State Governments May Not Return Tax Rebates On Time, But At Least They're Sorry About It

The New York Times is reporting that a number of state governments won't be sending taxpayers their tax refunds on time:

Procrastination is no longer just for the taxpayers who wait until the last moment to file their tax returns. Thanks to the economic downturn, at least a half-dozen cash-poor states are now delaying their tax refund checks.

Hawaii initially planned to delay all tax refunds until July, when its fiscal year begins, but decided two weeks ago that its finances were healthy enough to begin sending checks to people whose tax returns were processed back in January. New York briefly postponed sending out half a billion dollars worth of refunds until its new fiscal year began in April. Rhode Island extended its tax filing deadline until May 11 to help taxpayers who were still reeling from severe floods; now the state is delaying refunds to make sure it has enough money left to pay debts coming due in June.

On the other hand, they are sorry. And to prove it, they're all going to pitch in. Teamwork!

"We're sorry for the inconvenience. We understand that people are relying on the money for credit card bills, etc., etc., but we'll get them out as fast as we can," said Paul L. Dion, the chief of Rhode Island's Office of Revenue Analysis, explaining that 34,423 refund checks were being held up as the state ensures that it has enough cash on hand to pay its debts on time. "For the record, mine is on hold as well."

Some states lack the staff to process returns on time. Budget cuts left Iowa's Department of Revenue without the money to hire the 50 temporary workers it usually adds around tax time. So some refund checks were slowed while nearly everyone in the department—from auditors and revenue agents to top agency officials—was directed to pitch in by opening up envelopes and processing tax returns. 

No doubt it helps that many states require additional interest be paid on returns delivered later than 60, 90, or 120 days. As policies encouraging prompt repayment go, that's better than nothing. But why shouldn't the penalties be immediate? They are for the rest of us. The IRS begins assessing penalties on late tax filings for individuals the day after the deadline. I frequently hear people refer to their tax rebates as a sort of cash-back bonus, but the reality is that most tax returns effectively serve as interest-free loans from taxpayers; interest doesn't kick in until the government is two months late with the rebate. It's bad enough that the tax system is set up to give the government all those cheap loans in the first place. Shouldn't the penalties for late repayment be strict enough that state governments aren't tempted to extend those loans further?

More in we-are-out-of-money stories here and here.

Post updated for clarity.