State is taxing our credulity

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.

Republican legislators -- all of whom had vowed not to raise taxes -- smelled an odor and unanimously opposed the revenue speedups. So did five Democratic moderates, some concerned about their next political campaigns.

Democrats were able to pass the legislation on a simple majority vote, rather than needing two-thirds, because the Legislature’s attorney ruled it wasn’t a tax increase.

Maybe not legally. Not “technically.” But certainly logically and mathematically.

“You wouldn’t graduate from Finance 101 if you didn’t realize that if you increase withholding, or estimated tax payments, you’re increasing taxes,” says Tom Campbell, former state finance director and congressman, longtime economics professor and current candidate for the Republican gubernatorial nomination.


“It’s just dishonest to say that’s not a tax increase.”

When Campbell told me that recently, he was referring merely to the taxpayers’ lost use of their withheld money -- its “time value” and potential for earning interest. He didn’t realize that the accelerated withholding would continue indefinitely, taking a bigger tax bite.

“I didn’t know about the out-years,” he says in Sacramento-speak, referring to the future. “Isn’t that something!”

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., puts it this way: “If a mugger sticks a gun in your face and says, ‘Give me $20 and I’ll give it back next year,’ it’s still robbery.”

Especially if the robber gives it back and demands another $20.

“It’s just horrible policy,” asserts the anti-tax crusader.

Oh, I don’t know. You could argue the policy is fine, given the state’s cash crisis -- a relatively painless way to avoid more painful cuts in public services. But be up front and call it what it is: a one-time tax increase.

It’s simple: If the state makes money off taxpayers, the taxpayers lose money.

It’s the old duck test about walking and quacking. If it smells like a tax increase and acts like a tax increase, it’s not a short-term loan.