responding states, 88 percent of states accept credit and debit cards for individual income taxes, 81 percent of responding states accept credit and debit cards for sales tax collection remittance, and 78 percent of responding states accept credit and debit cards for corporate/business income taxes (see Table 6).

6.2 C A S H - L E S S S TAT E DISBURSEMENTS

Which state tax returns or welfare benefits can be (and are) paid via an electronic medium?

• For cash-less disbursements, the process by which states distribute benefits varies greatly depending on the benefit programs, including SNAP, TANF, worker’s compensation, child support, unemployment insurance, personnel payroll, expense reimbursement, adoption/foster care payments, and lottery payments. In general, states used the ACH

for their tax refunds and welfare distributions with other payment options, such as cash, checks, prepaid debit cards, and e-checks.

How extensive is the use of an electronic medium for state tax refunds and benefit disbursements?

• States used ACH for 54.8 percent (about $869.08 million) of their total 2,078,000 tax refund transactions (see Table 9). States used ACH for 40 percent (about $2,174 million) of their total 8,964,000 benefit disbursement transactions (see Table 10). Most states used checks and ACH for income tax refunds—only a small amount was transferred via prepaid debit card—but rarely used cash or electronic checks (see Table 9).

6.3 W H O PAY S T H E T R A N S A C -

T I O N F E E S A S S O C I AT E D W I T H C R E D I T CA R D PAY M E N T S A N D H O W A R E T H E Y PA I D ?

•

States accept credit/debit cards using diverse venues and options. For tax payments (individual income taxes, business/corporate taxes, and excise, sales, and usage taxes), handling by third-party vendors is the most common payment channel for credit/debit cards. For fee payments (agency user fees, licenses, and permits), internet payments predominate over other channels, such as third-party services, telephone payments, in-person payments, and mail payments.

•

•

for moving away from paper-based payments (see Table 11). In addition to the purpose of cost reduction and state decision, 22 percent believe that reducing check payments eases concerns related to security (Table 11).

Most of these states focused on the expansion and security of their electronic payment systems. For instance, 88 percent of states definitely or very likely have future plans for improving security/fraud prevention and expanding the electronic collection system for ACH and credit/debit cards.

In addition, states also definitely or very likely have a plan to increase financial inclusion/technology accessibility (75 percent) and expand the use of third-party service providers (63 percent) (see Figure 11).

This report aims to provide an overview of policies and processes on cash-less state collections and disbursements. As discussed previously, it is not surprising that state governments are increasing their use of electronic payments and are planning to expand them even further, which will subsequently continue to reduce their utilization of paper-based payments. Specifically, this study investigated the extent to which state governments actually use electronic payment options as well as which state payments and disbursement programs are transferred via electronic channels. Furthermore, this research identified key issues related to electronic payments and determined effective policies and practices that may be of use to state governments as they consider (1) introducing and expanding electronic payment options or (2) enhancing the efficiency and security of their electronic payment programs.

6.4 W H AT A R E T H E B E N E F I T S

AND CHALLENGES OF ALLOWI N G E L E C T R O N I C PAY M E N T S F O R STAT E CA S H - L E S S C O LLECTIONS AND DISBURSEM E N T S ? W H AT A R E T H E FUTURE DIRECTIONS OR POLI C I E S F O R STAT E E L E C T R O N I C DISBURSEMENTS? •

•

States specified that reducing check payments has become a state policy goal. Fifty-nine percent of responding states are planning to reduce check payments to follow legislative authorization or mandates. Additionally, 44 percent are more likely to move away from check payments due to taxpayers’ preferences.

Cost savings were identified as the major reason for accepting more cash-less payments and fewer paper-based payments. For instance, 72 percent of responding states pointed out that the cost of collecting and processing payments, such as cashing checks, may be the main reason

29

REFERENCE LIST Board of Governors of the Federal Reserve System. (2017). Report to the Congress on Government-Administered, General-Use Prepaid Cards. Retrieved from https://www.federalreserve.gov/publications/files/government-prepaid-report-201707.pdf Capgemini Financial Services Analysis. (2017). World Retail Banking Report 2017. Retrieved from https://www.worldpaymentsreport.com Committee on Payments and Market Infrastructures (CPMI). (2017) Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries: Figures for 2016. In. Basel, Switzerland: Bank for International Settlements.

Dwight V. Denison, Merl M. Hackbart, Juita-Eleana (Wie) Yusuf, & Song, J. H. (2007). Acceptance and Use of Electronic Payments for State Taxes And Fees. Retrieved from https://www.tandfonline.com/doi/abs/10.2753/PMR1530-9576360406 Federal Deposit Insurance Corporation (FDIC). (2015). The 2015 National Survey of Unbanked and Underbanked Households. Retrieved from https://economicinclusion.gov/surveys/2015household/ Federal Reserve Board. (2016). The Federal Reserve Payments Study 2016. Retrieved from https://www.federalreserve.gov/newsevents/press/other/2016-payments-study-20161222.pdf Federal Reserve Bank of Philadelphia. (2010). Federal Regulation of the Prepaid Card Industry: Costs, Benefits, and Changing Industry Dynamics. Retrieved from https://www.philadelphiafed.org/-/media/consumer-finance-institute/payment-cards-center/events/ conferences/2011/C2011-Federal-Regulation-of-Prepaid-Card-Industry.pdf Federal Reserve Bank of St. Louis. (2011). Cards, Cards and More Cards: The Evolution to Prepaid Cards. Inside the Vault, 16(2), 1-6.

Federal Reserve System. (2011). The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the United States: 2006 – 2009 Retrieved from https://www.frbservices.org/assets/news/research/2010-payments-study-summary-report.pdf Hayashi, F., Sullivan, R. J., & Weiner, S. E. (2003). A guide to the ATM and debit card industry: Payments System Research Department, Federal Reserve Bank of Kansas City.

Mandell, L. (1990). The credit card industry: a history: Twayne Publishers.

Master Card. (20145). Find where to pay state taxes online or by phone. Retrieved from https://www.Mastercard.us/en-us/consumers/get-support/pay-taxes/tax-payments-by-state.html National Automated Clearing Association (NACHA)1. (2018). NACHA Operating Rules. Retrieved from https://www.nacha.org/rules National Automated Clearing Association (NACHA)2. (2018). History and Network Statistics. Retrieved from https://www.nacha.org/ach-network/timeline National Automated Clearing Association (NACHA)3. (2018). Updates and Upcoming Changes. Retrieved from https://www.nacha.org/rules/updates The World Bank. (2012). General Guidelines for the Development of Government Payment Programs. Retrieved from Washington DC: https://siteresources.worldbank.org/FINANCIALSECTOR/Resources/General_Guidelines_Govt_Payment_Aug2012.pdf

30

APPENDIX A State Acceptance of Electronic Payments This survey includes questions about the forms of payments your state accepts for taxes or fees (e.g. individual income taxes or licensing fees) including cash, check, ACH, credit or debit card.

Acceptance and Use of Credit Card Payments for Taxes and Fees 1. Primary contact Name Agency Address Address 2 City/Town State ZIP Position Email Address Phone Number 2. What forms of payments does your state accept for taxes or fees? (Check all that apply) Individual Income Tax

Business/Corporate Tax

Excise, Sales or Usage Tax

Licenses or Permits

Agency User Fees

Cash Check ACH Credit Card Debit Card 3. How are the acceptable forms of e-payments determined? (Check all that apply)    

Upper-level administrative regulations Agency or department discretion Legislation Other (please specify)

4. Choose any/all of the following state taxes or fees for which your state accepts credit/debit card payments. (Check all that apply)               

Alcohol or liquor license Corporate/business income tax declarations Income tax withholding transfers Sales tax collection remittance Driver’s licensing fee Fishing or hunting license Individual income tax Park admission/recreational fees Park lodging fees Personal payment of sales and use tax Property tax Vehicle registration fee Vehicle sales or usage tax Occupational license fees Other (please specify)

5. If your state does not accept credit/debit card payments for any tax or fee, why not? (choose all that apply)   

   



 

Lack of information about implementation Lack of administrative approval and support Lack of consensus on who pays the merchant fee for credit/debit card payments Lack of legislative authorization Lack of taxpayer interest Not cost effective Tax collection/remittance process is not conducive for credit/debit card payments PCI DSS compliance (Payment Card Industry Data Secu rity Standard compliance) Not applicable Other (please specify)

31

6. What methods of credit/debit card payment does your state accept?

Individual Income Tax

Business/ Corporate Tax

Excise, Sales or Usage Tax

Licenses or Permits

Agency User Fees

Payment made in person (card swipe) Payment by mail Payment by internet Payment by telephone Payment handled entirely by third party vendor Credit/debit card not accepted Other (please specify tax and method) 7. What was the estimated total DOLLAR VALUE of tax or fee payments made to your state in fiscal year 2016?

8. Please estimate the percentage of the tax or fee payment DOLLAR amounts by the following categories (total should add up to 100%). Use the total DOLLAR amount in question #7.

Individual Income Tax: Business/Corporate Tax: Excise, Sales or Usage Tax: Licenses or Permits: Agency User Fees: Miscellaneous Others: 9. What is the estimated total NUMBER of tax or fee transactions made to your state in fiscal year 2016?

10. Please estimate the percentage of the NUMBER of payments by the following categories (each row should total 100%).

Use number referenced in question #8.

ACH Individual Income Tax Business/Corporate Tax Excise, Sales or Usage Tax Licenses or Permits Agency User Fees Miscellaneous Other

32

Credit/Debit Card

Check

Cash

11. Which of the following transaction amounts characterize the average credit/debit card payment received for each of the tax or revenue categories below?

Not applicable (card not accepted)

Less than $100

$101-$500

$501-$1,000

$1,001$5,000

More than $5,000

Alcohol or liquor license Corporate/business income tax declarations Income tax withholding transfers Sales tax collection remittance Driver’s licensing fee Fishing or hunting license Individual income tax Park admission and recreational fee Park lodging fee Personal payment of sales and use tax Vehicle registration fee Vehicle sales or usage tax Occupational license fees Other (please specify)

Checking 12. What are the possible reasons that your state is more likely to move away from check payments for taxes and fees (If not applicable, please move to next question).        

To reduce security concerns To reduce costs of delayed payment process To reduce costs of bounced or bad checks To reduce costs of collecting and processing payments (e.g. fee for cashing checks) To reduce costs of paper-based recordkeeping Taxpayer preference Legislative authorization or mandates to reduce check payments Other (please specify)

Card Payment Fees and Charges 13. Does your state use a third-party service provider to accept and handle the processing of credit card transactions for payment of state taxes and fees?

No

Yes

Not applicable

Individual Income Tax Business/Corporate Tax Excise, Sales, or Usage Tax Licenses or Permits Agency User Fees

33

14. Does your state have an exclusive contract with a single third-party service provider or does your state contract with multiple service providers?  

 

15. Is a central state agency (e.g. Administrative Division or Department of General Services) responsible for negotiating with and selecting the third-party service provider?

Do not use third-party service provider Exclusive contract with only one third-party service provider Non-exclusive contract with multiple service providers Other (please specify)

No, do not use third-party provider No, use a third-party provider but a different agency or multiple agencies are responsible Yes, we use a third party provider and a central state agency is responsible. Please identify the central agen cy responsible:

 



16. For the following taxes or fees, does your state currently charge convenience fees or transaction surcharges for payments made by credit/debit card?

No fee or surcharge

Fee or surcharge through third-party provider

Percentage-based fee or surcharge

Fixed-dollar amount fee or surcharge

Alcohol or liquor license Corporate/business income tax declarations Income tax withholding transfers Sales tax collection remittance Driver’s licensing fee Fishing or hunting license Individual income tax Park admission and recreational fee Park lodging fee Personal payment of sales and use tax Vehicle registration fee Vehicle sales or usage tax Occupational license fees

Future Policy 17. Does your state have any future plans to change policies or procedures for improving e-payment systems for state taxes and fees?

Definitely Expanding paper-based payments (e.g. cash or check) Expanding ACH payments Expanding credit/debit card payments Adopting new payment methods (e.g.

PayPal, digital wallets, apple payments, or Venmo) 34

Very Probably

Probably

Probably Not Definitely Not

Eliminating convenience fees or transaction surcharges paid by state agencies Eliminating convenience fees or transaction surcharges paid by residents Initiating/expanding the use of a third party service provider Improving security/fraud prevention Improving unclaimed money processes Increasing financial inclusion/technology accessibility

18. Please describe any changes to the acceptance of electronic payments in your state that are currently being considered.

State Electronic Disbursementss This survey includes questions about tax refunds, and benefit disbursements (e.g. SNAP, TANF,Workers Compensation, etc.), including the percentage of disbursements that are cash, check,ACH, pre-paid debit, electronic check transfer, etc.

1. Primary contact Name Agency/Organization Address Address 2 City/Town State/Province ZIP/Postal Code Position Email Address Phone Number 2. How are the acceptable forms of e-payments for disbursements determined? (Check all that apply)    

Upper-level administrative regulations Agency or department discretion Legislation Other (please specify)

3. Estimate the following dollar and volume figures for state TAX REFUNDS for fiscal year 2016: Total DOLLAR value of state tax refunds: Total VOLUME of state tax refund transactions (number of transactions):

5. Please estimate the percentage of the refund and benefit disbursement dollar amounts for the following categories (each row should add up to 100%): Cash Check

ACH Pre-paid Debit

Electronic Check Transfer

SNAP TANF Workers' Compensation Child Support Unemployment Insurance Tax Refund Personnel - payroll, expenses reimbursement Adoption/Foster Care Lottery

4. Estimate the following dollar and volume figures for state BENEFIT DISBURSEMENTS for fiscal year 2016: Total DOLLAR value of benefit disbursements: Total VOLUME of benefit disbursements (number of transactions):

35

6. Which of the following transaction amounts characterize the average prepaid debit card disbursements paid for each of the categories below?

Not applicable (card not accepted)

Less than $100

$101-$500

$501-$1,000

$1,001$5,000

More than $5,000

SNAP TANF Workers' Compensation Child Support Unemployment Insurance Tax Refund Personnel - payroll, expenses reimbursement Adoption/Foster Care Lottery 7. Does your state have an exclusive contract with a single third-party service provider or does your state contract with multiple service providers?    

Do not use third-party service provider Exclusive contract with only one third-party service provider Non-exclusive contract with multiple service providers Other (please specify)

8. Is a central state agency (e.g. Administrative Division or Department of General Services) responsible for negotiating with and selecting the third-party service provider?   

No, do not use third-party provider No, use a third-party provider but a different agency or multiple agencies are responsible Yes, we use a third party provider and a central state agency is responsible. Please identify the central agency responsible:

9. For the following, does your state currently charge convenience fees or transaction surcharges for disbursement made through prepaid debit cards?

No fee or surcharge

SNAP TANF Workers' Compensation Child Support Unemployment Insurance Tax Refund Personnel - payroll, expenses reimbursement Adoption/Foster Care Lottery

36

Fee or surcharge through third-party provider

Percentage-based fee or surcharge

Fixed-dollar amount fee or surcharge

10. Does your state offer residents the choice to opt-out of e-payments for the following categories?

No

Yes

Not applicable

SNAP TANF Workers' Compensation Child Support Unemployment Insurance Tax Refund Personnel - payroll, expenses reimbursement Adoption/Foster Care Lottery Additional details:

37

40