Law prevents future refund delays despite DOTAX opposition

HONOLULU—This election year, Hawaii lawmakers moved through a bill in response to the administration’s plan to delay the return of income tax refunds despite warnings that the State may not have the capabilities to expedite the returns and opposition from State tax officials who said the delays were necessary to balance the budget.

Gov. Linda Lingle signed into law today: House Bill 1948, a bill requiring the Department of Taxation to provide refunds to taxpayers in a timely manner. The legislation, now Act 171, states that the department must provide refunds within 90 days from the date the tax return is filed, or the due date of the tax return, whichever is later. The bill also requires that all general revenues collected from an increase of any general excise or use tax be used first to pay tax refunds delayed from fiscal years 2010 and 2011. The law goes into effect on July 1, 2010.

The bill was opposed by former DOTAX director Kurt Kawafuchi and The Tax Foundation of Hawaii questioned the State’s ability to accelerate the issuance of tax refunds.

Kawafuchi testified that HB1948 takes away an important cushion from the State’s ability to ensure a balanced budget.

“[DOTAX] opposes this measure because it interferes with the budgetary discretion provided to the department and other agencies in paying out tax refunds to ensure the general fund is not unnecessarily drained,” Kawafuchi stated. “For example, this fiscal year the department is utilizing its authority to delay payments to ensure the budget remains balanced. Without the authority for the department to payout refunds within a reasonable time, the budget and general fund are put at risk if all refunds went out at the same time (i.e., April 20). The current refund payout law is logical and provides important latitude when fiscal times are tough.”

In testimony, the Tax Foundation of Hawaii said it was questionable whether the State has sufficient resources and manpower to accelerate the issuance of tax refunds.

The tax department is currently going through its own logistical and leadership changes. Last month Kawafuchi issued his resignation to the governor for “mutual reasons.” DOTAX contracts with international IT company CGI Technologies and Solutions, Inc. are also currently under scrutiny by the State Auditor after complaints were made by DOTAX staff about their tax collection software.

Should DOTAX be late in returning tax refunds, taxpayers will be owed at the rate of one-third of once percent of the refund amount per month. The interest rate on that refund was previously reduced in the 2009 session from 8 percent to 4 percent.

The new law does, however, address a cycle of delayed fiscal responsibility.

“This measure is, no doubt, in reaction to the administration’s plan to delay the return of state income refunds, maximizing the 135-day period allowed under current law before interest is payable,” Tax Foundation of Hawaii stated in testimony. “While that strategy will help the cash flow for the current year, it merely delays the day of reckoning until the next fiscal year. Should the prospects for state revenue collections not improve, the State will be caught in the same cash flow dilemma next fiscal year.”

“One of the main benefits is that the State must pay interest to the taxpayer if the return is not paid within the required time frame,” said Rep. Pono Chong, the introducer of the bill.  “The Legislature was concerned that using the refunds as a way to balance the budget was merely delaying our fiscal responsibility. In addition, I think most taxpayers understand that the overpayment to the government is their money and they expect a return in a reasonable period.”