The States Are Broke

I heard rumors that it might happen months ago, but I finally read today that several states would actually do it. Due to budget problems, a number of states, New York in particular, have plans to delay paying tax refunds to their citizens. Obviously there will be severe repercussions for making people wait to be repaid their over-payments. The problems that will likely arise range from voter anger at the polls to retarding the local economy.

Almost all of the states are currently running budget deficits. They generally pay for these deficits by taking out debt against future revenues. However, this practice does not always prevent liquidity problems for individual states. As a states debt increases, they might have the money to cover what they owe but do not always have the cash on hand to physically pay it. Famously, this happened last year in California when the state was forced to make some payments through I.O.U.s. This year, some states have found a new pile of cash to raid in order to remain liquid - unpaid income tax refunds. These states are hoping to use this money to cover their spending while making their citizens wait to be paid. Such a move might be advantageous as it uses cash on hand and, in most cases, is interest free. Hopefully, the refunds will be paid later in the year.

One of the largest problems that delaying refunds will cause is voter anger. Many people are eagerly waiting for their tax refunds to supplement their normal income, or lack-there-of. These citizens will not be quick to remember who caused them to be late on their rent check or car payment. Incumbent politicians in these states will likely be punished come their next election.

Another problem that will likely be caused by delayed payments is the slowing of local economies in these states. By not putting this money into the hands of people, who will likely spend it quickly, local businesses may experience slower sales than otherwise expected. Upon receiving my refund each year, I generally go out and spend a large part of it as do many other people. This spending can provide added revenue for businesses, potentially spurring additional investment and added hiring. Thus, but delaying these refunds local economic activity may be stagnated.

As several states consider delaying paying their citizens tax refunds this year, their governments must consider many potential consequences. They can grant themselves a delay in feeling some fiscal pain and gain an interest free loan. Yet, by following this policy they risk angering their constituents and hurting their economies. Such a decision must be carefully thought over before being implemented.