I received an e-mail yesterday asking my opinion about the 10% withholding tax surcharge that went into effect in California this week and has reduced employee take-home pay. Here’s what the person wrote:

"I heard today on the radio, that the state of CA passed a new (Tax) of 10% on withholdings on payroll. They claim it’s not a tax, but a loan. This was not voted on by anyone. It supposedly took place during the dark of night."

What this person heard was yet another example of spin posing as fact because the spin was woven into the actual fact (this is a widely used propaganda strategy). Here’s the real scoop as I understand it, along with my perspective about it:

Yes, as of this week employers in California are required to withhold an additional 10% in state income taxes from employee paychecks.This accelerated withholding plan did not take place during the dark of night, however. It was part of the budget deal that the legislature and governor approved in February (although the legislature may well have voted on this agreement in the middle of an all-night session!).

Because the amount people will pay at tax time remains unchanged, this is not technically a tax increase. The most accurate way to view this is a cash advance provided by employees through next June when California’s fiscal year ends.

I would categorize this an interest-free loan from a group of taxpayers to the state because this plan prevents employees from getting maybe 1% interest on their 10% withholding. But, on a citizen-by-citizen basis the amount of de-facto tax increase this would amount to only a handful of dollars – assuming that a taxpayer actually would have put that entire 10% into investments. And how many people do you really think would have done that?!. When people file their tax returns the actual amount of tax they will be assessed will remain unchanged from last year. So, as is always the case, if their withholding exceeds the amount of tax they owe they will receive a refund.

I am utterly repulsed that California needed this in order to help deal with the budget shortfall without truly increaing taxes or cutting even more programs than it has already cut. But, the fact is that this strategy was part of a larger package of painful strategies that were approved by the people the voters voted for (that’s life in a representative democracy).

Let’s hope there is enough money in the coffers by then so that taxpayers owed a refund actually receive it!

I hope that helps.