BILL ANALYSIS AB 2225 Page 1 Date of Hearing: May 10, 2010 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Anthony J. Portantino, Chair AB 2225 (Gaines) - As Introduced: February 18, 2010 2/3 vote. Urgency. Fiscal committee. SUBJECT : Personal income taxes: withholding. SUMMARY : Repeals the recently-enacted 10% withholding increase on wages, supplemental wages, stock options, and other payments. Specifically, this bill : 1)Limits the application of the 10% withholding increase on wages, supplemental wages, stock options, and other payments to amounts paid on or after November 1, 2009, and before the effective date of this bill. As a result, withholding on wages, supplemental wages, stock options, and other payments paid on or after the effective date of this bill, would no longer be increased by 10%. 2)Restores the fixed rate of withholding on supplemental wages, other than stock options and bonus payments, to 6%. 3)Restores the fixed rate of withholding on stock options and bonus payments to 9.3%. 4)Makes a technical, non-substantive change to the definition of supplemental wages. 5)Takes effect immediately as an urgency statute. EXISTING LAW : 1)Requires the Franchise Tax Board (FTB) to provide the Employment Development Department (EDD) wage withholding tables for employers to use in withholding taxes on wages paid. 2)Requires, for wages paid on or after November 1, 2009, the wage withholding tables to produce a sum equal to 10% more than the sum specified for purposes of the former withholding tables. AB 2225 Page 2 3)Allows, in lieu of the withholding tables, withholding at a rate of 6.6% for supplemental wages and at a rate of 10.23% for stock options and bonus payments paid on or after November 1, 2009. 4)Requires taxpayers to make estimated tax payments if the amount of taxes withheld or paid for a taxable year is less than the amount due. Imposes penalties if a taxpayer underpays his/her estimated taxes. FISCAL EFFECT : The FTB estimates that this bill would reduce General Fund (GF) revenues by $1.4 billion in fiscal year (FY) 2010-11, by $170 million in FY 2011-12, and by $75 million in FY 2012-13. COMMENTS : 1)The author has provided the following statement in support of this bill: Over the last year and a half, California, along with the rest of the country, has experienced an economic downturn the size of which we have not since experienced since the Great Depression. Almost every sector of California's economy has been impact. Since February 2009, California has lost roughly 586,000 jobs. Families across our state are hurting, struggling to make ends meet and forced to cut back their own budgets to keep their heads above water. Faced with a dramatic loss of revenue triggered by the recession and years of reckless overspending, the Legislature last year enacted several temporary tax increases to bring in new revenue. Increases in the state sales tax, vehicle license fee and personal income tax were passed by the Legislature as part of the February 2009 budget. In the July 2009 budget revision, the Legislature approved a 10% increase of the withholding from people's paychecks, essentially granting California a zero interest loan on the backs of taxpayers. Assembly Bill 2225 will repeal the increased withholding tax that was levied on taxpayers. State government should not be using gimmicks to kick the can down the road. Just like California families have to tighten their belts, so AB 2225 Page 3 must the Legislature take steps to help the state live within its means again. Lawmakers should be seriously evaluating California's economic climate, making the tough decisions necessary to close the deficit and enact reforms to root out government waste. Californians have entrusted the Legislature with the responsibility of being good stewards of their hard-earned tax dollars. The Legislature should not be picking their pockets with schemes like the withholding tax when the state's bills can not be paid. 2)Proponents of this measure state: Californians are already burdened with some of the highest taxes in the country. We have [the] highest sales and car taxes, and the fourth highest income tax rates. Increasing withholding amounts to a forced interest-free loan and would take more money out of the pockets of people struggling to keep their jobs. The total economic impact could be as high as $200 annually. Clearly, this is not a way to spur economic growth, especially with the state facing a record 12.5% unemployment rate. 3)Committee Staff Comments a) A Brief History of Over-Withholding : Before the passage of AB 17 X4 (Committee on Budget), Chapter 15, Statues of 2009, the wage withholding tables were based on the estimated amount of tax due on the wages paid by the employer. For wages paid on or after November 1, 2009, however, AB 17 X4 requires the amount determined for the wage withholding tables to be increased by 10%. AB 17 X4 also increased the withholding rate on supplemental wages, other than stock options and bonus payments, from 6% to 6.6%. The withholding rate for stock options and bonus payments was increased from 9.3% to 10.23%. b) Arguments in Favor of Over-Withholding : The Assembly Budget Committee's analysis of AB 17 X4, which was never heard in this Committee, candidly noted that the bill's provisions were aimed at accelerating revenues to the GF. The analysis also noted that, in many instances, taxpayers with significant income from non-wage sources ended up owing significant taxes under the prior withholding regime. Finally, the analysis noted that taxpayers could always elect to modify their withholding amount. AB 2225 Page 4 c) Arguments in Opposition to Over-Withholding : While it is true that taxpayers can elect to modify their withholding amount to more closely match their anticipated tax liability, many unsophisticated taxpayers are likely unaware of this option. As a result, many of these taxpayers are being subjected to over-withholding, which essentially means they are providing an interest free loan to the state that is "repaid" when they file their returns and receive a refund. While Committee staff is fully aware that AB 17 X4 was enacted to address budgetary issues, it is difficult to support intentional over-withholding on tax policy grounds. d) Suggested Amendments . i) As recommended by the FTB staff, a conforming amendment relating to the reduction of withholding on wages should be made to Unemployment Insurance Code Section 13020. ii) As noted by the FTB, it would take approximately two weeks to revise and provide the reduced wage withholding tables to the EDD. While this bill would be effective and operative immediately upon enactment, a reduction of withholding on wages may be delayed until employers have received and implemented the new withholding tables. e) Related Legislation : The following related bills have been introduced in the current legislative session: i) AB 1959 (Logue) contains provisions similar to this bill. AB 1959 was held under submission in this Committee. ii) SB 952 (Wyland) contains provisions similar to this bill. SB 952 has been referred to the Senate Committee on Revenue and Taxation. iii) SB 1337 (Wyland) contains provisions similar to this bill. SB 1337 has been referred to the Senate Committee on Revenue and Taxation. REGISTERED SUPPORT / OPPOSITION : AB 2225 Page 5 Support Howard Jarvis Taxpayers Association Opposition None on file Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916) 319-2098