I almost laughed out loud when I read the proposal floated by Virginia Beach delegate John Welch in this morning’s Virginian-Pilot.
Welch announced that he wants to stop taxing the overtime Virginians work. Welch, running against Democrat Bobby Mathieson, said the move would be an incentive to work overtime for people at small businesses. It also would let workers keep more money, he added.
Is this like former governor Jim Gilmore’s “no car tax” plan? We saw how well that worked out. In this case, Welch is talking about eliminating state income taxes on overtime wages. A few things came to mind here:
- Is he talking about all overtime or just the extra compensation? Overtime is paid at the rate of 1 1/2 or 2 times the base wage, depending on certain circumstances. So for a $10 per hour worker, overtime would make the pay $15 or $20. By saying “overtime pay,” does he mean the extra $5 or $10 or the whole $15 or $20?
- Implementation of this by any business, but especially small businesses, would be a nightmare. Believe it or not, a lot of small businesses still do payroll by hand. And for those who rely on computer software, how long would it take for the software to catch up? Not to mention the cost to the payroll companies to reprogram.
- Given the changes in the definition of employees who are exempt from overtime pay, expect companies to become even more aggressive on who is eligible versus who is not in order to avoid the extra work.
- How will this be handled on the W-2 forms? Will there be a special designation of the amount of overtime paid? Where will it be reported?
The Department of Taxation conservatively estimates that this plan will cost $433 million. Now, tell me, when Virginia is facing a $641 million budget deficit, where’s the money going to come from?
This “no overtime plan” is a no go.
VIVIAN J. PAIGE | All Politics is Local 
AEM – sometimes a little knowledge is a dangerous thing.
Those are set by the Federal government, not the states. I’m sure that the Feds are going to accommodate the VA Dept of Taxation.
Read a little further – it would have to be done in Box 14 and it would have to be properly coded in the computer systems.
No. Unemployment taxes are based on gross pay, which is before the 401(k) contribution.
The problem is that unemployment benefits are based on wages earned. If the wages are not subject to unemployment taxes, then they would not be counted as a part of the wage base. We saw that happen with Ford Motor Company employees (and the support companies) who were out of work a lot of time in 2006 when the plant was closed. Their unemployment benefits in 2007 were affected by that.
A lot of folks rely on overtime to make ends meet. There was an article in the Pilot a few weeks back on this. To remove the wages from the unemployment wage base would be not only to reduce the benefits, but also would likely cause the employer contributions (for all) to have to increase.
If Welch wants to do a giveaway, why not propose a change to the VA earned income tax credit? At least that would target the lowest paid workers among us.
Vivian, the wages are NOT subject to unemployment taxes. Unemployment taxes are paid by the employers, not the employees. Just as removing 401(k) contributions does not reduce the employers’ unemployment obligations, exempting overtime pay from taxes need not do so either.
“If Welch wants to do a giveaway….
Giveaway? Whose money do you think it is, anyway? When a thief steals your car stereo and leaves the CDs, is he giving you the CDs?
“…why not propose a change to the VA earned income tax credit? At least that would target the lowest paid workers among us.”
Maybe he wants to target the hardest working among us.
Like I said, a little knowledge is a dangerous thing.
The wages are indeed subject to unemployment taxes. All wages are. What else do you think they are called? Regardless of who pays them, they are still called unemployment taxes.
The reason that 401(k) wages are not the same is that those wages are not currently subject to income taxes (federal or state) but will be when the money is withdrawn in retirement. (In nearly all states, this is the case. PA, for example, taxes 401(k) contributions when made and exempts them when the money is withdrawn in retirement.) The exemption of overtime pay from state taxes means that the money would never be taxed at the state level. So it follows that state unemployment benefits would not include those wages so exempted.
Think of cafeteria plans – the amount of money contributed to those plans come off the top before ANY taxes are computed. They are not included in the wage base for ANY calculation, whether it be 401(k) contributions, Social Security & Medicare, state taxes, federal taxes, state unemployment and federal unemployment.
And yes, it is a giveaway. We live in a society where all participate according to their means. We pay for roads that way, we pay for schools that way. We pay for Social Security that way and welfare benefits that way. If everyone wants to take their ball and go home, we can forget about taking care of our common needs.
Bottom line is that this is a poorly thought out plan. You can argue about a sales tax versus an income tax all day long but we don’t have a system which utilizes a sales tax.
Let me clarify one thing: there is a limit on the amount of wages that are subject to federal and state unemployment taxes; however, the benefits are based on the wages reported. So going back to my original statement, if the wages are not reportable for unemployment tax purposes, there will be reduced benefits.
“The reason that 401(k) wages are not the same is that those wages are not currently subject to income taxes (federal or state) but will be when the money is withdrawn in retirement.”
The issue of future income tax has no bearing whatsoever on the matter of current unemployment tax. Unemployment taxes are paid on 401(k) contributions, which are not currently taxed. What’s the problem with continuing to pay unemployment taxes on overtime pay? Nothing changes but the INCOME tax — the unemployment tax would not change.
“The exemption of overtime pay from state taxes means that the money would never be taxed at the state level. So it follows that state unemployment benefits would not include those wages so exempted.”
Not necessarily. 401(k) contributions are tax deferred at the state level. If, upon retirement, one moves to a state that has no income tax (which is another reason many retirees like Florida), does one have to pay income tax to the state in which one was living when the money was earned? Thus, unemployment taxes will have been paid to Virginia, but no matching income tax will ever be paid.
“Bottom line is that this is a poorly thought out plan.”
It is an idea. The point is to get the idea out, so that we can have discussions like this, find the idea’s good points and bad points, form a plan which will emphasize the good and mitigate the bad, and mold that plan into a bill, which will then be amended as others in the legislature add their thoughts and wisdom. This is the start of the process only.
“You can argue about a sales tax versus an income tax all day long but we don’t have a system which utilizes a sales tax.”
Yes, we do. Delaware does not.
I’m starting to feel like a broken record.
A little knowledge is a dangerous thing.
You cannot segregate current income taxes from future. It’s the nature of the beast when it comes to taxation.
There have been a number of moves by the states to capture that income tax, California chief among them. They call it a “source” tax. As the population ages, you can expect more of such behavior, or more moves like PA. PA is taking no chances that they will never get the money. There is no tax deferral for 401(k) contributions there.
If they want to provide a means-tested tax deduction for overtime pay, it would solve all of the problems I have mentioned, except that the information would still have to be reported on the W-2.
Of course, there’s still that little $433 million price tag to deal with.
And Delaware having a sales tax does not even come close to approaching a wholesale replacement of the income tax with the sales tax.
“You cannot segregate current income taxes from future.”
We do it now with 401(k) contributions. Furthermore, unemployment taxes and payroll taxes are already separate entities. Some income is subject to one tax but not the other. The computation of unemployment tax, which is done on the employers’ payroll as a whole, not individually like FICA taxes, need not change. It did not change with the introduction of 401(k) plans, and it need not change with this, either. They are simple separate taxes.
“There have been a number of moves by the states to capture that income tax, California chief among them. They call it a ‘source’ tax.”
Now THAT would be an accounting nightmare — one would have to have a separate account for every state in which one worked.
“PA is taking no chances that they will never get the money. There is no tax deferral for 401(k) contributions there.”
Are the withdrawals free of state income tax? That just makes it a Roth-401(k). I have no problem with that.
“If they want to provide a means-tested tax deduction for overtime pay, it would solve all of the problems I have mentioned, except that the information would still have to be reported on the W-2.”
Why means test it? What happened to equal protection?
“Of course, there’s still that little $433 million price tag to deal with.”
Yeah, it’s a real wrench to let hard-working people keep their money.
“And Delaware having a sales tax does not even come close to approaching a wholesale replacement of the income tax with the sales tax.”
Delaware does NOT have sales taxes. It is Florida that has a sales tax but no income tax. In this instance, I was talking about state-level taxation, not federal.
AEM – that is flat out wrong. It is indeed done individually. How in the heck do you think they know what your earnings are in order to calculate your benefits? Have you ever prepared an unemployment tax form? Guess not, otherwise, you’d know that is not the case. And if you are looking at the federal 940, what you probably also don’t know is that the states administer the unemployment program, with both federal and state dollars. While the separate reporting of the individual earners is not done at the federal level, it is done at the state level.
PA 401k withdrawals are free from PA taxes. But not necessarily from other states’ taxes, depending on the state. VA does have a subtraction to rectify the problem but not all states do.
As for means testing – that’s easy. Just ask the state how much the flat age subtraction cost (when they were trying to fix the problem with the taxation of retirement benefits from pensions other than the state) and which they had to scrap as the result of the cost.
As for Delaware, your reference to the sales taxes instead of the income tax is why I mentioned it. Delaware does indeed have an income tax, and it is higher than VA’s.
It takes X amount of dollars to run a state. Different states have a combination of different taxes in order to cover the cost. FL has no income taxes but they tax your wealth via the intangibles tax. CT used to not have an income tax but charged outrageously high real estate taxes. You have to look at the overall tax burden. Virginia is a relatively low tax state, no matter how you cut it.
“How in the heck do you think they know what your earnings are in order to calculate your benefits? ”
The can look at the W-2 forms the employers send to the state. They can probably also access the person’s Social Security files.
“Delaware does indeed have an income tax, and it is higher than VA’s.”
I know — that’s because they don’t have a sales tax.
“It takes X amount of dollars to run a state.”
No, it doesn’t. If that were the case, the budget would never change, and all states would have similar budgets. But the legislators add programs, expand programs, make capital expenditures, etc., many of which are not necessary to running a state — or Virginia would have collapsed years ago because it did not have those programs.
The legislatures make choices. Many of those choices simply involve money from taking from one group of citizens and giving to others. Those transfers have nothing to do with running a state.
Look at the W-2s? Are you serious? How often are W-2s sent to the state? Looks at Social Security files? Do you have any idea how Social Security files are updated or how often?
Obviously not.
Payroll information is provided for each employee to the state each quarter. Benefits are based on quarterly earnings. To take it a step further, unemployment benefits get charged back to the employer and are a factor in setting the employer’s contribution rate. The states actually work together on this, since the employer who gets charged is the last employer for which you worked 30 days or more. You could, for example, file an unemployment claim in Virginia and actually get benefits from, say, NC, because that is the location of your last 30 day employer.
As for the dollars to run a state, yes, it takes X. The question is where does X come from. I wish it were as simple as you think it is.
If the W-2s are not sent to the state, how does the state audit income taxes? The Social Security files are updated at least once a year, because we get the statement lying about the benefits we’re not going to get because the system is a Ponzi scheme.
“As for the dollars to run a state, yes, it takes X.”
Really? What is X, then? Surely, we have the experience from running fifty states long enough to know that number by now.
“The question is where does X come from.”
They tax and spend whatever they can get away with. When that is not enough for their insatiable desires, they sell bonds. (I love how they say they are selling bonds to pay for schools, or roads, or parks, or whatever the cause du juor is. Bonds do not pay for anything, taxes do.)
In the past ten years, the Virginia population has increased about 15%. Our budget, however, has gone up over 100%, from $17.1B to $35.1B. http://dpb.virginia.gov/about/history.cfm
How could they possibly have run the state on so little money?
I explained why the information has to be provided to the VEC more timely than once a year. Someone filing for unemployment cannot rely on more than a year old data for determining their benefits. If you look at your SS earnings statement, it often does not include the last calendar year’s data because the information has not been processed yet. W-2 information is not due to the SS Admin or the state until two months after the end of the year. That information is not magically entered into the system. It takes time. Your ignorance on the realities of this is not unexpected; I’d wager that most people have no idea how the system works or why it works the way it does. Why you continue to post comments that amplify that ignorance is beyond me.
As for the taxes – you might as well give up. You are believe that somehow government magically runs and that the answer is to take away the resources. I don’t believe that. So you are wasting your breath (or, rather, your typing skills). Virginia is a relatively low tax state, while still garnering awards for being the best managed state, the best state for business, and the best place to raise a child. I’d like to see us continue on that path.
Going back to the premise of this post: the plan floated by Welch was ill-conceived and not completely thought out. If he thinks he can just say “no overtime tax” and get away with it without being challenged, it’s not going to happen – at least not here.
OK, let’s agree then, that trying to tie this to the unemployment tax is also a no-go. All wages are reported to the state quarterly, but only wages BELOW $8000 per quater are subject to unemployment tax. So there is already a disconnect between money that is subject to income tax and money that is subject to unemployment tax. The idea of not having income tax on overtime pay is completely separate from the issue of unemployment tax.
“Why you continue to post comments that amplify that ignorance is beyond me.”
Because by being corrected, I learn.
“Virginia is a relatively low tax state, while still garnering awards for being the best managed state, the best state for business, and the best place to raise a child.”
I think you have it backward. Virginia wins those awards in part because it is low-tax state, not in spite of it. The tremendous growth of our state budget in the last decade — over 100% versus a 15% increase in population, puts our position at risk.
“The plan floated by Welch was ill-conceived and not completely thought out.”
We have already agreed that it was not completely thought out — it is an idea, not a bill. Why do you say it was ill-conceived?
“If he thinks he can just say ‘no overtime tax’ and get away with it without being challenged, it’s not going to happen – at least not here.”
I do not think that was his intention. The point of getting ideas out is to have them debated, discussed, and refined before sitting down and crafting legislation.
You missed the point entirely, as usual. The unemployment BENEFIT is not based on the wages subject to unemployment tax. That’s the reason the total wages are reported. Call the VEC and ask them. That’s the reason I made the point earlier about the FMC employees. If the wages are not counted for state income tax purposes, the logic of taxation says they would be exempt from being counted for unemployment BENEFITS.
Your tone makes you try to sound as if you know something, when in fact, you repeatedly come up with arguments based on lack of knowledge. That’s the most annoying part.
The income that goes into a 401(k) is not taxed either. The income that goes to buying health insurance is not taxed. The income that goes to vision and dental insurance is not taxed. The income that goes into a health-Care Flexible Spending Account is not taxed. Is that income reported on the VEC-FC-21 for the unemployment tax?
“If the wages are not counted for state income tax purposes, the logic of taxation says they would be exempt from being counted for unemployment BENEFITS.”
That is not necessarily the case. That is something that will need to be clarified in the bill.