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The “Ghetto Tax”

The Brookings Institution has issued a report documenting what people who live in the “ghetto” already know: it’s expensive to be one of the urban poor:

Drivers from low-income neighborhoods of New York, Hartford and Baltimore, insuring identical cars and with the same driving records as those from middle-class neighborhoods, paid $400 more on average for a year’s insurance.

The poor are also the main customers for appliances and furniture at “rent to own” stores, where payments are stretched out at very high interest rates; in Wisconsin, a $200 television can end up costing $700.

Those were just two examples among several cited in a report Tuesday showing that poor urban residents frequently pay hundreds if not thousands of dollars a year in extra costs for everyday necessities. The study said some of the disparities were due to real differences in the cost of doing business in poor areas, some to predatory financial practices and some to consumer ignorance.


Businesses have a hard time opening up in poor neighborhoods because banks redline them. Residents can’t get credit, either. So they have to rely on loan sharks or high-interest lenders and check cashing places that charge a pretty substantial fee to cash checks. And even if they do have bank accounts, sometimes they have problems using them — for instance, in high school, I worked in a grocery store in East Hartford where we were told to get the manager to approve checks with a Hartford address. White customers got their checks approved. Black customers did not, even if they did not live in the poor North End.

It was a huge deal several years ago when Magic Johnson started opening movie theaters in inner-city neighborhoods. The one up on 125th Street had been the first one in many years to be built in Harlem. And it’s a big success. Now, just that bit of push helped open up the area for development, as banks and businesses started seeing that they could get a return on their investment.

Supermarkets are another business that poor neighborhoods often lack. Whenever the subject of obesity comes up, someone inevitably points to poor people taking their kids to McDonald’s and sniffing about how irresponsible that is. But McDonald’s is one of the few major food businesses willing to do business uptown. Poor urban neighborhoods frequently lack for stores selling fresh, quality food at a fair price. What they get is a poor selection of rotten vegetables at prices jacked up higher than they are in wealthier white neighborhoods. So they can pay through the nose for sketchy food, or they can eat cheaper at McDonald’s.

What’s amazing about the report is seeing just how much impact the “ghetto tax” has on these families. How can you get ahead when you’re losing this kind of money?

“There’s a large and for the most part overlooked opportunity here to help low-income families get ahead,” Matt Fellowes, the Brookings researcher who wrote the report, said in an interview. “That is to reduce their costs.”

Measures that reduced the price of essential goods and services for low-income Americans by just 1 percent would put an additional $6.5 billion a year in their hands, said the report, titled “From Poverty, Opportunity.”

My emphasis. That’s an amazing figure, and it should make people in Washington sit up and take notice. Well, one hopes.

And all those little fees and points tacked on for poor customers add up as well:

Citing other examples of the ghetto tax, the report found that nationally, 4.5 million low-income customers, defined as families making less than $30,000 a year, paid an average of two percentage points more for car loans than did middle-class buyers. And the common use of storefront check-cashing services by poor people, it said, comes at a steep price that varies with local regulations; in 12 cities studied, the fee for cashing a $500 check ranged from $5 to $50.

Part of the problem, the study found, is a discrepancy between the poor and the middle class in consumer skills and mobility: people who comparison-shop, especially on the Internet, tend to pay hundreds less for the identical car than those who walk onto a city lot and buy.

But the disparities can be reduced, the report said, not only by consumer education but also by some combination of incentives to lure banks and stores into poor neighborhoods and tighter regulation on things like the fees of storefront lenders.

Some states are trying to encourage lenders to invest in poor neighborhoods using some creative tactics:

The New York State Banking Department has drawn major banks into underserved neighborhoods by placing deposits of government money, sometimes at below-market interest, in the new branches. These may enable more residents to open accounts and reduce reliance on costly check-cashers and lenders, said the state’s superintendent of banks, Diana L. Taylor.

In Pennsylvania, a program led by a Democratic state legislator, Dwight Evans, used state and private financing for construction of supermarkets in areas where residents had previously had to rely on costly small stores or drive long distances for groceries.

Washington State’s insurance commissioner, Mike Kreidler, described efforts to restrict the use of personal credit scores by sellers of home and car insurance.

I’m glad to see this study, and the efforts to force banks and businesses to stop victimizing poor people. I may write more later when I have time to look at the actual report.


9 thoughts on The “Ghetto Tax”

  1. The poor are also the main customers for appliances and furniture at “rent to own” stores, where payments are stretched out at very high interest rates; in Wisconsin, a $200 television can end up costing $700.

    Another popular customer base for these types of stores, and the check-cashing stores, and the high-pressure car dealers, are low-ranking military families. These families make very little money (some are on WIC and food stamps) but have relatively stable job security, so if they don’t/can’t pay the companies know they can garnish their wages. Its quite a big problem in the military. In my military-heavy area they advertise all the time that you qualify for credit based on your military status alone, they don’t even pull your credit report. So you just know the interest rates are horrible. And of course most folks end up defaulting and then it ruins whatever credit they might have.

  2. Washington State’s insurance commissioner, Mike Kreidler, described efforts to restrict the use of personal credit scores by sellers of home and car insurance.

    Put another way, to force good insurance risks to pay higher premiums to subsidize bad insurance risks.

  3. The rent to own thing is pretty common in my area as well… I live in a depressed rural area and we get the same advertising “NO credit check, just come in and you’re approved”. I know a lot of people who have defaulted on it, screwing their credit up more than it already is. We also have a lot of “buy here, pay here” car dealerships who will reposess your car if you’re even a day late and sock you with an enormous amount of fees to get your car back.

  4. Put another way, to force good insurance risks to pay higher premiums to subsidize bad insurance risks.

    An assumption of risk based on an individual’s credit score? How please tell me, does a credit score determine an individual’s driving habits?

    Here in New Hampster, the latest of the poverty pimps are the Payday Loan operators and the Car Title Loan purveyors.

    I can see it now, a long drawn out discussion of ‘why should I care if people are poor?”

    In heading off the coming firestorm of the greedies: +

    One can’t say that people should ‘pull themselves up by their bootstraps’ if one allows the path upward to be lined with tricks and traps.

    Once that occurs, then one’s claim to ‘support their independence’ rings rather hollow as these institutions exist solely to prey on the poor and low income and serve to keep them poor and low income for a very long time, sometimes for a life time.

    Poverty is highly expensive for society as a whole and also is very regressive as well.

  5. Measures that reduced the price of essential goods and services for low-income Americans by just 1 percent would put an additional $6.5 billion a year in their hands, said the report, titled “From Poverty, Opportunity.”

    Phhht! Typical shoddy, liberal mis-analysis of the cold, hard facts! You could also interpret the situation in the following way “Measures increasing the price of essential goods and services for low-income Americans by just 1 percent would make an additional $6.5 billion a year for stockholders.” Woot! How’s that taste, America? Tastes like freedom to me!

  6. Poverty is highly expensive for society as a whole and also is very regressive as well.

    This is so very, very true. In the immediate sense, creating and implementing solutions for poverty *is* expensive. In the long run, however, it’s far more expensive to keep the status quo. Never mind the morality of keeping the poor poor. That is a whole other issue that’s best saved for another day.

  7. When the paper mill in my home town was sold to a foreign company, a lot of people lost jobs and the town became rather poorer. When I was a kid, there were no check cashing places on main street, now that the mill changed hands there are at least 5. They’re like vultures on the corpse of my poor home.

  8. ***The study said some of the disparities were due to… consumer ignorance.***

    I interpret some of this ignorance, in relation to rent to own situations, to the stigma associated with the term “ghetto.”

    Sure, a low income family could get a working TV from a thrift store for 30 dollars, but paying three times as much to a RTO for a 60-inch big-ass BLING in your living room fucking rocks because a thrift store TV is so, you know, ghetto.

    I blame the media for that…I just got into it the other day with my SO about this. I argued that the media and advertising are turning everyone into debtors because the “BLING” bar is continually being raised. Everyone gotta have the new.

    ***So they can pay through the nose for sketchy food, or they can eat cheaper at McDonald’s.***

    Orwell addresses this situation in his book, “The Road to Wigan Pier.” He states that (I’m nutshelling here) that even though low income people might buy fruits and vegetables, it’s not as satisfying as “a nice cuppa tea” or sending a kid out to buy “a ha’pennorth of chips.”

    Just my 2 cents.

  9. … You could also interpret the situation in the following way “Measures increasing the price of essential goods and services for low-income Americans by just 1 percent would make an additional $6.5 billion a year for stockholders.” Woot! How’s that taste, America? Tastes like freedom to me!

    No, actually you can’t interpret it like that. The measures used to calculate the relation are neither perfectly one-to-one, nor do they hold on forever. That is, at some point, increasing prices one percent is not going to yield $6.5 billion a year for stockholders, as you say, just like doubling tax rates does not necessarily mean doubling the amount of taxes collected.

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