BILL ANALYSIS
AB 2225
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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
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Support
Howard Jarvis Taxpayers Association
Opposition
None on file
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098