How would you like to be able to borrow as much money as you want and not have to pay any interest? And better yet when payments come due you could borrow more to make these payments and still not have to pay any interest. Sound like a good deal? It certainly has been for the state of California for the past 39 years. It’s called income tax withholding. Behind closed doors in the Capitol it is called “revenue acceleration” because it forces workers to pay government before taxes are actually owed.
Many California workers have never known any other system. If at the end of the year they get money back it is considered “found” money and they are pleased to have it. What is often overlooked is that government has been using their money without paying any interest. The taxpayer pays early and gets no discount or benefit. And if the taxpayer pays late government still wins by collecting penalties and interest. In the private sector this kind of deal is called a scam or “shakedown” and is usually enforced by muscular gentlemen with crooked noses.
But the tax-and-spend lobby in Sacramento can never get enough of a good thing. This is why during last summer’s budget revision they quietly increased the withholding rate and then claimed they had solved the state’s budget crisis without raising taxes. When California workers began to see smaller paychecks in October they were told by the politicians not to worry because they would not owe any more in taxes at the end of the year.
Of course we now know that in spite of these tax withholding and other budgetary gimmicks California is again behind the budget eight ball. So it should come as no surprise that the usual suspects in the Legislature are looking at additional revenue acceleration.
Senator Pro Tem Darrel Steinberg has proposed a new three percent withholding on independent contractors. Governor Schwarzenegger who has returned to the “no new taxes” fold calls it a tax increase a charge not surprisingly Steinberg denies.
Independent contractors already must make estimated tax payments quarterly. Payment obligations were increased last year along with income tax withholding so that they pay 70 percent of their estimated taxes in the first half of the year. Not only would additional withholding be another blow to independent contractors — many of whom are self employed individuals or small businesses and who operate on a thin profit margin — it would force business clients to become tax collectors for other businesses creating bookkeeping and reporting costs. These costs would make hiring independent contractors less appealing which would ultimately cost jobs.
In 1972 Sacramento saw withholding as a way to provide more money to government. However when government has more it means taxpayers have less. In both 2009 and 2010 increasing the rate of withholding is like taking blood from a patient already on life-support.
Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.