State taxes witheld as subsidy to employer?

Here's what I now about state job creation and/or retention tax incentives. Many states have them. More than half? I don't know. They all work aproximately the same way. It takes the form of a credit against the employer's tax return. The credit differs in how each state calculates it. It is quite possible that one or more states use employee withholding as a basis for computing the credit. The employer does not get to keep any employee's tax withholding.

It took a few minutes to find this from the Christian Science Monitor web site (it's an opinion piece but seems pretty credible on the facts). Many more details are provided in the 2-page article, see link below, here is an excerpt:

"Sixteen states now allow corporations to withhold state income taxes from employees and keep the money as an incentive to locate to or remain in a state. That means that, in effect, employees pay personal income tax to their company rather than their state government. (The 16 states are: Colorado, Connecticut, Georgia, Illinois, Indiana, Kansas, Kentucky, Maine, Mississippi, Missouri, New Jersey, New Mexico, North Carolina, Ohio, South Carolina, and Utah.)"

The editorial concludes:

"It?s time that state lawmakers stop hiding behind the label of economic development and call it what it is: a corporate welfare program funded by hard-working American taxpayers."

It took a few minutes to find this from the Christian Science Monitor web site (it's an opinion piece but seems pretty credible on the facts). Many more details are provided in the 2-page article, see link below, here is an excerpt:

"Sixteen states now allow corporations to withhold state income taxes from employees and keep the money as an incentive to locate to or remain in a state. That means that, in effect, employees pay personal income tax to their company rather than their state government. (The 16 states are: Colorado, Connecticut, Georgia, Illinois, Indiana, Kansas, Kentucky, Maine, Mississippi, Missouri, New Jersey, New Mexico, North Carolina, Ohio, South Carolina, and Utah.)"

The editorial concludes:

"It?s time that state lawmakers stop hiding behind the label of economic development and call it what it is: a corporate welfare program funded by hard-working American taxpayers."

Makes me wonder if the state income tax that was withheld but never paid to the state is deductible as state/local income taxes on Schedule A?

Here is a link to the original report upon which the editorial was based:

The exact terminology used:

credit(s) against withholding retention of withholding wage assessment rebate of withholding grants based on withholding business tax credit based on withholding corporate income tax credit based on withholding

As I live in New Mexico, I am familiar with the various jos credits that we have. Typically, an employer who meets the requirements of the incentive and qualifies for the credit, can apply that credit against quarterly filings. Usually, the credt can be applied against either the gross receipts tax (we don't have a sales tax), the compensating tax, withholding tax, E911 and TRS payments. So... the article's author who says "in effect" the emloyee is paying personal income tax to his employer... is somewhat stretching the truth. N.M. is just making the credit available on a more timely basis (quarterly instead of annually with the tax return) and is allowing the employer to offset a variety of different tax payments. The employee is paying tax to the state via employer withholding. An employer who qualifies for the credit, can opt to offset their tax obligation to the state by taking the credit.

It would be no different that an employer who failed to pay in withholding without legal authority. On the federal side, the employee gets credit for withholding whether paid in or not by the employer. I'm guessing state laws are similar.

Do these 16 states get to keep all or part of the withholding? Many of these states are ones that raised or established state income taxes, and businesses were fleeing the state. It's quite a mess -- raise taxes for everyone, then give a huge break to some of them.

Maybe the state tax credit is income, so it balances out the deduction.

It isn't income to the _employee_.

Seth

Agree.

When your escrow agent fails to pay the taxing authority, you do not qualify for a property tax schedule A deduciton.

So I wondered if your employer fails to pay the state (taxing authority) can you deduct income tax withholding?

Presumably the penalty is imposed on the employer. Penalizing employees, who had nothing to do with the offense, would be an incredible scam.

On 9/24/2012 10:05 AM, Arthur Kamlet wrote: [snip]

I can't speak for every state, but I think it is reasonable to assume that they mimic CA, AZ, CO, NM & OK and the feds... the employer is responsible for payment to the tax authorities for all withheld taxes. The taxpayer is entitled to all deductions whether the employer makes the payment or not (that's why an employee should always keep the last payroll stub that shows withholding). This is also why the failure to pay or failure to pay on time penalties for the employer are more harsh then the taxpayer penalties. In addition, if the employer outsources payroll, the employer is still the responsible party to the government.