Picking the Taxpayer’s Pocket in California

I’ve been wondering how California will extract itself from the severe fiscal crisis it is currently facing. I always thought a federal bailout would be what saves the Golden State’s worthless tush — and that may yet happen — but the state government in Sacramento has come up with an ingenious new scheme of its own: it’s going to force the state’s taxpayers to loan it money.

No, it doesn’t put it in those terms, but that’s exactly what is happening. The government is “adjusting” the state income tax withholding rates, so that the taxpayer will be shorted a little bit with every paycheck. It’s a fiendishly brilliant plan, and you have to admire the cash-starved mandarins in Sacramento for the sheer chutzpah of their operation.

The state can honestly claim that it is not raising taxes. Come tax day, no taxpayer will pay more tax than he would have under the former arrangement. He’ll simply be due a larger refund, and there’s the rub: will the state treasurer have enough money to cut all those checks when the time comes? I expect that a new “deferred refund program” will suddenly be created to kick the can a little bit further down the road. Or maybe, instead of checks, the state will issue vouchers that will be redeemable… when? And for what?

Anything to postpone the day of reckoning a little longer, preferably past the next election.

Here’s what The Sacramento Bee says about it:

California’s Tax Withholding Bump-Up Starts Today

Some call it California’s cash advance.

Effective today, the amount of state income taxes withheld from California workers’ paychecks will increase 10 percent.

That might sound like a tax increase, but state officials insist that’s not the case.

Tax experts agree, saying this bump up in withholding taxes gives the state some wiggle room in managing California’s treasury in a year that saw a titanic political battle to get a handle on the state’s budget.

The increased withholding comes on top of a 0.25 percent state income tax increase and a reduction in the dependent credit, also enacted as part of the state budget.

Essentially, the accelerated withholding program does not generate additional tax revenue. Instead, it front-loads it, bringing cash in more quickly in an effort to keep the state treasury stocked with funds, which is where the “cash advance” tag comes in.

State officials have estimated that the move will generate an additional $1.7 billion in the current fiscal year.

The bottom line is that a worker’s total annual income tax bill won’t rise, and the amount owed at April 2010 tax time will be adjusted accordingly.

Simply put, if you owe taxes when April 15 comes along, the balance due will be less based on what was withheld from your paycheck in the last two months of the year. If you’re due a refund, you can expect a little more.

Taxpayers can evade the accelerated withholding schedules simply by increasing the number of allowances on the withholding forms filed with their employers.

That won’t make much difference for the calendar 2009 tax year, but it will have a bigger impact for 2010 and perhaps beyond.

“The changes that are happening are only for about nine weeks for 2009, so the impact for 2009 is minor,” said Brenda Voet, spokeswoman for the state Franchise Tax Board. “But we’re trying to warn people to go to their personnel and human resources departments for 2010 to make sure they have the proper amount of tax withheld and make any adjustments they need to make. We don’t want people to be surprised by anything.”

For low-income earners, the withholding change has minor effects.

FTB said a single person earning $17,000 annually with no dependents and one withholding allowance will see his or her weekly withholding rate go to $2.68 compared with $2.44 prior to the change, a difference of 24 cents. That same person with five or 10 withholding allowances will see no change.

Those with higher wages will experience bigger impacts.

FTB said a single person earning $51,000 annually with no dependents and one withholding allowance will see his or her weekly withholding rate go from $40.58 to $44.64, an increase of $4.06.

For a married person earning $145,000 annually with two dependents and no withholding allowances, the weekly increase is $16.90 (from $168.95 to $185.85). The married $1 million-a-year earner with two dependents and no allowances will see a $173.92 weekly increase (from $1,739.19 to $1,913.11)

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Those who pay quarterly estimated income taxes will have to make an adjustment at the change of the year in January. They will pay 70 percent of their estimated taxes in the first half of 2010, as opposed to the 60 percent paid this year.

Even with the increases, state withholding will remain less than half the amount withheld for federal taxes.

The withholding increase taking effect today is open-ended. The Legislature could call it off at some point, but financial analysts don’t see that happening in the near future, given California’s recent struggles to balance its budget.

Local workers who say they’re counting every penny in the current economy said the withholding increase represents another body blow.

“I know the state has its budget problems, but so do I,” said Marjorie Smith, an employee at a local insurance office. “I guess it’s not called a tax increase, but taking even a couple of dollars away right now makes a difference. I’m paying medical bills, lunches for kids and household expenses.”

Sacramento hair stylist Melissa Adams agreed: “I’m barely hanging on to my home right now. I can’t make ends meet, and I can’t borrow any more. Every dime means a lot.”

FTB officials said they are stressing that California wage earners meet with both tax preparers and at-work human resources department officials to fine-tune their taxes.

Besides increased withholding, a state income tax increase approved by the Legislature as part of February’s budget deal will raise rates by 0.25 percentage points for each tax bracket for the 2009 and 2010 tax years.

Some taxpayers — those fortunate enough not to suffer any drops in income — also will be paying slightly higher taxes under new rates posted by the FTB in August. That’s because price deflation, which occurs when consumer prices fall, has caused California’s six tax brackets to kick in at slightly lower income levels.

However, Californians whose incomes were reduced by pay cuts, furloughs and layoffs probably won’t see a noticeable tax increase because of the bracket changes. State officials said the taxes of those people likely will go down, not up.

Also in the mix: A new tax law lowered the state dependent exemption credit from last year’s $309 to $98 for the 2009 and 2010 tax years.

“With all of the changes, it’s a good time to sit down and figure out the proper amount of tax you’re going to pay for your particular situation,” Voet said.

You have to wonder how long the shysters in Sacramento can keep their little shell games going. At some point even Californians — the most relaxed and big-government-friendly folks in the country — are going to start pulling down their clotheslines and eyeing the nearest lamp post.


Hat tip: MZ.