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.  








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          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  








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               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. 








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              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