Saturday, November 7, 2009

California's Stealth non-Tax, 10% Tax Increase

One of today’s clichés is that California shows the way to the rest of the country. Think Silicon Valley, culture, style, freeways, fast food, strip malls, vocabulary, gangs, botox, plastic surgery, Dragnet, Sierra Club, The OC, Laguna Beach, The Real Housewives of Orange County, and Arrested Development,

Some of the ideas are ill-advised, especially high taxes and a dysfunctional state government

Never underestimate the genius of the legislature in raising taxes after the voters overwhelmingly rejected a tax increase. They have created a whole new tax increase, not covered by any restrictions.

As part of the third budget agreement this fiscal year, as the state budget headed south, the legislature increased withholding rates by 10%, effective November 1.

In other words, the Governor, seemingly opposed to new tax increases, and the Legislature, always willing to raise taxes, increased the state income tax by 10%. If your current withholding tax is $1,000, it is now $1,100, a further drain on wage earners discretionary income.

The theory is that if you currently underpay your taxes, you will now be more accurate. And if, perchance you overpay, they you will be entitled to a refund in April.

Until then, you will be providing the state an interest free loan, potentially a 6 month interest free loan.

However, the state is not required to refund tax overpayments to taxpayers until the end of July, deriving an additional 3 ½ months of an interest free loan. The State of California is giving itself a multi-billion dollar, interest free loan. And just in time, since the state and its political subdivisions are encountering resistance in the normal bond market.

The genius is even more brilliant. If we assume that California will be short of funds next April, as it was this year, then the state will issue vouchers at the end of July to be redeemable at an even later date. The vouchers at least carry a nominal interest rate.

Sheer genius!

Except for one small technicality. Once taxpayers catch on to what’s happening, they can adjust their withholding taxes by increasing the number of allowances on their withholding forms. They might end up withholding less than before.

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