January 16, 2009 / 8:13 PM / 11 years ago

California delaying tax refunds amid cash crisis

SAN FRANCISCO (Reuters) - California will not pay state tax refunds for individuals and business that overpaid 2008 taxes, in order to conserve dwindling cash for priority payments including school spending and debt repayment required by state law, the state’s controller office said on Friday.

Other state checks to be postponed for 30 days include payments for vendors who provide services and products to the state government and state checks to a million aged, blind and disabled Californians to cover rent and utilities bills, State Controller John Chiang’s office said in a statement.

California has been hard hit by the housing downturn and is facing a sharp slump in revenues as the effects spread, pushing the state’s current budget into a deep deficit and opening another massive shortfall in its next budget, which begins in July.

The financial market turmoil that has Wall Street reeling is also slashing into California’s revenues, which rely heavily on personal income taxes. They are shrinking due to the recession and rising unemployment and because stocks and other assets have lost so much of their value in recent months.

California’s budget gap is projected to top $40 billion over its current and next fiscal year.

Various state officials have warned in recent weeks that the most populous U.S. state’s coffers would run dry if Gov. Arnold Schwarzenegger and lawmakers fail to balance the state’s current budget.

The governor in his state of the state speech on Thursday said California faces insolvency within weeks if it does not balance its books.

“I take this action with great reluctance,” Chiang said in the statement. “I know it will put many California families who rightfully expect their state tax refunds in a desperate position.”

“Individuals who already are vulnerable will be hit hard,” Chiang added. “Small businesses that don’t get paid may have to lay off more workers. Rather than helping stimulate the economy, withholding money from Californians will prolong our pain and delay our economic recovery.”

The notice by Chiang, a Democrat, of delayed tax refunds and other payments comes as Schwarzenegger and lawmakers press on with negotiations to balance the state’s books.

The talks have been moving a glacial pace as leaders of the Democrat-controlled legislature resist the deep spending cuts its minority Republicans are demanding.

Republicans, whose votes are needed to pass budgets, are resisting proposals for tax increases.

Schwarzenegger, a Republican, has backed some form of tax increase to raise revenues, angering Republican lawmakers, and is pressing Democrats to cut spending.

Editing by Chizu Nomiyama

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