What’s Wrong With IOUs?
by Byrne Hobart
The other day, California put its tax refunds on hold. Given their financial straits, that’s not such a bad idea — it was either that, or bouncing some checks, apparently.
But California isn’t the only one with bills to pay. What about people who were counting on a tax refund? There’s a big difference between $100 in hand and a $100 check that’s not in the mail now and won’t be for some time.
What’s odd is that usually, we have a simple way of dealing with this problem: California has made plenty of promises to pay billions of dollars in the future to fund spending it wants now — those promises are bonds. That’s simpler than just telling taxpayers to wait and see: if the state gave people state bonds of value equal to the amount they were owed, some people could wait for the state to pay, but others could sell their bonds and use the cash now.
Of course, the first objection is “What if everyone immediately sells their bonds, and the price drops too fast.” Unlikely: the state owes some $57 billion in debt, so the extra debt from tax refunds would be a drop in the bucket.
A more sensible objection is the transaction cost: for a $50 refund being paid as a bond due in three months, the cost of postage would be about as high as the cost of interest; adding up the costs of processing all of those new transactions indicates that the state would be spending a lot of money in order to avoid spending more money.
Of course, the whole point of this idea is that the state wants to avoid paying tax refunds now, even if they suffer some inconvenience for it. In the long run — or even in the very short run — it’s probably better for them to give taxpayers something rather than nothing. After all, if California’s lenders hear about what happens to people who California owes money, the result could be pretty unpleasant.