Cash-Strapped States Delay Paying Income-Tax Refunds

Last year California and Alabama delayed processing refunds. This year, a spokesperson at California's Franchise Tax Board says that refunds are being sent out in a timely fashion. In Alabama, however, refunds are being processed slower, according to Carla Snellgrove, a spokesperson at the state's Department of Revenue.

"Refunds are being approved but are going out slowly this year," said Snellgrove. "We haven't stopped issuing refunds." She said under normal conditions an electronic refund would take about five to six days to get to taxpayers. This year, it's slower, but there's no timetable on when taxpayers can expect refunds.

"It varies," Snellgrove said. "Refunds are issued as the fund balance allows them to be issued."

Kansas Secretary of Revenue Joan Wagnon has been quoted in news reports that a shortfall could delay income tax refunds, but a spokesperson at the office said that refunds weren't delayed yet and Wagnon was just saying that it could be a possibility at some point.

These are examples of states that have been more candid about delays, said Kim Rueben it might be some are slowing down the process but are being quieter.

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New York is currently considering delaying some $500 million in refunds to alleviate a $1.4 billion deficit, said Matt Anderson, a spokesperson for the New York State Division of the Budget.

“Clearly, the fact that we have to delay payments speaks to how dire the state’s budget is,” he said. In December 2009, New York’s Governor David Patterson (D) did something similar when the state held back $750 million in payments for schools. The funds were finally released in January 2010.

Iowa has a different problem: while the state has the funds for income tax refunds, it can't afford to pay a staff to process the paper fillings. Fifty employees worked on processing paper refunds last year. This year there are none.

Instead, Renee Mulvey, a spokesperson at the Iowa Department of Revenue says that people who work at the department doing other stuff—such as auditing and IT—are also doing rotations to get paper statements out as fast as they can. It can take as much as 16 weeks to get a paper return. Electronic returns are being processed normally.

"These are states that are explicit that there might be some delay," said Kim Rueben, a senior fellow and public finance economist at the Tax Policy Center. "Others are slowing down the process but are being more quiet."

Outside of the states mention in this article, spokespeople from each individual state said that refunds were being sent out on time.

But all the delays could affect how taxpayers file in the future.

“If there’s all this anxiety about whether taxpayers will get their refunds, you might see them changing how they approach their tax burden,” Kenneally said.

After seeing a major delay in their refunds, Dennis said that she has seen clients and other taxpayers go to their employers and lower their state withholdings so that they pay less state taxes throughout the year in hopes of avoiding getting a refund all together.

“Taxpayers are really resentful that states are holding their money, especially since they feel like they paid their taxes all year long,” she said.

The problem is that some taxpayers get too aggressive and find they unexpectedly owe their state money for a sum they didn’t save up for which can be an issue for many Americans who are trying to scrape by in a recession.

“People are in desperate situations,” said Clark. “It’s their money. The state really owes it to the people.”

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