Every one of us has had that moment when we've had to shuffle the cards a bit to make sure all of the bills get paid. That’s exactly the situation our country is finding itself in right now. And what’s in the stack of “to pay later”? It could be your tax refund.
How could that happen? Here’s the quick rundown. On January 2, 2013,Congress finally passed a tax deal. The country seemed to heave a collective sigh of relief. The thinking was that things could finally get back to normal – except for that pesky debt ceiling still waiting in the wings.
Without any action from Congress, the government will hit the debt ceiling by mid-February. In other words, we’ll run out of money. Technically, we ran out of money at the end of 2012 but Treasury took steps to push that date off for a couple of weeks. Now, the deadline is looming again.
According to the Bipartisan Policy Center in Washington, D.C., when we hit the debt ceiling (again), the government will only have enough tax revenue to pay about 60% of its bills. That happens to coincide – unhappily – with the bulk of income tax returns being filed requesting a refund. This is because taxpayers who are expecting a refund tend to file early (those of us who tend to owe generally file later). In fact, on average, the government writes checks worth about $85 billion in February to cover taxpayer refunds. That’s about a third of all refund dollars: the IRS delivered a total of 104,486,000 refunds in 2012 for a total of $282.813 billion.
This year, the problem is exacerbated due to a sort of “perfect storm.” A tough financial climate means that many taxpayers seeking refunds will likely file as soon as possible. And since the IRS has delayed the start of tax season to January 30, the traditional 8-10 day wait for tax refunds (assuming e-filing and direct deposit) means that tax refund requests will hit right about – you guessed it – mid-February. You know, when the country runs out of money.
Of course, we won’t be broke forever. The cycle is such that funds will land in the Treasury eventually. Since the government doesn't keep a stash of money under the mattress to pay tax refunds, it pays its obligations – including tax refunds – with new revenues from tax dollars and bond sales. Currently, there’s no authority to borrow more (that could change) and taxpayers who are expected to pay into the system will start filling the coffers again by March. But will that be too late?
Congress says no. In fact, many in Congress have taken to treating the debt ceiling simply as an annoyance. Potential solutions have run the gamut from ignoring it to choosing to only pay bondholders. But as much as Congress wants to pretend that it’s not happening, there are real consequences to hitting the debt ceiling – and chief among them are tough decisions about how to divvy up the available funds – including whether to pay tax refunds on time.
Ask taxpayers in North Carolina and California how realistic that scenario might be. In 2010, North Carolina taxpayers had to wait for their refund checks amid worries that the state might not have enough cash to pay its bills for the fiscal year – and that wasn't the first time it happened as the state had faced the same worries in 2009. Taxpayers in California encountered a similar issue in 2010 when refunds were delayed as part of an effort “[to] confront the state’s cash problem and avoid the danger of IOU's.”
However, as federal dollars go, a waiting game can have serious consequences for the economy. Tax refunds are hardly ever tucked away for a rainy day: they are generally used to pay off debt (often from holiday spending) or to make large purchases. Those are the kinds of activities we probably want to be promoting, not postponing.
So will the unthinkable happen? I doubt it. The President is adamant that we’re not a deadbeat nation; we’re going to honor our debts. We’re also not going to stop paying our troops, our doctors and our seniors. And we definitely aren't going to choose to pay Congress a salary while not refunding taxpayer dollars (remember, those folks on the Hill will still want a job in a couple of years). We’ll raise the debt ceiling first.
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