The word “interest” is a hard working one in the English language. As a noun, there will typically be from six to ten definitional entries in a dictionary. The meaning I’m focused on here is financial: interest is the cost of using someone else’s money, usually stated as a percentage of the amount borrowed or owed over time. In state tax administration, that “someone else” is either the state or the taxpayer, depending on whether there has been an underpayment or an overpayment of tax. But if interest is simply the time-value cost of money, that cost should be the same regardless of who owes whom.

Simple, right? Unfortunately, not. While many states do apply the same interest rate to overpayments (refunds) as underpayments (assessments or deficiencies), many do not. When the interest rate is the same for both refunds and assessments, this is commonly described as symmetry. The interest rate is operating neutrally as the time-value of money. When the rates differ, that is asymmetry. At that point, the higher rate is no longer operating neutrally; something other than the time value of money is driving the difference. And in practice, asymmetrical rates mean that taxpayers are charged more on underpayments than states pay on refunds.

There are two primary reasons offered to justify asymmetric rates. The first is that a higher rate on underpayments serves as a disincentive for taxpayers to use taxes owed as low-interest borrowing by delaying tax payments. In other words, the excess rate above the time-value of money operates as a de-facto penalty. Penalties are a legislative or administrative choice, but they should be explicit, not disguised. The second is that a lower rate on refunds serves to offset the administrative processing costs the state incurs when handling refund claims. Put another way, taxpayers—who already fund core governmental functions through the taxes they pay—are effectively charged again for using an essential tax-administration function: the processing of refunds. Again, this should not be disguised; states should either fund their tax department fully or this “refund fee” should be explicit.

More musings to come on this topic; for now, more states moving to symmetry would be a beautiful thing.