In 1733, a little known printer named Benjamin Franklin published the first edition of Poor Richards Almanac. For the next twenty-six years, Franklin’s fictional compiler of the annual almanac, one Richard Sanders, a supposed mathematician and stargazer, filled in the blank spaces between calendar dates with witty proverbs about the virtues of hard work, prudence, diligence, good management and thrift. The proverbs that Franklin popularized over two hundred and fifty years ago still pop occasionally in our conversations such as “early to bed, early to rise, makes a man healthy, wealthy and wise,” and “God helps them that helps themselves.”
We hear often on the floors of the U.S. Congress and State Legislatures that it is good public policy to encourage savings for important purposes such as education and retirement. Last year, President Bush and the U.S. Congress took a step in the right direction. On June 7, 2001, President Bush signed HR 1836, which increased the maximum dollar amounts that individuals, private and public employers could place in employee retirement savings plans: the IRA, 401(k), or 457 Plan. The federal law also gives those over 50 years old an opportunity to make extra or catch-up contributions to their workplace savings plans and IRAs. And for those who want to help their children or grandchildren pay for college, HR 1836 boosted the dollar amount that one can put in an Education IRA. As Poor Richard says, “if you would be wealthy, think of saving as well as getting.”
But I am beginning to wonder if the leadership of the California Legislature has forgotten about Poor Richard’s wise advice about the virtue of thrift and saving money. Because state tax law still has lower contribution limits for retirement plans and Education IRAs than what is contained in federal law, many financially prudent Californians are being unfairly penalized in a variety of ways. So far, legislative paeans in the past extolling the virtues and importance of saving money for one’s retirement has not been matched by deeds. As Poor Richard says, “many words won’t fill a bushel.”
Because state tax law still has not been conformed to federal law, many Californians face tax-filling headaches and the possibility of being required to pay state taxes and penalties for excess contributions to their IRA saving accounts. Because of the confusion, the California Public Employees Retirement System (CalPERS) and many private companies in the state are holding off improving their retirement plans. “The confusion alone is maddening,” said Assemblyman John Campbell, who was an accountant before being elected to the Legislature. “Businesses are stuck between telling employees to increase contributions, assuming California will fall in line, or to take advantage of the federal changes out of fear of penalties and taxes,” said Campbell.
Californians even face the possibility of what is being called by tax experts the Armageddon scenario. Under this scenario, a company’s retirement plan could be suddenly disqualified by the state Franchise Tax Board (FTB) if a single worker puts an extra $1 in his or her retirement plan that exceeds current state limits. All the workers with the company would then face state taxes and penalties. The tax lawyers at the FTB have not ruled out the possibility that the Armageddon scenario could occur. Of course, California residents would not be facing these problems if the Legislature conformed state law with federal tax law six months ago. As Poor Richard says, “a little neglect may breed great mischief.”
The good news is that Governor Davis last week expressed his support for conforming state tax law with federal tax law. Assemblyman John Campbell (R-Irvine) and Senator Jack Scott (D-Pasadena) have introduced bills to make the necessary tax law changes. But nothing is guaranteed in the Legislature. Good ideas have a way of getting strangled. But I believe that the California Legislature should pass a state tax conformity bill and do it as soon as possible. Every day that the Legislature procrastinates in passing such a bill, Californians are discouraged from helping their children and grandchildren pay for college and preparing for their own retirement. Let’s not waste any more time. As Poor Richard says, “lost time is never found again.”
January 25, 2002