Corporate Tax

Is the corporate tax hike too sizzling?

Dan Walters: CALmatters comment

Bill 71 is one of the most controversial laws of the year – a hefty hike in corporate and income taxes to fund new efforts to end homelessness.

MEP Luz Rivas, a Democrat from Arleta, is carrying the bill with the support of dozens of left-wing social service organizations.

“Now is the time to take big, bold steps to address this major political issue. Californians stress that they want lawmakers to take action,” Rivas said after the meeting’s Revenue and Taxation Committee last week AB 71 had approved. “Rural and urban local governments across the state need this financial assistance right now to keep this current crisis from turning into a full-blown disaster.”

However, an equally large number of corporate groups reject the bill. Quoting recent corporate moves to Texas, she said it would encourage even more employers to avoid expensive California.

“The remaining companies will be exposed to an enormous competitive disadvantage,” the opposition coalition told the legislature. “Your only answer will be to lower or not raise wages and benefits for their workers and to move new employees to lower-cost jurisdictions to stay competitive.”

The disagreement extends to uncertainty about how much AB 71 would increase. Rivas says it could be “up to $ 1 billion a year,” opponents say it could be $ 2.4 billion a year, and the state’s Franchise Tax Board estimates it at $ 950 million for a couple of years and then sinks to it $ 600 million.

The discrepancy arises from the very complex nature of the legislation and the impossibility of calculating how companies would react to the reversal of a major change in corporate tax policy introduced in 1986.

California has for many years followed a “one size fits all” approach to taxing multinational corporations. They had to report their global earnings and use a rigid formula to calculate how much California is due for taxation.

Overseas-based companies, particularly in Japan and the UK, hated the reporting requirements, which they considered intrusive, and urged California to change them. The problem arose during Jerry Brown’s first governorship and initially he defended the California system to do a 180 degree flip after visiting Japan.

Brown attributed his change of heart to “fluffy data” from top Franchise Tax Board manager Martin Huff, but Huff publicly called Brown a liar. Huff had also angered lawmakers by saying their “daily rate” payments should be taxed, and eventually Brown and lawmakers forced Huff to resign.

Meanwhile, the unified tax controversy continued to ebb until Brown’s successor, Republican George Deukmejian, and the 1986 legislature ruled that companies could only report data about their California tax operations, known as the “Water’s Edge” method.

Decades later, the system was optimized again to benefit Californian companies with multistate or multinational activities.

AB 71 would severely restrict the “water at the edge” option by obliging taxpayers of companies and private individuals to include income from foreign companies that are considered unequally protected, and partially adopt the new federal tax rules that were introduced in 2017 by former President Donald Trump were signed.

The move could put Governor Gavin Newsom in place. In a recall election later this year, he told lawmakers not to send him any new major tax hikes for individuals or businesses, but at the same time made homelessness a high priority issue.

Democratic lawmakers have tried to protect Newsom from controversy by suspending action against high-profile measures it approved in principle, such as banning fracking and single-paying health care.

AB 71 could also fall into this category too hot to handle.

CALmatters is a public interest journalism company that explains how the California State Capitol works and why it matters. For more columns by Dan Walters, visit calmatters.org/commentary.

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