Californians may get IOUs on tax refunds

[J]

msnbc link

Calif. Taxpayers Due Refunds May Get IOUs
By Patrick Healy
NBCBayArea.com
updated 5:19 p.m. ET, Thurs., Jan. 1, 2009


If you expect you'll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a "registered warrant." Translation: an IOU.

California is rapidly running out of money. Blame it on the state budget deficit that continues to bleed billions of dollars from California's reserves. Facing inadequate credit to make up the difference, California's Controller John Chiang warns that by the end of February, the nation's most populous state may not be able to pay some of its debts, and instead be reduced to issuing those creditors IOUs.

"My office has projected that, in approximately 60 days, there will be insufficient cash available to meet all expenditures reflected in the 2008-09 Budget Act," stated a Tuesday letter from Controller Chiang to the directors of all state agencies. "To ensure that the State can meet its obligations to schools, debt service, and others entitled to payment under the State Constitution, federal law, or court order. California may begin, as early as February 1, 2009, issuing registered warrants...commonly referred to as IOUs...to individuals and entities in lieu of regular payments."

California has not resorted to IOUs since the 1992 budget crisis when Pete Wilson was governor. Back then, some 100,000 state employees got IOUs instead of paychecks for two months until the state approved a budget. The 1992 crisis came during summer, well past the tax season, but at least 12,000 tax refunds were also issued as IOUs, according to a contemporaneous report in the Los Angeles Times.

State workers filed a lawsuit, arguing the IOUs violated the federal Fair Labor Standards Act. They were awarded damages. In this current cash crisis, The Controller's office expects that hourly state employees would continue to receive paychecks. But IOUs could be issued to elected state officials, including legislators and judges, and their appointed staff, some 1700 in all, "as well as tax refunds owed to individuals and businesses," according to Chaing aide Hallye Jordan.

The Controller himself remains in a Texas hospital where he was taken after falling ill during a visit with family. Chiang has remained in communication with his staff by phone, Jordan told NBC Los Angeles Tuesday evening.

The Controller's office will not take the emergency steps outlined in the letter to state agencies, Jordan said, if California can resolve its budget crisis in the next few weeks. But no new budget package has been proposed since the one presented by Democratic lawmakers was rejected by Governor Arnold Schwarzenegger as inadequate. "We've made very little progress the past couple of weeks," said Aaron McClear, an aide to Gov. Schwarzenegger, while the Governor was away from the capital on a holiday vacation.

Even without a deficit resolution, issuing IOUs is not the only option for tax refunds. The state could simply delay payment. Under the law, it has until May 30, Jordan said.

In 1992, banks honored the state's IOUs, cashing them on demand, and then receiving an additional 5% from the state when it made good on the obligations. In effect, the IOUs served the state as unsecured bridge loans from banks. But this time around, with credit tight and banks still feeling the impact of the fall meltdown in the financial services industry, it is not yet clear how banks will respond.

"Nobody's making any decision whether 'Bank X' will take the IOUs as money or not," said Brian Tobin, a Culver City based tax preparer. At the request of NBC Los Angeles, Tobin reviewed a copy of Chiang's letter. Tobin noted that in past years, California's Franchise Tax Board has processed electronic refunds in as short a period as a week. This raises the possibility that taxpayers with simple returns who file as soon as possible after New Year's may be able to receive refunds before the proposed February start date for issuing IOUs.

Those who could be most affected are taxpayers who routinely plan for large refunds as a means of saving for anticipated expenses, such as property taxes which are also due in April. But with notice coming at year's end, there is not time for those taxpayers to adjust their withholding or take other steps to try to capture their return in advance from the state's coffers. "They've got their money taken out of your paycheck. That's it," Tobin said.

One final irony, Tobin sees: electronic deposit refunds are inexpensive to do. Instead sending out IOUs is a more costly procedure for a state looking to save money.

If this gets out of hand it could be the spark which sets off protests, tax revolts and all kinds of other fun stuff. Several other states will be in the same position in the not too distant future. My guess is there may be a federal government bailout of the states at some point in the future, however, as with all bailout action to date, that will have some very interesting unintended results.

[Beowulf]

Makes me glad I don't have to get a CA tax refund, despite needing to file one this year.

[Alyeska]

I wonder if California realizes how bad this will be for them in the long run. If the government doesn't pay back the money they over took in the first place, people will change their tax deductions so that the government can't do this at all. If I were in California, I would change my deductions so that next year I pay the government money on April 15th, not them owing me a refund. And with zero extra tax revenue, the government takes an even bigger hit.

[Tanasinn]

I wonder if taxpayers will get to threaten government workers with life-ruining consequences and jail time if they don't pay up?

[Edi]

If they pay the tax refunds out as IOUs, I wonder what will happen when property tax time comes around and they get the same IOUs back and no actual money into the state coffers. All the bills will still have to be paid and there just won't be any new money at all. It'll get ugly fast after that.

[aerius]

I wonder if California realizes how bad this will be for them in the long run. If the government doesn't pay back the money they over took in the first place, people will change their tax deductions so that the government can't do this at all.

That and several other things. Those who can will be getting the hell out of there, others will be taking in more "under the table" income. For instance a lot of tradesmen could start doing cash only deals and then refuse to report their income and claim unemployment or welfare on top of it. Some small businesses could do the same to a lesser extent, they could fudge their cash sales and report a lower income, hey, it's a recession, my sales took a dump, what can I say? Go ahead, audit me, you can't prove shit.

That's going screw over the State's tax revenues even more.

[Teebs]

Don't many of the problems with California's finances stem from voters constantly passing ballot initiatives which restrict its right to raise tax whilst mandating more spending on various things?

[TrailerParkJawa]

If they pay the tax refunds out as IOUs, I wonder what will happen when property tax time comes around and they get the same IOUs back and no actual money into the state coffers. All the bills will still have to be paid and there just won't be any new money at all. It'll get ugly fast after that.

Property taxes are paid twice a year and we've already paid the 1st installment. Property taxes here are paid to the county not the state. I'm honestly not sure if funds are siphoned off too the state from there. But you can pay a few months late without a penalty and it wouldnt surprise me if a lot of homeowners simply pay later.

I have no idea if I'm going to get money back or owe this year, my tax situation is too different than last year to be sure. But I personally know a few state employees and they've already been warned several times this year already they might not get paid.

Aerius is right about cash transactions. If you want someone to put in some new baseboards or hang a few doors then there are plenty of skilled craftsmen who will work for cash. All under the table.

[CaptainChewbacca]

I already lost my job due to the problems with our state budget, belive me that I know how bad this is getting.

[Guardsman Bass]

Don't many of the problems with California's finances stem from voters constantly passing ballot initiatives which restrict its right to raise tax whilst mandating more spending on various things?

That's partially it, although the role of the initiatives is significant in that it ties the hands of the Legislature in downturns to cut spending in accordance with their Balanced Budget Amendment. A lot of it, though, just has to do with the fact that California's tax revenues come largely from state income and sales tax (property tax is heavily tied down because of Proposition 13), and those fluctuate a lot between good and bad economic times.

[Guardsman Bass]

Don't many of the problems with California's finances stem from voters constantly passing ballot initiatives which restrict its right to raise tax whilst mandating more spending on various things?

That's partially it, although the role of the initiatives is significant in that it ties the hands of the Legislature in downturns to either cut spending or raise taxes in accordance with their Balanced Budget Amendment. A lot of it, though, just has to do with the fact that California's tax revenues come largely from state income and sales tax (property tax is heavily tied down because of Proposition 13), and those fluctuate a lot between good and bad economic times.

[Kanastrous]

I wonder if there is any basis for a taxpayer to say if the state is issuing IOUs for refunds, then the state will have to settle for an IOU when it comes to my taxes.

[Count Chocula]

Man, I lived in Kalifornia during the Pete Wilson budget debacle. He got roasted over it, and lost the next election. And that was only state employees getting the shaft! If the state starts issuing IOUs in February, Ahnold's done and there will be dozens of lawsuits filed the first few days after the IOUs go out.

AFAIK, the state could get away with IOUs because, well, they make the rules. A private party returning those state IOUs to their county tax collector would get the hairy eyeball right quick - tax collectors don't take IOUs!

If they run out of money in February, you will hear the howls from California liberals all the way to the Missisippi, since at that point the state will have no choice but to drastically curtail social programs, as well as civil services, across the board.

[Master of Ossus]

Man, I lived in Kalifornia during the Pete Wilson budget debacle. He got roasted over it, and lost the next election. And that was only state employees getting the shaft! If the state starts issuing IOUs in February, Ahnold's done and there will be dozens of lawsuits filed the first few days after the IOUs go out.

The Governator's already done as the governor because this is the last term he can serve in that office (taking over for that clod, Davis, counts as a term).

AFAIK, the state could get away with IOUs because, well, they make the rules. A private party returning those state IOUs to their county tax collector would get the hairy eyeball right quick - tax collectors don't take IOUs!

If they run out of money in February, you will hear the howls from California liberals all the way to the Missisippi, since at that point the state will have no choice but to drastically curtail social programs, as well as civil services, across the board.

Cutting all the services strikes me as being basically necessary at this point--it will be difficult or impossible for them to raise taxes in the next few months, and the crisis is imminent.

[aerius]

I'm not so sure they'll have to cut anything, the way I see it California is likely first in line for a Federal bailout. A bunch of State Governors have gotten together recently to beg for a $1 trillion bailout from the Feds, they'll probably get it and if they do get it or think they'll get it they'll just blow their budgets as usual after making a few token cuts.

[Count Chocula]

Hmm..I can't help but wonder, if the Feds offer bailout money to California, will they ask for some kind of Federal legislative share of the state? Banks that got bailout money had to issue preferred shares to the federal government, with a substantial interest amount IIRC. What would the Feds want from Sacramento as some form of surety? Maybe they can just buy out the California state government [sarcasm].

On the same point: if California gets say $50 billion in bailout money, would they have to repay it? Good luck raising the funds to do that.

[aerius]

And an update. If you ain't got your refund yet you ain't getting it for a while, maybe a very long while.

State to stop sending tax refunds
07:41 PM PST on Wednesday, January 28, 2009

By JOSEPH ASCENZI
Special to The Press-Enterprise

Anyone who has yet to file their state income tax return and is expecting a refund will likely have to wait a while before they see a check from the state in their mailbox.

Starting Feb. 1 the state Controller's office will temporarily stop sending out tax refund checks, according to a spokesman.

No delay has been announced for federal refunds.

With the legislature and Gov. Arnold Schwarzenegger still trying to pass a budget, State Controller John Chiang announced earlier this month that all state tax refund checks would be delayed for 30 days starting Feb. 1.

Checks could be released if a budget is passed before then, but if the stalemate continues it could mean more delays starting in early March, said Jacob Roper, spokesman for the controller's office.

"If the governor and the legislature come to some budget agreement then we will reverse course and start issuing checks again as soon as cash comes available," Roper said. "If they don't come to an agreement then we could be looking at more delays."

Last year, the controller's office, which issues the refund checks, sent out approximately $2 billion worth of checks from the state's general fund. Twelve months later the state's general fund is empty.

"The state hasn't had a positive balance in its general fund since June of '07," Roper said. "It's been living on borrowed money for a long time."

The Franchise Tax Board, which processes and approves all of the state's tax returns, will continue to process returns until the budget crisis is resolved, said Brenda Voet, spokeswoman for that agency.

"If the check has already been issued then you're going to get your money," Voet said. "If not, then you're going to have to wait."

[Kanastrous]

Haven't received a refund from California in years. But I sympathize with people who were expecting one.

[Admiral Valdemar]

Even better. Not only do they have to issue questionable IOU's, they can't even do that now.

How does such a rich state become penniless so badly?

[Atlan]

Even better. Not only do they have to issue questionable IOU's, they can't even do that now.

How does such a rich state become penniless so badly?

By allowing every jackass a vote not just on how to spend the state's money, but also on how much taxes can be raised.
This is also known as "Letting the inmates run the asylum".

[Beowulf]

Even better. Not only do they have to issue questionable IOU's, they can't even do that now.

How does such a rich state become penniless so badly?

Give power to the people. X amount must be spent on this and that, and when downturns happen, the state runs out of cash in the general fund, since so much funding is specifically dedicated.

[Master of Ossus]

California's budget has been a problem for years, but here are two painless measures to narrow the deficit considerably:

1. Cancel California Solar Initiative. Savings: $2.2 billion. This program is ridiculous on an incredible number of levels, but in general creates perverse incentives and achieves virtually nothing.
2. Cancel Low-Income Energy Efficiency. Savings: $1 billion/year. This program has been in existence for years and has literally achieved NOTHING. You could have built numerous nuclear or coal plants with this funding. Cancel it.

So that's over $3 billion in painless cuts. (Yes, I'm aware they're not the same budget, but that's ultimately still revenue that the state's dispensing for no conceivable benefit and that taxpayers are already putting up).

[TrailerParkJawa]

If anyone is interested, here is the FAQ directly from the Franchise Tax Board in California.

http://www.ftb.ca.gov/refund_delay_2008.shtml

[JME2]

Yeah, this is going to be fun...not...