California takes bigger chunk out of paychecks, will other states follow suit?

Californians like me will see less money in their next paycheck because, like it or not, we're being forced to give an interest-free loan to the financial basket-case of a state we live in. As of November 1, California is withholding 10% more in income taxes from residents' paychecks. The move is expected to reap $1.7 billion that will be used to plug the holes in the state deficit and keep some money in its rapidly-dwindling coffers.

So officially it's not a tax increase. California will repay the extra withholding in April when it calculates tax refunds -- those getting a refund will get a larger one while those who owe taxes will owe less. And state tax officials who say the increase will hardly be felt by workers. A worker earning $51,000 with no dependents and one withholding allowance will see his weekly withholding rate go up $4. (The Sacramento Bee has a chart of withholding increase scenarios for some single and married taxpayers.) Still, with nine weeks left to go in 2009, that $36 could come in handy for a holiday present or a utility bill.



California is the first state to be doing this, but will it be the only one? I called the Federation of Tax Administrators, a research and training group for state tax collectors, to see if this was a trend. Spokesperson Verenda Smith says probably not, unless other states reach the extreme financial brink California is teetering on. "This move is not unheard of in times of extreme budget stress, but it's not a long-term solution."

Smith says this "budget gimmick" certainly won't add any new income to the state treasury. "It's just moving money from one fiscal year to the next. California gains it now but loses it in April, so it nets itself out."

Californians can try dodging this new withholding change by increasing the number of allowances on their employers' withholding forms. While it may not help much this year, it's more important for 2010 and beyond.

While the state's Franchise Tax Board says this increase will apply only for the next two months, don't count on it. California's budget deficit is $7 billion now and expected to keep ballooning, so the legislature is expected to try something -- anything -- to get the money coming in. A state income-tax increase may be inevitable. And let's see if California even has any money left in April to pay back its loan from worker paychecks.

This time, the threat of tax-refund IOUs may become a reality.