Struggling Businesses Face Billions in Increased Taxes

2020’s recipe has proven to be equal parts unpredictable and incalculable with a heaping helping of calamity and lest we forget the generous scoop of crisis. Despite this year’s twists and turns one constant remains-California’s turbulent business climate. Unemployment figures wax and wane near Depression Era levels while certain market sectors close, partially open, re-open, and re-close at any given time. Piling on top of this are legislative moves and ballot initiatives that will certainly impact business decisions in this state.

State Budget

In June, the Governor signed Budget tax increases, primarily on businesses, totaling about $8.7 billion over the next three years. The bulk of these tax increases comprise a three-year suspension of the net operating loss deduction and $5 million-per-year limit on utilization of tax credits. Those tax changes are retroactive to January 1, and will apply to the 2020, 2021 and 2022 tax years. Notably, the business incentive tax credit suspension will include a cap on the research and development credit, no doubt affecting biopharmaceutical research related to COVID.

Proposed Legislation

Headcount Tax. AB 398 (Chu; D-San Jose) Punishes certain employers who create jobs and discourages hiring and employment growth by imposing a headcount tax of $275 per employee.

Burdensome and Unnecessary Corporate Tax Disclosure. SB 972 (Skinner; D-Berkeley) Violates traditional taxpayer confidentiality to undermine business strategy, destabilizes competition and politicizes tax policy by requiring the Franchise Tax Board to disclose all taxpayers’ identities and tax credits if their gross receipts are $5 billion or more.

Unnecessary Commission to Study Tax Expenditures. SB 956 (Jackson; D-Santa Barbara) Creates an unaccountable bureaucracy to study tax expenditures, largely removing the Legislature from the debate over the value of tax incentives designed to increase jobs and investments in California. This bill will potentially increase taxes by $20 billion.

Ballot Initiatives

Proposition 15. Prop.15 aims to repeal many of Prop. 13’s protections and increase taxes on business properties. Prop. 13 limits total taxes to 1% of the property’s value, and any increases to a maximum of 2% per year. Prop. 15 will require nearly all commercial properties be reassessed to fair market value for tax purposes. This will increase business property taxes by $7.5 billion to $12 billion a year, according to the Legislative Analyst.

CalChamber is a member of the Californians to Stop Higher Property Taxes coalition, along with hundreds of other organizations, opposing Prop. 15. Small businesses have already suffered staggering pandemic induced setbacks and an historic property tax increase could not be more ill-timed. If Prop. 15 passes it will likely prove to be unmanageable for many employers.

Joseph Vranich, a business relocation expert, reported that approximately 17,000 businesses have left California over the last decade, in full or in part, diverting an estimated $99 billion in capital. With bills and initiatives like these, in addition to the highest state income tax in the country and a state corporate tax rate of 8.84%, it doesn’t appear that trend will change any time soon.

Preston Young, Policy Advocate