Minn. tax agency halts move to debit cards for now

The Minnesota Department of Revenue is choosing paper over plastic when it comes to tax refunds.

The state tax agency confirmed Wednesday it is indefinitely postponing a conversion from paper refund checks to preloaded debit cards. An official cited concerns over data security and a decision to focus on promoting direct-deposit refunds instead.

Minnesota lawmakers last spring granted the department permission to move to debit-card refunds.

At a House hearing this week, Democratic state Rep. Mary Murphy of Hermantown brought up the high-profile theft of customer data from Target Corp., Neiman Marcus and other prominent retailers. That's when Deputy Commissioner Matt Massman told legislators that the transition to debit cards wouldn't be introduced this year.

"Context is obviously important," he said. "Even if we were comfortable with the security of the tool, it just wouldn't be an ideal time to roll out."

Massman told The Associated Press on Wednesday that the agency needs complete consumer confidence to get them to buy into a new system. He said officials will reevaluate the debit-card program later this year, but he said it was unlikely the change would happen in time for the 2015 tax season either.

"For us right now it's a definite pause," Massman said. "It's on hold."

The department is aggressively pushing to have refunds directly deposited in bank accounts, an option available since 1997. They stress that direct deposit gets refunds out twice as fast, cost the state less in printing and mailing and cuts down on the risk of lost or stolen payments. Last year, nearly three-quarters of income tax filers went that route.

The agency processed about 1.7 million refunds last year, most of them income tax returns. Just shy of 500,000 paper checks were issued last year.

Aside from reducing state costs, the debit cards were cast as a more-convenient option for people who don't have a bank account and face difficulty cashing checks.

Ten states have a prepaid debit card program for tax refunds or are on the verge of implementing one, according to a study by Harvard Kennedy School professor John Friedman. His analysis found the cards resulted in $1 in savings to government per refund but often pushed costs onto the card users or merchants.

Cardholders in some states faced fees every time they withdrew money from an ATM, when they called to check their balance or if they went months without using the card.

Last week in Virginia, state senators voted unanimously for a bill to reinstate paper checks as the default option for filers, scrapping the current practice of sending debit cards for people who don't select direct deposit. The bill awaits action in the state assembly.

"Virginia's experiment with the debit cards for tax refunds was a failure," said Democratic state Sen. Adam Ebbin. "People were having to jump through too many hoops and pay way too much money to get to a tax refund that was rightfully theirs."

There have also been worries about security.

Last month, Connecticut's tax agency suspended its debit card refund program after the company that issues the cards suffered a data breach. Information for thousands of cardholders was potentially compromised. The state decided to issue paper checks for the remainder of 2013 and give filers a choice for how they receive their 2014 refunds.

The cards have been slow to catch on elsewhere. Missouri began offering debit cards for refunds last year. Revenue officials said it was a payment option selected by 20,237 taxpayers out of 1.9 million refunds issued.