BILL ANALYSIS
REVISED-NEW BILL
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 137 - Maldonado
As Proposed to be Amended: April 22, 2009
Hearing: April 22, 2009 Fiscal: Yes
SUMMARY: Requires the State Controller to Pay Interest on
Tax Refunds Delayed By Cash Management Emergency
for Specified Period
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 deems withholding amounts and estimated
payments paid on the due date of the return. State law
provides that returns of tax filed before the due date
shall be considered as filed on that day, but tax payments
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are deemed paid on the last day prescribed by law for
filing. Additionally, the FTB uses above deemed paid dates
for interest calculations, credits or refunds for estimated
payments, and court-ordered refunds resulting from
overpayments.
EXISTING LAW directs the State Controller to account
for and control the payment of tax refunds.
THIS BILL provides that notwithstanding the interest
payment requirements and deemed paid and deemed received
dates listed above, the Controller must pay interest on
refund warrants for personal income taxpayers when he or
she determines that a cash management emergency exists and
postpones the issuance of refund warrants under the
following conditions. The Controller must pay interest
during the interest period, which begins 15 days after the
date the return is filed or 15 days after the date the
issuance of the refund warrant is postponed, whichever is
later, and lasts until 30 days before the refund warrant is
issued.
FISCAL EFFECT:
Because the author is only amending the measure today,
no FTB revenue estimate is available. Committee Staff
estimate minimal costs for tax refunds for the 2008 tax
year because the measure would not affect many returns;
however, should California experience protracted cash
management crises in the future, the costs of the measure
would increase significantly as the state would have to pay
interest on more tax refunds.
COMMENTS:
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A. Purpose of the Bill
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.
Current law states that refunds are not technically due
until May. 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
(ahead of the statutory requirement) 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, 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
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did not have enough money to pay all claims. After
enactment of the 2009-10 state budget, the Controller began
sending out the delayed tax refunds on March 6th, and paid
all claims by March 25th.
C. Stay Just A Little Bit Longer?
In response to the Controller's decision earlier this
year forced by the state's cash crisis, SB 137 provides an
exception from the usual interest calculation and tax
refund laws that guide taxpayers and FTB. However, while
the bill moves the beginning date of the interest rate
period forward when the Controller delays tax refunds due
to a cash management crisis, the bill terminates the
interest payment period as much as the date 30 days before
the Controller refund warrant is issued, consistent with
current law guiding interest payment. FTB determines this
date based on how quickly the Controller can issue the
refund warrant after the tax return is provided, which is
generally five days for individual personal income
taxpayers, and will generally limit the interest period to
limit General Fund costs. For example:
A taxpayer files his or her return on
February 1st, and the Controller declares that he
or she will delay the tax return because of a
cash crisis on February 7th. The interest period
(the period in which the state must pay interest
on the overpayment each day) begins 15 days after
the date the return is filed (February 16th).
Later, on March 7th, the Controller starts
issuing tax refunds because cash is available.
FTB may declare the end of the interest period on
February 12th, 25 days before the date the
Controller issues the tax refund, resulting in no
payment of interest.
Again, the taxpayer files his or her
return on February 1st, and the Controller
declares that he or she will delay the tax return
because of a cash crisis on February 7th. The
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taxpayer files his or her return on February
10th, and the interest period begins on February
26th (15 days after the return is filed).
However, this time the cash crisis is worse, and
the Controller must delay the tax refund until
April 1st, which leads the FTB determines the end
of the interest period to be March 7th, allowing
the taxpayer 10 days of interest.
The amount of interest, and therefore the fiscal cost,
and effect upon the Controller's cost-benefit decision is
contingent on the duration of the cash crisis. SB 137 may
not compel any additional interest in a cash crisis that
delays tax refunds less than 30 days, and minimal interest
for ones that last a few days more, such as this year's
crunch. However, the bill's costs will increase as a cash
crisis worsens.
D. Of Deck Chairs and the Titanic
SB 137 seeks to change the Controller's cost-benefit
calculation when determining which claims he or she will
pay by requiring the payment of interest on some tax
returns: if the state has to pay more interest earlier, the
decision to toll tax refunds becomes more expensive,
thereby making the Controller less likely to delay these
payments in the future. However, in the case the state
cannot pay all its claims, should the Legislature put the
Controller in an even more difficult position during an
emergency situation by requiring payment of extra interest?
Should the Legislature realign the Controller's incentives
when California voters elected him or her to use their best
judgment when prioritizing who the state pays and who the
state stiffs? Because SB 137's costs grow the longer tax
refunds are delayed, the measure would nudge the Controller
away from paying contractors, vendors, state employees, and
possibly bondholders due to the increased interest required
by the measure, and that nudge could turn into a push if
the cash crisis persists and SB 137 interest payments
accumulate. While taxpayers should expect timely refunds
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of overpaid taxes, under current law interest is precluded
until after May 30th. The Committee may wish to consider
the wisdom of adding costs to the state during a fiscal
meltdown.
E. Gears and Wheels
State law must provide specific dates in which taxes
are deemed paid, and returns deemed filed to properly
calculate the number of days upon which to base interest
calculations; without commonly accepted dates, taxpayers
and tax enforcement agencies could fight endlessly. In
California, taxes are deemed paid on the date the return is
due, but returns are deemed filed on the day the return is
filed. Taxpayers must overpay taxes for the state to issue
a refund, but taxes aren't deemed paid until April 15th
(the due date of almost all individual personal income tax
returns), and interest isn't allowed until May 30th. To
remedy this problem, SB 137 excludes the application of
these sections explicitly, thereby removing the statutory
conflict provided by the measure's direction to pay
interest beginning before April 15th.
F. Just People
The March 31, 2009 version of SB 137 applies to both
individuals and fiduciaries, thereby excluding some
business taxpayers that file under the Personal Income Tax
instead of the Corporation Tax Law, such as "S"
corporations and limited liability companies, among others.
The current version of the bill applies only to
individuals, which state law describes as "natural persons"
(as opposed to unnatural ones). In either case, SB 137
allows interest for delayed tax refunds just for people.
G. Related Legislation
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AB 1251 (Saldana) requires FTB to pay interest on PIT
refunds delayed as a result of the Controller's decision.
Support and Opposition
Support:State Controller John Chiang (if amended),
previous version
Oppose:None Received
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Consultant: Colin Grinnell