Californians planning to stuff their thinning wallets with money from 2008 state income tax returns could be disappointed.
For the first time in 17 years, California finance officials warn they could pay taxpayer income tax refunds in April with IOUs. And don’t get any ideas: Residents who owe tax cannot pay the state with IOUs.
Though the plan sounds like a desperate move from a down-and-out Vegas high roller, it’s actually one of the few alternatives remaining for the world’s eighth-largest economy as it struggles to close an ever-growing budget gap – now estimated at nearly $15 billion for this fiscal year. If nothing’s done, the gap could widen to $41.6 billion by July 2010.
In the near term, the cash-strapped state could run out of money in 60 days unless Sacramento officials can agree on a budget plan.
“They are still in discussion on how to tackle the budget problems,” said Jacob Roper, California state controller spokesman. “The way to avert the cash problem is to solve the budget problems.”
In a letter Tuesday, state Controller John Chiang notified agencies that could be affected by the IOU payments. It could start in February with paychecks for the state’s 1,700 elected officials and their staffs.
Only once since the Great Depression has the state turned to such extremes. A budget standoff in July 1992 slammed the state into a cash shortage, and several thousand state employees were paid in IOUs until a plan was approved.
At the time, thousands of residents were also mailed IOUs for tax refunds. However, fewer taxpayers were pinched by that budget fallout because it happened in July, months after the majority of residents file income taxes.
On Friday, state Finance Director Mike Genest unveiled Gov. Arnold Schwarzenegger’s 2009-10 budget. It involves $17.4 billion in spending cuts and $14.3 billion in tax increases. Schwarzenegger has already signed an order requiring 235,000 state employees to take two unpaid furlough days a month starting Feb. 1.
Jerome Thompson, an office clerk in Canoga Park, said the state dips into his paycheck every two weeks, and that he’s owed a portion of that money back in his annual tax refund.
“If they give me an IOU, that’s terrible,” the 42-year-old said. “Where does all the money go?”
If IOUs come into the plan, it’s unknown now how they will work at financial institutions or whether residents can cash them like checks.
Wells Fargo Bank has made no decisions yet about how to handle state IOUs, said spokeswoman Mary Trigg.
“We’re monitoring the situation closely,” said Trigg. “We’re aware of it.”
If IOUs are issued, they will earn an interest rate that could go up to 5 percent. But no rates have been determined at this time, Roper said.
Just what these IOUs could look like remain to be seen. Roper said the agency is creating a design, but nothing has been printed because it’s unclear whether the state will actually issue them.
“We’re still looking at other options to manage the cash flow,” said Roper. “No decision has been made.”
Mustafa Mamujee, 38, of Canoga Park wondered how the state could have gotten to the point where it would have to issue IOUs to taxpayers.
“It’s not fair,” he said. “Whatever we deserve, we should get it back.”
When asked if taxpayers who owe money to the state can pay their debt with IOUs, Roper said no. IOUs are registered warrants, issued on behalf of the state’s treasury, and each has a promise to pay by a number on the check, Roper said.
“I don’t think there’s any comparison there,” he said.
Sue Doyle, Staff Writer
