Arizona Borrows via Income Tax?

Excerpts from “State taking larger chunk from paychecks“ by Christine L. Romero at The Arizona Republic:

A new law forces workers to have a higher percentage of state taxes withheld from their paychecks, even though many of those workers already overpay and get refunds.

Don’t panic; no one’s taxes were raised. The total you owe at the end of the year will be the same, but the amount you pay on each paycheck could change.

The change is aimed at keeping cash flowing into state coffers after federal taxes were cut. If lawmakers didn’t bump up the state rates, which are based on federal ones, Arizona would have lost an estimated $14 million in cash flow in 2003, although that would have meant more money in your pocket in the short term.

. . .

The law kicked in July 1, but employers have until Sept. 18 to change the amount taken from workers in state taxes. Even if employers don’t implement the change until mid-September, the money owed is retroactive to July 1.

Arizona takes taxes as a percentage of federal withholding, so legislators thought the best way to regulate cash flow was to slightly increase the withholding percentage rates in the wake of the federal tax cut. The increases range from 0.2 to 0.4 percentage points.

This coincides with the state forcing workers who don’t owe state income taxes because they don’t make much money and who previously didn’t have taxes withheld from their paychecks to fork over $5 a month from their checks and file tax returns to get the money back.

. . .

Consumer advocates say overpaying state taxes throughout the year, resulting in tax refunds, is bad because it gives government an interest-free loan. The state pockets interest earned from the cash flow, but state officials were not able to say how much.

Frankly, if the State is knowingly borrowing from us, by increasing our withholdings expressly for this purpose, they should pay us interest on our returns! I’m also curious how much it costs the State to process a tax return — is it really worth it to process all those extra $60 Refunds for those in the 0% tax bracket?

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