Will Tax Withholding Affect California Retailers Over the Holidays?

Posted by on November 3, 2009 in Business News [ 0 Comments ]

At the start of this week, California workers will notice their paychecks are slightly smaller. In July, California legislature passed a plan to falsely increase state revenue until June by increasing the Personal Income Tax withholding by 10%. Technically this is not an increase in the personal income tax as any extra withholding will be returned in April, it is a matter of when personal income tax is paid. This increased withholding is being referred to as an “interest free loan” and will serve as a $1.7 billion cash advance for the government through next June. However, the timing matches right up with the holiday season. Will the withholding reduce holiday shopping?

The government argues that it will have a minimal impact on people’s income, with an income reduction of only about $10-$45 a month. The problem is, for California families living paycheck to paycheck, this “minimal” reduction is huge. CareerBuilder reports that 61% of US workers generally live paycheck to paycheck. However with this year’s Labor Day decline in sales and with Labor Day being considered a sales indicator for the upcoming holiday season, the withholding measure may lead to tighter wallets for California shoppers. California’s increased withholding, coupled with the other tax increases this year, makes Californian’s disposable income smaller and smaller. (Other impacts this year: sales tax increased by one percent, state income tax increased by .25 percent and dependent credit was reduced by two-thirds).

Who is affected most by this?

Local California business, particularly those in counties with higher unemployment rates, such as Riverside County with a September unemployment rate of 14.7%, might sharply feel the increased withholding tax. It is possible that people will use credit cards more this holiday season as an attempt to compensate for a lack of cash. Credit card processing capabilities may play a large factor in holiday shopping profits this year for areas with higher unemployment rates.

Companies who employ ecommerce web design for their websites and have developed their online marketing and search engine optimization efforts will be in a more comfortable place this holiday season. Websites with shopping carts will grant these businesses access to out-of-state customers unaffected by the increased personal tax withholding.

Get around the increased tax withholding measure:

People can change their personal withholding allowances through their employers or payroll services provider with the Employment Development Department’s DE4 form. The legislature is hoping most will not be wise to this technique.

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