Monday, November 02, 2009

California: "Think of it as a forced, interest-free loan"

I'm an accountant. As such I've done tax returns in the past as part of my employment, and still do a few here and there each year. One of my biggest pet peeves is people having a large withholding balance at year end when they don't really need one. See, the way taxes work is that each paycheck your employer withholds paying you a certain amount and sends that amount to the federal and state government. The reason for this is so that the government has consistent cash flow throughout the year to pay its bills. At the end of the year and sometime before April 15 you figure out what your tax bill is, and then you subtract what you've already sent to the government. If the number is positive, then you have to pay more to make up the difference. If it's negative, then that means you've overpaid and you get money back. Overpayment means that you have lent the government money all year long, interest free. So even though you're excited to get a big tax return, you've actually lost money on the deal.

Well, the state of California has taken that scenario one step further.

Because California is so inept at budgeting, they've found themselves in serious red ink. They don't have enough cash to pay their bills. Usually when states find themselves in this situation, states like our very own, they either raise taxes or cut spending. But the geniuses out west are doing neither.

California is simply going to withhold 10% more money from its residents. It's not a tax increase, so they'll pay it back when you file your return next year. But between now and next spring Californians are unwillingly going to give their state a huge, $1.7 billion interest free loan.


Charles D said...

So you would prefer a tax increase? I agree that this is a deceptive way to deal with the situation and California, more than most states, has put itself into a real deep hole by allowing initiative/referendum changes to their Constitution that prevent the Assembly from enacting a meaningful tax increase. They also made deep cuts in social services and education that will cost them more in the future than they are saving in the present.

California needs to re-write its Constitution so that the people's representatives are actually empowered to run the people's business. But barring that, if they have to do tax accounting tricks to remain solvent, then it beats the alternative.

Cameron said...

So it's either tax increases or interest free loans then? Those are the sole options?

California has worked itself into a giant mess because they've asked for lots of services and refused to pay for them. This has left them with hard choices to make, but rather than making them they decided to just take a billion dollars from Joe Citizen instead.

Charles D said...

The problem IMHO are things like Proposition 13 and other measures that took away the authority of the government to raise taxes without a statewide referendum. That meant that during boom years when the state could have been raking in lots of revenue (and hopefully not investing with Bernie Madoff), it was not and had no cushion for times like these.

We also have to fault the federal government which cut taxes, mostly on the wealthy and the corporations, and then cut revenue sharing with the states and laid on lots of unfunded mandates.

We disagree about the purpose of government, but there has to be a balance when it comes to taxes and spending. Government has a responsibility to provide essential services - that's why we form governments in the first place - and therefore they have a responsibility to insure that they have sufficient revenue to cover those essential services, and when times are tough they can cut back on non-essential services. California can't raise taxes and they should not cut essential services that will delay an economic recovery, and reduce their future competitiveness.

Randy said...

California... land of fruits and nuts.