Californians love to party. They always have. There are beach parties, Super Bowl parties, American Idol parties, poker parties, lingerie parties, bachelor and bachelorette parties, even parties for television shows with the same names, and a wide variety of other parties, both legal and illegal. The latest craze is the T party. No, it's not the Tea Party. In fact, it's nothing at all like that Tea Party. T is for tax.
The California T party is going to be a wild one! Everyone in California is invited. Before you load up the truck and move to Beverly, though, there is a catch. For every Californian on a payroll, attendance is mandatory. No one said this would be a fun party. With an official unemployment rate of 12.2% in California, it's time to get this party started before there's no one left to force. Effective November 1, California's state income tax withholding rates were increased by 10% for wages, supplemental wages, stock options, and bonuses. Faced with dwindling tax receipts from the economic downturn and their own reluctance to cut social programs, liberals in Sacramento had to do something.
California's bond rating is near junk status, which makes borrowing an expensive proposition. All across this country, businesses and households are cutting costs to endure what looks like a long road to economic recovery. The California legislature considered doing that, but it seemed like a lot of work, and it's really hard to cut the programs they believe keep them in office.
Rational bond investors become apprehensive whenever they see the word "junk." Too often "junk" is followed very closely by "default." They might invest in junk bonds, but when they do, they require correspondingly higher coupon payments to cover the added risk. Paying bondholders more interest is not what liberals consider redistribution of wealth. Bond investors are considered greedy and wealthy enough already. Thus was born the notion to borrow from taxpayers.
Back in July, with very little public attention, the ultra-liberal California state legislature passed Assembly Bill 17.
A note to other state legislatures and the U.S. Congress watching California for innovation: July is a very good month to enact this type of legislation. Many taxpayer-subjects are on vacation or otherwise distracted with kids home from school and various outdoor activities.
AB 17 allows California's Franchise Tax Board to increase state income tax withholding by an additional 10%. Apparently, the highest marginal income tax rates in the country are not enough for California's liberal tax-and-spenders. Liberals in Hawaii's legislature may think they have bragging rights over California with a top marginal tax rate of 11%. California's top marginal rate is only 10.55%. It's worth a closer look though. Hawaii's 9% rate kicks in at taxable income of $150,000. Cali's 9.55% rate kicks in at $47,055.
Get ready for something really wacky. This increase in income tax withholding is not a tax increase. It's a loan. The State of California promises to pay back the money it will borrow without permission.
Try that at any bank in the world. Imagine walking into a bank and taking whatever you want. It would be interesting to see how many steps out the door you could get, even after promising to pay it back.
Okay, so California is in a jam. Tax receipts are way down, and bond investors don't like the risk-reward thesis for "near junk" debt. Liberal tax-and-spenders now have trouble doing either, let alone both. As anyone with maxed out credit cards will attest, you can't spend credit you don't have.
The State of California needs another credit card, and fast. Because of their other maxed out cards, the State of CA should be prepared to pay a fairly high rate to borrow new money. While California taxpayers contemplate an appropriate interest rate to compensate them for the added risk incurred when loaning to an entity that has already proven itself a shaky credit risk, let's consider the impact of this story on the rest of the country.
There's a saying: "As goes California, so goes the country." When it comes to fashion, music, hip lingo, technological innovation, cuisine, and various fads, most people around the country are, at the very least, curious to see what California has to offer. Rest assured that legislators from other states are watching California very closely right now to see how its subjects react to this news. If the taxpayers revolt, march on Sacramento, and start threatening to vote liberals out of office, other liberal legislators across the country will take notice.
If, on the other hand, California's subjects shrug it off with their world-famous laid-back style, then your own liberals will feel emboldened to try the same thing in your state. You should probably get ready. Remember, it was California that gave us "hangin" and "chillin."
Okay, California, what is an appropriate interest rate to charge your state government for the money you are being forced to loan? Keep in mind that the promise to repay is somewhat shaky. Earlier this year, the Franchise Tax Board was forced to delay tax refunds to its subjects because there was no cash in the state coffers.
A tax refund provides a good analogy here. Despite the way many taxpayers feel, a tax refund is not free money from a benevolent government. It's actually surplus collected and used by the government interest-free. Surprise! The loans that Californians are now forced to make to their spendthrift state government will pay 0% interest.
Now all we need is a cool name to help market this concept across the country. T-bills, T-notes, and T-bonds all pay relatively low interest because they're issued by the U.S. Treasury and backed by the full faith and credit of the U.S. Government and its printing presses.
That's it, T-loans! They're backed by the full faith of a cash-strapped liberal promise and pay 0%. As they say in California, "That's sick, dude!" It's a little confusing at first: in California, sick is really good and T is for tax. Get ready.