States Delaying Paying Tax Refunds

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My standard advice to most people is to avoid getting large tax refunds which runs counter to the logic that most people operate under.  To get them to understand, I usually pose this question: “ Do you overpay your weekly grocery bill and go back a year later to seek a refund from the grocer?” When presented that way, most people readily see the logic.  They understand that in addition to wasting money by overpaying, there’s always the risk that the grocer may not be around to refund your money.  When it comes to taxes, most would be better off slightly underpaying the bill rather than grossly overpaying it.

This point looks like it will be driven home based a number of states either holding up or considering holding up state refunds due to acute problems with cash flow.  The state of Hawaii may not release refunds until July while Alabama and North Carolina are managing the release of refunds on a week to week basis.  California has increased withholding rates without a commensurate increase in tax rates simply to pull in more cash.  I wonder what states will do if folks wise up and decrease their withholding to avoid refunds?  They’ll probably be forced to stop playing these sorts of games and do a straight up tax increase as their fiscal problems aren’t short-term, but are structural in nature.  Basically, the tax base isn’t there to support the infrastructure and commitments that have been made.

States like New Jersey, New York, California and North Carolina qualify as “tax hells” due to their high marginal rates of tax, so there’s not a lot of room to raise taxes.  The situation in places like New Jersey is made much worst by an excessive real estate tax burden on top of the income tax.  I suspect that each of these states, along with a few others, are going to see a lot of outmigration.  A good portion of financial planning involves where one is spending money at and if one can move and spend less, he may be inclined to do so.  

Many states are in a classic catch 22.  If they raise taxes too much, folks will vote with their feet and move to economically friendlier climes and if they don’t raise them at all, their financial situation continues to deteriorate.  The only sensible thing to do is to cut spending and that includes abrogating union contracts promising rich retirement benefits and wage increases that aren’t affordable. 

The bed the states are in is the cumulative effect of years of gross mismanagement of public funds and by the time this is over with, public trust in government and commercial institutions will be at new lows.  To some extent that’s reflected already by the congressional poll ratings at the national level which are hovering around a 20% favorability rating.


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