Legislature Taking Up Governor’s Tax and Leave Proposals

The Legislature will take its first actions on Governor Newsom’s proposed 2022 budget and policy proposals next week, after negotiating a package deal to reduce the tax bite on employers and implement a second year of pandemic-specific sick leave, which include improvements to last year’s sick leave mandate.

Earlier this month the Governor proposed restoring the full use of tax credits, including the research and development tax credit, and the ability to utilize net operating loss carryforwards, which had been suspended in 2020 in response to the pandemic recession. At the time state leaders feared massive budget shortfalls and enacted more than $10 billion in tax hikes on businesses.

Fast forward to today – the Governor anticipates a second straight year of massive budget surpluses, leading to his call to restore these tax tools and incentives. The budget argument was bolstered by research commissioned by CalChamber and produced by the Milken Institute that found the research and development tax credit spurred innovation and created high-paying jobs in all regions of California and in many diverse economic sectors. Among many others, Assembly Member Evan Low, Cottie Petrie-Norris and Kevin Mullin championed the restoration of these tax tools.

The Legislature may also act on several additional incentives and assistance proposed by the Governor in January. These include state tax conformity for California recipients of federal relief grants in significantly impacted industries, the waiver initial filing fees for new businesses, and support for small businesses previously waitlisted in prior rounds of the state’s Small Business COVID-19 Relief Grant Program.

Legislative approval of the Governor’s proposals will help small businesses on their road to recovery, as well as signal California’s commitment to a stable and predictable tax structure that welcomes innovation and risk-taking.

Moved by the surge in omicron cases – and intense interest by Democrats in the Legislature – the Governor also proposed extending the temporary sick leave benefit for Covid-related illnesses for another nine months. The benefit will again apply to employees who have contracted Covid-19, are subject to quarantine or isolation, as defined by state or federal authorities, are getting the vaccine or recovering from side effects, or who are caring for sick family members or children unable to attend school.

The proposal maintains the exemption for small businesses (less than 26 employees) to provide the benefit, despite pressure from labor advocates to apply the mandate to all employers, and will be limited in duration – expiring at the end of September.

Responding to concerns raised by CalChamber and other employer advocates, the Governor improved the sick leave benefit and reduced compliance costs by:

  • allowing employers to mandate proof of a positive COVID-19 test if the employee is seeking more than 40 hours of leave,
  • limiting to 40 hours the overall number of hours that can be used by an employee, unless the employee or a family member tests positive for COVID-19,
  • limiting the number of hours that can be used to attend a vaccine appointment or recover from vaccine-related side effects to 24 hours,
  • ensuring the rate of pay matches existing paid sick leave, and
  • easing compliance for reporting on wage statements.

Loren Kaye, President, California Foundation for Commerce and Education