Don't Mess With Taxes

All those shell-shocked Wall Street guys aren't the only Big Apple residents taking major hits because of the financial crisis.

The City of New York has been forced to refund more than $800 million to companies that overpaid their taxes this year. The excessive tax payments, reports the New York Times, were based on expectations of a more robust business performance.

New York businesses each year estimate their tax liabilities based primarily on how well they did in prior years. The first half of 2007 was quite lucrative for many financial firms and other companies, says the Times, leading them to prepay millions more in taxes than is the actual case in light of 2008's end-of-year revenues collapses.

The paybacks, according to the paper, are three times the typical refund amount. And some experts say the refunds will continue to grow over the next few months. That means the city now faces the possibility of slashing services and raising taxes.

A similar situation is also happening with state taxes. New York State paid out $1 billion in corporate refunds during the first 10 months of 2008, reports the Times, in contrast to the $581 million it paid out during the same period in 2007.

Pay after it's earned: Such business tax collections might be commonplace nationwide and might have worked just fine for years, but it seems to me a bad method.

Sure, it gets money into state and local treasuries in advance, but it also forces the tax departments to administer continual refund operations, although usually not at this year's level.  Maybe that's more efficient and cost-effective than collection efforts, but they've got those, too, anyway.

And as a business owner, I'd really hate it if year after year I was overpaying my taxes. Many companies can't afford to have a chunk of cash being held unnecessarily by anyone, but particularly not by the tax man.

I don't know about NY firms, but I always expect my revenues in the next year to be lower. Maybe I'm just a pessimist; I think I'm more a pragmatist. One year's good income is great and if it continues, all the better, but I don't count on it. I keep working to make that happen and am pleasantly surprised when my good business fortune continues, and grows, from year to year.

And then I'll share my success with the tax collectors, when it actually happens!