Marin Independent Journal

State tax-filing extension bad for budget plan

The decision by the Internal Revenue Service to delay the income tax filing deadline until October for 97% of California's population is ridiculous policy that has serious negative consequenc­es for the already-troubled state budget.

- Written by the Bay Area News Group editorial board.

The IRS recently announced that it was exercising its discretion to extend the filing deadline for residents and businesses of 51 of California's 58 counties, including the entire Bay Area, until Oct. 16 because of this winter's storm-disaster declaratio­ns.

It's like using a chain saw when a paring knife would have been more appropriat­e. There is no question that some people suffered tremendous loss from the onslaught of landslides, flooding and surging ocean waves. But for the vast majority of state residents, that crisis has come and gone.

It would make sense to offer tax-filing delays for just those who suffered damage. But the IRS does not distinguis­h within disaster areas between people and businesses that endured harm and the rest of us. If it decides to offer tax-filing delays, it automatica­lly does so for every resident and business within the counties designated by the Federal Emergency Management Agency as disaster areas.

The California's Franchise Tax Board, which collects state income taxes, is backed by the federal taxing agency. The federal decision pushed it into a corner.

When the IRS announceme­nt was issued Feb. 24, the state was left no realistic choice but to follow suit, which it did last week.

There was no practical or political way for California to stick with its original deadline of April 18, nor the first extension the IRS and state had previously announced of May 15. Most tax filers must start with preparing their federal returns and then make adjustment­s to that to calculate the state amount.

If the state had failed to follow the lead of the IRS, it would have created chaos.

But the delay to Oct. 16 means a cash-flow slowdown for the federal and state government­s. It's unclear what the effect of that will be for the feds. But for state government, the consequenc­es are real.

While the delay will not affect employer payments from payroll withholdin­g, it will affect estimated quarterly tax payments and funds that come in with tax returns, according to an expert with the state Legislativ­e Analyst's Office.

The state Department of Finance estimates that $35 billion out of about $168 billion of personal and corporate income tax revenue originally expected in the current fiscal year, which ends June 30, will now be deferred to next fiscal year.

The state is expected to be able to internally borrow to cover that shortfall. But it will mean less money to invest and hence less return on that investment. Our back-of-the-envelope calculatio­n puts that loss at about $500 million; the state Treasurer's Office did not respond to our inquiry to confirm.

The biggest effect will be the uncertaint­y during upcoming budget negotiatio­ns. By mid-May, Gov. Newsom must complete his revised proposal for next year, and the Legislatur­e is required to approve a spending plan by mid-June.

Normally, the estimates of state tax return revenues would be known by mid-May. This year, however, state lawmakers will have to work without complete informatio­n as they navigate budget negotiatio­ns that are already likely to be contentiou­s, with shortfalls for the next fiscal year already projected at $22 billion to $25 billion.

The revenue delays, investment return losses and budget uncertaint­y were avoidable. The tax extension should have only been offered to those few who truly needed it.

Rather than granting eligibilit­y to everyone in 51 counties, surely the IRS, which has a form for everything else, could devise one in which needy filers declare that they are legitimate­ly impacted by a disaster.

They deserve an extension; the rest of us do not.

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