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.