March 4, 2012

Tax Surprise Time

Patrick Laverty

It's tax time again and people are sitting with their 1040 and Schedule A and 1099 and W2 and all the other fun hoops the IRS makes you jump through. This year, it took me a minute but I was reminded of a little change to the RI tax code last year that very few people noticed.

Last June, with the fiscal mess the General Assembly was dealing with, they cooked up new ways to bring in revenue. One of those being to hold on to even more of our money. I normally get a pretty small refund from the state. My goal each year is to have both my tax returns end up as close to zero as possible. I don't want to have to pay anything more, but I don't want to give the government an interest-free loan either. However this year, we had no choice. The state decided that I can't afford to get back what I'm owed from the state. Or something. They've been withholding even more from each paycheck than they have in past years, even though they've already been withholding enough to result in a refund in past years.

On the face of it, it's a pleasant surprise to get a bigger refund than usual, but at the same time that money never should have been withheld from me in the first place. The state knows how much I need to pay them and I've been doing it just fine each year. Yet last year I needed to have even more withheld?

What the state did was give themselves an interest-free loan all year. If I missed my tax payments by the amount that Rhode Island missed their withholding, there'd be penalties involved. Interest added. But there's no interest in the other direction. Why?

Plus, there's the dumb economics of it. Let's say RI was withholding $40 a month too much from my paycheck. Let's also say I make the average salary and just to pick numbers out of the air, let's say there are 400,000 people working (eliminating the unemployed, retirees and underage). Just doing some back-of-the-napkin math, that's $1.6 million that the state has taken out of the economy each month or nearly $20 million over the last year. Does that make much sense? Our economy didn't need $20 million to be pumped in? I guess if they look at it selfishly and could get even a 2% return on that money, the state got a free $400,000 for simply holding on to it all year, only to give the $20 million back now. Not a bad deal, I guess.

Happy tax season.

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As I've noted, recently, this dynamic is also a significant factor in the state's having higher-than-expected revenue, year to date:

That hasn't stopped the Projo et al. from touting state revenue as a sign of pending recovery and a deficit-free budget season.

Posted by: Justin Katz at March 4, 2012 10:27 PM

" this dynamic is also a significant factor in the state's having higher-than-expected revenue, year to date"

They're counting the temporary, forced overpayment of taxes as an increase in revenue? That is neither smart nor honest.

Posted by: Monique at March 4, 2012 10:47 PM

"They're counting the temporary, forced overpayment of taxes as an increase in revenue?"

My "back of the napkin" math said $20M, Justin's numbers showed about $24M. So I'm guessing I was in the ballpark. The question I'd have for the revenue folks, what happens when you need to give back that $24M to the rightful owners? Sure, maybe the state racked up a half million in interest income, but is that $24M being included in the conversation when Chafee says that revenues are pacing higher than expected and might not need to push for the new taxes that he suggested in his budget proposal? Or is this some of the money that Sen. Bea Lanzi is including when she wants to fund full day kindergarten for towns that don't currently have it?

One has to believe that the state knows exactly how much of its income tax revenues is "keepable" and how much needs to go back, right?

Posted by: Patrick at March 4, 2012 11:01 PM

To be fair, the revenue folks are very circumspect about what their numbers mean. They calculate an annual number, which is the projection for the year, and then the month-by-month numbers are based on a model dependent on past experience. At that level of specificity, there's only so much one can do to be accurate.

It's the politicians and the media who've been trumpeting the numbers. Of course, Revenue Analysis Director Paul Dion does still believe we're above estimates and the economy is growing.

Posted by: Justin Katz at March 5, 2012 6:14 AM

I'm not a subscriber tot he 'interest free loan' theory... If you have money in savings, you know that the interest doesn't amount to anything.

Does the economy need another $20M pumped into it? Sure, but that's not even a drop in the bucket of our economy.

Both things bring to light our human inability to see the scale of things. $20M would only make the state $10,000 in interest. What it likely did was clean up the cash flow so the state wouldn't have to issue those anticipatory revenue bonds.

Posted by: mangeek at March 5, 2012 11:04 AM

Correct me if I'm wrong but didn't the state cap deductions this year and they were afraid that many of us would end up owing. If that's the case, it looks like it isn't a loan. It's already spent.

If you're depending on a savings account to earn on your money, you need a financial adviser. That money could be making money year over year in my investments.

Posted by: Max D at March 5, 2012 11:54 AM
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