IRS blew it with California tax-filing extension

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.

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 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 decision by the federal taxing agency backed California’s Franchise Tax Board, which collects state income taxes, 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 Thursday.

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. Gov. Newsom must prepare by mid-May 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-$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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