New tax withholding hike on hold -- for now

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Senate Democrats have shelved – at least temporarily – a controversial plan for the state to withhold a chunk of payments to independent contractors working in California.

The upper house’s budget committee will not consider the plan in its afternoon meeting today, according to legislative staff.

Though the plan has been put on hold for now, Senate President Pro Tem Darrell Steinberg (D-Sacramento) is expected to push it again later this year. His office did not respond to a request for comment Tuesday.

The new tax withholding would apply to some 3 million Californians who work as independent contractors, including cab drivers and real estate agents. The plan would not raise the contractors’ overall tax burden but force them to pay taxes throughout the year, instead of only when they file their year-end tax returns.

The earlier taxes collected would result in a one-time revenue gain of roughly $1.4 billion that could be used to close the state’s $20-billion budget gap this year, Democrats estimate. In the following years, the new withholding is expected to create an additional $140 million to $375 million windfall from contractors who had been under-reporting their income.

Gov. Arnold Schwarzenegger has opposed the change, with his aides calling it a tax hike. “The fact of the matter is for a number of businesses this is tantamount to a huge tax increase at a time when we are trying to encourage businesses to create jobs,” said H.D. Palmer, spokesman for the governor’s Department of Finance.

Palmer said implementing the new withholding would be “very complex. It’s not like turning an ‘on/off switch.’” He said withholding the taxes earlier would take time and that “any revenue estimates associated with this are shaky at best.”

Last month, Schwarzenegger declared a fiscal state of emergency, forcing lawmakers to act to close the budget deficit by next Monday, Feb. 22. A panel of legislators began passing budget cuts last week.

-- Shane Goldmacher in Sacramento