In 2020 California passed a budget that reflected dire financial circumstances. A raging pandemic and shuttered economy led politicians and pundits to believe the state was barreling into a $54 billion deficit. Desperate times called for desperate measures.
The 2020 budget cut spending in a number of areas, but one of the most significant actions wasn’t a line item deletion – rather, it was a $9.2 billion tax increase. Specifically, AB 85, 2020’s budget bill, suspended net operating loss (NOL) deductions and capped business incentive tax credits at $5 million to address the looming fiscal emergency.
The tax increase wasn’t permanent. Rather, the NOL deduction suspension and tax credit cap were put into place for a period of three years with a carryback provision. In other words, California was borrowing the money to assist in closing the deficit with the intention of paying it back, in full, in three years.
Lo and behold, 2021 is fiscally historical, but not for the reasons we anticipated. California has a once-in-a-generation surplus. In fact, the state has so much money Governor Newsom announced that two-thirds of Californians would receive checks amounting to nearly $12 billion – this was touted as the largest state tax rebate in American history.
Considering the state’s prodigious fortune, now is the time to sunset AB 85’s provisions and restore NOL deductions and business incentive tax credits. Why delay? The money has to be repaid and now is an opportune time. The state’s budget can easily absorb it and the repayment will only include one year of the suspension rather than three. Thus, the cost to the state will be much less now than it will be in two years when the bill is due.
The business incentive tax credit cap should be restored immediately. California’s innovation-based economy pays economic dividends not only in our traditional technology hubs, but in every region of the state and in a wide variety of jobs (read more here). Additionally, the NOL suspension is causing even greater financial strain for employers who have suffered staggering losses over the past year and have no way to offset their revenue declines. Struggling businesses need help now – not in several years when the 2020 budget’s carryback provisions take effect. Sunsetting the NOL suspension and cap on business incentive tax credits would send a strong, positive message that California is supporting a strong economic recovery.