BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 137 - Maldonado
Amended: March 31, 2009
Hearing: April 22, 2009 Fiscal: Yes
SUMMARY: Changes Deadlines for Paying Interest on
Overpayments
EXISTING LAW (Federal and State) prohibits the
Internal Revenue Service and the Franchise Tax Board (FTB)
from paying interest on personal income tax overpayments
before the later of the following two dates:
45 days after the date the taxpayer files
the return
45 days after the date the return is due
(April 15th for the great majority of personal
income taxpayers)
EXISTING LAW requires the state to pay interest in the
amount of the federal short-term rate plus 3%.
EXISTING LAW directs the State Controller to account
for and control the payment of tax refunds.
THIS BILL revises the above deadlines for individuals
and fiduciaries by providing that the state pay interest on
overpayments refunded or credited within 60 days of the
taxpayer filing the return for tax year 2008 and beyond.
The bill further provides that the interest allowed by the
measure does not constitute a gift of public funds.
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FISCAL EFFECT:
FTB estimates revenue gains from the proposal of
$460,000 in 2008-09, $1.3 million 2009-10, and $1.6 million
in 2010-11
COMMENTS:
A. Author's Statement
According to the Author, "Earlier this year, the State
Controller's Office (SCO) delayed tax refunds as a direct
response to the state's fiscal crisis. The SCO, which acts
as the state's accountant, said he had no choice but to
delay these payments for 30 days because the state was
running out of cash.
The SCO withheld approximately $1.9 billion in
refunds. The refunds are overpayments from the taxpayers
to the state. Many residents depended on these refunds for
health care, rent and other vital services. By delaying
these refund, many innocent taxpayers incurred additional
costs.
SB 137 is common sense legislation that will prevent
taxpayers from being penalized solely because they paid
their taxes early. This bill charges interest the SCO if
tax refund payments are delayed. This interest will be
paid back to the taxpayer whose money is being withheld."
B. May You Live in Interesting Times
In fiscal year 2007-08, FTB processes over 17 million
tax returns per year, and approximately 11 million include
a claim for refund. The average return is processed in 25
days, although taxpayers filing electronically receive
refunds much more quickly than those filing a paper return.
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Only rarely did the deadlines in the law require interest
payment - of $8.5 billion in refunds, the state paid merely
$10 million in interest.
However, taxpayers expecting quick refunds this year
did not receive them because of the state's unprecedented
cash flow shortage. On February 2nd, State Controller John
Chiang announced a thirty day delay in the payment of tax
refunds, understandably frustrating more than three million
taxpayers who had already filed their 2008 taxes and
expected more than $2 billion in refunds. The Controller
decided to toll these refunds, instead making other claims
and payments because the state did not have enough money to
pay all claims. On March 6th, the Controller began sending
out the delayed tax refunds, and paid all claims by March
25th.
C. You Were Saying Something About Best Intentions?
SB 137 seeks to change the Controller's cost-benefit
calculation when determining which claims will be paid by
requiring the payment of interest on some tax returns: if
the state has to pay interest earlier, the decision to toll
tax refunds becomes more expensive, thereby making the
Controller less likely to delay these payments in the
future. SB 137 helps those taxpayers that filed early in
2008 by requiring the state to pay interest earlier for a
taxpayer who filed his or her 2008 tax return on January
15th, because the sixty day from the return date (March
15th instead of May 30th). However, for taxpayers filing
on the deadline date of April 15th, SB 137 would preclude
the state from paying interest to those taxpayers in some
cases - the state would not have to pay interest until June
15th (60 days from the date the return is filed) instead of
May 30th, 2009 (45 days from the date the return is filed).
FTB estimates that the state would pay 41,000 taxpayers
additional interest, but would recoup the cost because the
state would have up to fifteen additional days to process a
refund before triggering the interest payment requirement.
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FTB additionally points out that because the measure
applies to the 2008 tax year, FTB would have to recalculate
interest payments after the enactment date of the bill for
tax returns already filed. SB 137 would require FTB to
send refunds to those positively affected by the measure,
but send balance due notices to those who were paid
interest because FTB to did not send a refund after May
30th but before June 15th.
D. Related Legislation
AB 1251 (Saldana) requires FTB to pay interest on PIT
refunds delayed as a result of the Controller's decision.
Support and Opposition
Support:None Received
Oppose: None Received
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Consultant: Colin Grinnell
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