Taxing our credulity

Spelling out the state's new 'interest-free loan': T-A-X

From Sacramento

The state of California began withholding more taxes from paychecks last week. And don't believe it if you hear this isn't a tax increase.

It's being characterized by the state -- and reported by much of the media -- as merely a "cash advance" or "interest-free loan." Nobody's tax "liability" increases. So it's not really a tax increase, not technically.

No? Well, I've yet to hear a convincing explanation of how the state can make big money on the deal -- permanently -- without its being a tax hike.

Bottom line: When the state increases its tax revenue by tapping paychecks, that's a tax increase. In this case, it's a one-time tax increase.

Sure, you'll get a refund in April if too much tax has been withheld. Or, if you still owe taxes, you'll write a smaller check. But then you'll give the money right back to the state as the same withholding scheme continues indefinitely. Year after year.

To actually recapture the money and keep it -- to finally catch up with the nimble-fingered tax collector -- you'll have to quit working or die.

It's like this analogy:

You pay $1,000 rent on April 1, as you do the first of each month. Then the landlord says he'll need the future rent 15 days earlier. But not to worry, the rent won't increase. On April 15, you pay $1,000 for May. But wait a minute: Now you've forked out $2,000 in April.

You'll pay another $1,000 in May and each month thereafter until you decide to move. Finally your last month living in the rental, you make no payment. Only then do you recoup the $1,000 extra payment made that long-ago April.

But let's return to taxes and back up to the beginning:

Desperate to close a $26-billion deficit hole, Gov. Arnold Schwarzenegger proposed and the Legislature passed a speedup in personal income tax withholding starting Nov. 1. The withholding increased by 10%, generating a projected $1.7-billion revenue bump in the current fiscal year.

Additionally, starting in 2010, taxpayers required to make quarterly estimated payments will be told to send in 70% during the first half of the calendar year. The state figures to make $250 million off that during the current fiscal year.

So all told, it's a $2-billion one-time boost in personal income tax revenue.

And don't be distracted by words such as "liability" and "refund."

For the state to truly return the money -- rather than merely refunding it with one hand and grabbing it back with the other -- the governor and Legislature would need to reinstate the old withholding and estimated payment systems. And they're not going to do that, at least for the foreseeable future, because it would cost $2 billion.

The state already is facing another budget deficit of around $15 billion. So the policymakers won't be providing one-time tax cuts, which is what returning to the old withholding system would amount to. Besides, they probably wouldn't get credit from the public for a tax cut anyway because they've never owned up to hiking taxes in the first place.

The reason it's not a tax increase, insists Brenda Voet, spokesperson for the Franchise Tax Board, is that "people have the opportunity to change the amount of withholding."

Thank you, Brenda. That's the only way to avoid the tax hike: Call your employer's payroll department and adjust the withholding allowances to block Sacramento's money snatchers.

One state tax expert -- who didn't want to be identified for fear of being fired -- questions how many quarterly taxpayers will go along with the prepayment front-loading.

So the projected revenue increase could fall short.