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By Steve Wiegand
swiegand@sacbee.com

When it comes to balancing the state budget, no idea ever wears out its welcome. That explains why lawmakers are currently pondering a list of revenue-raising proposals that bit the dust just la

When it comes to balancing the state budget, no idea ever wears out its welcome.

That explains why lawmakers are currently pondering a list of revenue raising proposals that bit the dust just last year.

Chief among them is a proposal to require private companies and government agencies to withhold 3 percent of payments they make to independent contractors.

That’s a group estimated to consist of more than 3 million California taxi drivers, lawyers, farmers, miners, plumbers, real estate agents, food storage container salespeople, home builders and others who in essence act as their own bosses.

By withholding part of the payments as income tax and transmitting it to the state, the Franchise Tax Board estimates the state could pull in $1.4 billion during the year instead of having to wait until the contractors filed their tax returns.

Moreover, the FTB estimates that the forced withholding would produce an additional $140 million to $375 million per year that contractors don’t pay now because they under report their income.

That would help close a fairly decent-sized chunk of the $19.9 billion budget gap the state faces over the next 17 months.

“We would be applying the same withholding rules to these businesses that we apply to people who work for employers,” said state Senate President Pro Tem Darrell Steinberg, D-Sacramento, a leading proponent of the idea.

Steinberg points that it’s not imposing a new tax, merely “smoothing out” the collection of a current tax.

That means it takes only a majority vote in both legislative houses rather than the two-thirds margin required for tax hikes, and thus avoids the mountainous obstacle of minority Republicans who are opposed to most revenue raising proposals.

But it doesn’t remove the muscular roadblock in the governor’s office, where Gov. Arnold Schwarzenegger vetoed similar proposals last January and last June.

The idea, Schwarzenegger said in his veto message in January, “punishes Californians by raising revenue without providing permanent and ongoing cuts, does not create jobs or stimulate our economy, (and) does not allow government to run more efficiently in California.”

As with most ideas under the dome, the independent contractor proposal wasn’t born yesterday – or last year.

In 1991, a budget crisis prompted then-Gov. Pete Wilson to embrace a similar plan. But fierce lobbying by a confederacy of groups forced Wilson to abandon it in favor of a temporary increase in top income tax rates.

Even if Schwarzenegger changed his mind, which is problematical at best, it’s not a simple task, the governor’s Department of Finance said.

“It could be the Manhattan Project of (tax conformity) efforts,” said finance spokesman H.D. Palmer. “It would involve a significant IT (information technology) undertaking.”

Finance officials provided an example in which a health care provider contracts with an X-ray company that’s a subsidiary of a company that is owned by doctors who for legal reasons are individually incorporated.

Figuring out who owed what tax and who was owed refunds would require a six layer process, officials said.

In addition, the state would only be borrowing much of the money, and would have to refund a lot of it. A 2005 FTB study estimated that more than 70 percent of affected taxpayers would have more withheld than they would ultimately owe, and the state would have to refund almost half of what it collected early.

Tracy Hamilton isn’t keen on making what amounts to an interest-free loan to the state.

Hamilton is a 34-year-old Sacramentan who makes her living selling cosmetics and other beauty care items for Avon Products Inc.

She also supervises a team of about 65 part-time salespeople, including many state workers who are striving to make up for the 14 percent pay cut they’ve taken because of mandatory furloughs.

Some of Hamilton’s income comes from selling products face-to-face to customers.

She takes their checks, forwards a share to Avon, and pays her taxes at the end of the year.

Another portion of her income comes from online sales, in which the customer’s money goes to Avon, and the company sends Hamilton’s share to her. That’s the part that would be subject to withholding.

“That would bother me a great deal,” Hamilton said.

“Being self-employed is hard enough, because everything falls on you, every bill, every expense. To take something out on top of that would be very hard to manage.”

That’s the key difference between salaried taxpayers and independent contractors, according to Amy Robinson, vice president of communications at the Direct Sellers Association, a 200-company group based in Washington, D.C.

“Salaried employees receive compensation for their work every day,” Robinson said in an e-mail. “Independent contractors, direct sellers in particular, are only compensated from the sales and growth of their business.

They need every cent they earn to start, maintain and grow their independent business.” It’s a perspective not lost on Steinberg.

“If we move forward with this, we could have a threshold for small businesses like this,” he said. “But here’s my basic view on it: There is a strong policy rationale for (this) withholding, just as we do for people classified as employees.” More important, he said, is that in the never-ending struggle to balance the budget, everything is a choice.

“Nothing can be seen in isolation,” Steinberg said. “I look at the potential of collecting $1.5 billion in taxes that are already owed, compared to $1.5 billion in additional cuts to education, or health care for kids, or caring for the elderly and disabled … and it’s a pretty simple choice for me to make.

“And that’s what this whole struggle is about, making choices.”

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