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To save cash, California will print up $3.6 billion in funny money this month to pay some of its other bills — mostly to vendors who sell goods and services to the state. These include both major corporations and mom-and-pop operations that can ill-afford the disruption in their cash flow. Some of these businesses may have to fold, generating more layoffs in a state where the official unemployment rate already stood at 11.5 percent in May.
In the short run, businesses or individuals could send the bogus bucks right back to Sacramento to pay taxes. But these IOUs will likely mature in 90 days, which means the state will convert them back into cash — with interest — before most people have to pay their taxes in April. In the meantime, the IRS will continue to require that employers withhold taxes from most workers’ paychecks. So the IOUs can’t be used to offset that federal tax liability.
It’s also not clear whether banks will accept this funny money once it’s issued. Most did so the last time this happened in 1992, but the financial problems of both the state and the banks are much worse than they were 17 years ago. If banks do accept IOUs, they’ll probably pocket the interest paid when the IOUs convert back to cash. Or they may charge a fee to cover the risk that these faux dollars turn out to be worthless.
Given the sorry state of the state’s financial and political affairs, that’s not an unreasonable fear. State officials in Sacramento have been flailing for years as this budget nightmare has escalated. But they didn’t create this mess by themselves. The people of California, having led the nation in a “property tax revolt,” have now shot themselves in the foot with a government that spends $26.3 billion more on services than it takes in on taxes.
In the short run, businesses or individuals could send the bogus bucks right back to Sacramento to pay taxes. But these IOUs will likely mature in 90 days, which means the state will convert them back into cash — with interest — before most people have to pay their taxes in April. In the meantime, the IRS will continue to require that employers withhold taxes from most workers’ paychecks. So the IOUs can’t be used to offset that federal tax liability.
It’s also not clear whether banks will accept this funny money once it’s issued. Most did so the last time this happened in 1992, but the financial problems of both the state and the banks are much worse than they were 17 years ago. If banks do accept IOUs, they’ll probably pocket the interest paid when the IOUs convert back to cash. Or they may charge a fee to cover the risk that these faux dollars turn out to be worthless.
Given the sorry state of the state’s financial and political affairs, that’s not an unreasonable fear. State officials in Sacramento have been flailing for years as this budget nightmare has escalated. But they didn’t create this mess by themselves. The people of California, having led the nation in a “property tax revolt,” have now shot themselves in the foot with a government that spends $26.3 billion more on services than it takes in on taxes.
