MAY 2019 – Pay your taxes? More may be on the way

Pay Your Taxes? Take a breath, more may be on the way

By – Loren Kaye,Calchamber

More than $15 billion in tax increases – mostly aimed at business taxpayers – await hearings and decisions in the Legislature. If the tax proposals get that far (they require two-thirds approval by the Legislature), then new Governor Newsom will have his say.

California’s treasury is awash in surplus revenues, more than $13 billion when the Governor introduced his budget in January, which is on top of a nearly-filled Rainy Day Reserve. Economic growth signals remain strong. And we haven’t seen the last of budget-brimming Silicon Valley IPOs that will boost revenues even more.

The response to this bounty of good fiscal news? Raise taxes!

Record budget surpluses have been met with record tax increase proposals. Here’s just a taste:

Massive corporate tax increase. A state senator is proposing one of the steepest corporate tax increases ever contemplated in California. It would bring the top tax rate for some companies to an eye-popping 22.26%, about 150% higher than today’s rate. It would make the California corporate tax rate easily the highest in the nation.

Were this $5 billion tax increase to pass, California would have the highest or second-highest tax rates nationally for income taxes, corporation taxes, sales taxes and motor vehicle fuel taxes.

While the author means this bill to attack alleged wage disparities and foreign outsourcing, it would likely have little effect on those objectives and more likely have the easily-anticipated effect of harming workers in California or elsewhere in the United States.

While CEO compensation is a favorite topic of class warriors, this legislation ignores the enormous responsibility placed on these individuals to maintain or improve the success of a company that creates jobs for hundreds or thousands of workers, and value for thousands of shareholders, including pension funds.

Companies have also been reshoring jobs from overseas steadily since the beginning of the recovery, with more than a half million jobs returning since 2010 because of better access to skills, favorable transportation or marketing needs.

A $5 billion tax increase cannot just be waved away by corporate taxpayers. This bill would increase revenues from this source by about a third, but would fall on just a small percentage of corporate taxpayers. The malignant effects inevitably would include reduction of workforce or constraint in workers’ pay or benefits. Another outcome could be a reduction in the value of the company, which would affect shareholders. Note that more than 20 percent of household assets are in stocks, and retirement plans own a majority of corporate stock.

Corporate tax revenues in California are at record highs, having increased by 80 percent since 2012. Federal tax reform broadened the corporate tax base and has generated more revenues for the state, and on a parallel track, the Governor has proposed further conformity to the federal tax law to bring in even more revenues.

New taxes on food, farmers and innovation. Another Senator will be proposing to eliminate a dozen tax incentives and exemptions, raising at least $8 billion in general revenues. The key changes: (1) eliminating the sales tax exemption for meat and fish, for animal feed and medicine, and for plants, seed and fertilizer used for food production, (2) eliminating tax credits that encourage companies to create innovation in California, and (3) eliminating a longstanding separate tax benefit for small business pass-through organizations (called Subchapter S firms) to help the owners minimize double-taxation.

California hasn’t taxed food for generations, or what’s necessary to grow food, so now is the right time to hit low income consumers the hardest? That one is a head-scratcher.

This bill would also repeal the research and development tax credit, which rewards innovative activity in California, which in turn is the main engine for small business growth and the creation of well-paid, middle class jobs.

According to the Milken Institute, innovation is crucial for the creation of high-quality jobs and strong economic growth, and in the global race for innovation, California enjoys advantages that others envy. California’s research credit is a crucial part of the tax environment that businesses evaluate in choosing whether to site new research activity in California or in another innovation hub.

Exhumation of the California death tax. Repealed by voters in 1982, another state senator has proposed imposing a new inheritance and gift tax at a 35% rate, on estates valued at more than $3.5 million, up to the point where the federal inheritance tax kicks in. The tax would in effect step into the void vacated by the federal tax reform, which upped the estate exemption to $11.4 million . This bill would directly affect many small business and farm owners who seek to pass along their businesses to family. The tax base is not indexed for inflation, so as time goes on will capture more estates of lower value.

But wait, there’s more. In the category of products that are unpopular or unfashionable:

• A new tax on sweetened soft drinks, targeting a single product to pay for health programs that have many causes and beneficiaries.
• A new tax on oil and gas produced in California that will increase costs, prices, carbon emissions, out-of-state oil imports, and cut jobs in the hard-pressed San Joaquin Valley.
• A new tax on pain-killer pharmaceuticals, which will increase costs and potentially reduce availability of drugs for some of patients who most need pain medication.
• A new tax on tires to pay for water pollution that comes from many sources.
• Lurking in the background and awaiting launch: a new tax on business services.