Wednesday, February 17, 2010

NY may delay refunds, but the federal government keeps them coming fast

"How long until I get my refund?" is the question on the tips of our taxpayers' tongues.

Federal refunds have always come faster than New York State refunds, and that's likely to be even more true this year, as the state dives into the sofa cushions to look for the loose change to pay the refunds it owes to taxpayers who have overpaid their taxes. An AP story in today's Albany Times Union reports: NY governor considers delays in paying tax refunds

Some New Yorkers could see a delay in the arrival of their state income tax refund checks if Gov. David Paterson decides it's the best way to make sure the state has enough cash.

The state limits the amount of tax refunds it pays in the first three months of the year to $1.75 billion. Paterson is considering reducing that to $1.25 billion because the state must roll $1.4 billion into next year's budget to close this year's budget gap.

The federal government follows a prompt and mostly predictable schedule for paying tax refunds.

In general, when the IRS acknowledges an efiled return by its 11 a.m. Thursday morning "drain time" weekly deadline, the taxpayer can expect that the IRS will deposit his tax refund into his bank account eight days later. (If the taxpayer requested a refund check to be mailed rather than a direct deposit, the IRS will mail the check out 15 days after the Thursday morning weekly drain deadline.)

The IRS does not make an absolute guarantee that it will adhere to its published schedule, since there can sometimes be unpredictable "glitches" but I've seen it rack up an impressive track record of on-time refunds in the five years that I have supervised the Union College VITA site.

Indeed, one of my friends recently posted on Facebook that she efiled her own return on Saturday February 6, woke up to an acknowledgement from the IRS on Sunday February 7, and discovered the money had hit her bank account on Friday February 12, a week ahead of the IRS predicted schedule. One of her friends posted a Facebook comment also noting that she had experienced the same unexpectedly fast refund.

These are just two anecdotes, but I don't recall any stories of such fast refunds arriving in previous years. And, I certainly have not heard of any delays due to electronic glitches this year, even though federal refunds for many taxpayers are bigger than ever due to all the new tax breaks.

So if the federal government is maintaining or setting speed records for refunds this year, why is New York State so slow.

New York State is a different story.

New York State has never made any predictions or promises about its refund schedule in the five years our VITA site has operated.

New York--and other states as well--operate under different legal and financial constraints than the federal government.

Legal constraints: The federal government is free to run operating deficits as large as it likes, without any Constitutional constraints. Congress occasionally goes through the motion of trying to restrain itself by enacting PAYGO measures, but it's kind of like a dieter who puts a lock on the refrigerator and hangs the key around her neck. The PAYGO rules are symbolic statements that Congress is free to set aside anytime it wants to do so.

By contrast, New York and most other states operate under constitutional rules that do not leave them free to run an operating deficit.

However, ahem, also like most states, New York is free to play certain accounting games to hide a certain amount of deficit financing. Delaying payment of tax refunds into the next fiscal year is one of those games. Under strict accrual accounting rules, delaying the payment of your accrued obligations does not actually reduce your operating deficit, but governments do not operate under the same accounting rules as businesses do.

Financial constraints: Right now, the federal government has a triple-AAA credit rating and investors all over the world are falling all over themselves to lend the federal government money at phenomenally low short-term interest rates by historic standards. At the moment, the US government can borrow the money to pay your refund at an outstandingly low APR of 4 basis points per year. What is a basis point? A basis point is 1/100 of a percent. So the US government is not paying an APR of 4% per year on short term debt. It is paying 0.04% per year on short term debt. It seems unlikely that this situation can persist indefinitely, but rates have been very low for over a year and there's no clear end in sight. There are occasional vague worries in the press, but nobody at the federal government is acting like the wolf is at the door.

By contrast, New York State's credit rating is not so high as the federal government's, and there are serious worries that it could dip lower. By November of last year, Moody's rating on New York's general obligation debt was four notches below the top possible rating. (At least, it was not the lowest ratest state--that honor went to California, at four notches below New York.) As a result, New York pays short-term interest rates ten times as high as the federal government pays.

Even if New York were constitutionally free to borrow to run large operating deficits, the capital markets would enforce a discipline on New York State that they do not currently enforce on the US government.

After all, New York does not have the power to run printing presses to pay back its debt.

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