Editorials A lesser evil? March 01, 2010 Share 1 -- These are trying times for budget planners in state and local governments all over the country. Income tax revenue is down, real estate tax revenue is down, sales tax revenue is down -- and yet the snowplows must roll, the libraries must stay open and the cops need new radios. What to do? One time-honored tactic is to raise the hotel tax 2 points, a popular solution adopted most recently by the city council of Gloucester, Mass., where hotel guests will soon be paying nearly 12% in combined state and local occupancy taxes -- which seems to us like an awful lot. As much as we recognize that local governments are in a bind, we remain distrustful of taxing strategies that place a disproportionate burden on particular activities and especially on visitors, who don't get to vote and who often derive few benefits in return. Which brings us to California, where Sacramento is facing the mother of all state budget woes: a deficit on the order of $20 billion. To put that in perspective, every one of the state's 500,000 hotel rooms would have to generate $40,000 in additional tax revenue to close that gap. Among the proposals being aired to help address this problem is the idea of income tax withholding for independent contractors. In terms of popularity with the state's business community, the proposal ranks right up there with earthquakes, wildfires and mudslides. The state Chamber of Commerce and countless businesses and business associations are opposed, including ASTA, the California Hotel & Lodging Association and the California Coalition of Travel Organizations. Opponents say it will be disruptive and costly for employers to implement and will impose a financial hardship on people who work as contractors, including self-employed individuals and small-business operators, a group that includes thousands of independent travel agents. They also point out that the 3% withholding is inflexible and cannot be adjusted downward for workers who might end up owing little or no tax. These are valid complaints, but there are some positive things to say about this proposal, too. First, it's not a tax rate increase. It is more of a cash flow increase, at least from the state's perspective. It is true that taxpayers will pay sooner and will have to wait for a refund if they overpay, but this pay-as-you-go system is already a fact of life for millions of salaried workers and wage-earners who have been subject to automatic state and federal withholding for decades. Independent contractors in all fields of endeavor are increasingly being recognized as a major force in the economic mainstream. Subjecting them to tax withholding might appear disruptive at first, but California's wage-earners might have a point if they are heard to say, "fair is fair; join the club." Secondly, the concept of withholding wasn't just imported from Mars. Every employer already withholds state and federal taxes for salaried and hourly workers. The cost of adding a 3% withholding regime for independent contractors hardly seems like a crushing burden. Ultimately, of course, this is for Californians to decide. They also have to decide how to get a grip on their state government's spending. But as a way to address the revenue side, this proposal could be refined into something workable and fair. Considering some of the other options that might be available to a state government that needs revenue, we think the California Legislature could be capable of doing a whole lot more damage than this.