The Family Business Association of California is one of the business groups that signed on to the following letter to Assembly Members Phil Ting, D-San Francisco, and Kevin McCarty, D-Sacramento, opposing their proposal to impose a 10 percent “surcharge” on corporate taxes. The effort is being led by the California Taxpayers Association (CalTax.) You can also view and download a fact sheet opposing the measure here.
CalTax and the organizations listed in this letter oppose ACA 22, one of the largest tax increases in state history. ACA 22 imposes a 10 percent “surcharge,” in addition to the existing state corporate tax rate of 8.84 percent, on California employers. Companies with annual net income of more than $1 million that are subject to corporate income and franchise taxes in California would be required to pay the new tax. We oppose this policy for the following reasons:
Creates the Highest Corporate Tax in the U.S. ACA 22 would more than double the state’s corporate tax rate, which already is the highest among the Western states, and one of the highest in the nation. This would represent one of the largest tax increases on California employers in the state’s history. The 18.84 percent corporate tax rate proposed by this measure would be the highest corporate tax rate in the United States, by a wide margin, and would create a huge incentive for California businesses to take their jobs and operations to other states. Texas, Nevada and Washington, for example, have no corporate income tax, and even New York’s 6.5 percent corporate tax would be roughly two-thirds less burdensome than California’s tax.
Creates a Competitive Disadvantage for Employers Who Stay in California. Higher corporate tax rates put California companies at a tremendous competitive disadvantage. The 49 other states all would benefit from California’s decision to make itself less attractive to employers. A thriving economy is the best source of growing revenue for important government programs, but by chasing jobs away, this proposal would hurt rather than help.
A 2017 study by the Washington, D.C.-based Tax Foundation found that the corporate tax falls predominately on labor, which it estimates bears at least 70 percent, if not all, of the burden. At some point, a tax increase on business impacts individuals through less economic growth, lower wages, higher prices, fewer jobs or decreased returns in retirement accounts.
California already has sufficient revenue to provide additional funding for programs that benefit the Middle Class. The Legislative Analyst’s Office stated in its review of the governor’s proposed 2018-19 budget: “Under our current revenue and spending estimates, and assuming the Legislature makes no additional budget commitments, the state would end the 2018-19 fiscal year with $19.3 billion in total reserves (including $7.5 billion in discretionary reserves).” The analyst added that revenue is expected to be even higher when the
budget is revised in May, and noted that these estimates do not account for possible economic stimulus from federal tax changes. When the state is bringing in surplus revenue, it simply is unnecessary to impose one of the largest tax increases in California history, targeted directly at companies that employ California workers and fuel the state’s economy.
For the foregoing reasons, we must oppose this legislation.
California Taxpayers Association
Advanced Medical Technology Association (AdvaMed)
Association of California Life & Health Insurance Companies
Biocom
California Ambulance Association
California Apartment Association
California Beer & Beverage Distributors
California Business Properties Association
California Forestry Association
California Hotel & Lodging Association
California Life Sciences Association
California Manufacturers & Technology Association
California Railroads
California Restaurant Association
California Retailers Association
CompTIA
Council on State Taxation
Family Business Association of California
Los Angeles Official Police Garages
Orange County Taxpayers Association
San Diego County Apartment Association
Silicon Valley Leadership Group
Western Growers Association
Western Manufactured Housing Communities Association
Wine Institute
Governor Brown delivered his 16th – and final – State of the State address last week, asserting that the “bolder path is still our way forward” on climate change, infrastructure investment, health care, education, and criminal justice.
In his remarks, the Governor pointed to a number of far-reaching, bipartisan measures passed in recent years – from pension and workers’ compensation reform to the Water Bond, Rainy Day Fund, and the Cap-and-Trade Program – that demonstrate “some American governments can actually get things done.”
Some of the major points he discussed in his speech included:
“We can’t fight nature. We have to learn how to get along with her.” He discussed the negative climate impact from forest fires and discussed better management practices for forests are needed.
He made a strong statement for California WaterFix - the controversial twin-tunnels project his administration has been working on its entire tenure.
The Governor included a pitch for the gas tax, which he said “wasn’t easy, but absolutely necessary.” The measure faces an initiative to repeal it this fall.
He made a strong pitch for high-speed rail, which garnered little applause and even some boos. He made a light-hearted statement that high-speed rail “will last 100 years — after all you are gone.”
He discussed his proposal for online community college for under-skilled Californians in the workforce and specifically stated it would not compete with traditional “brick and mortar” colleges.
The final policy point during the address was identifying criminal justice reform.
The State of the State is often just a place where the Governor can expand upon his budget priorities and policy focus for the year.
Legislature Considers Tax Increase on Businesses
California Democratic lawmakers have proposed a corporate income tax surcharge that would take half of the savings businesses get under the federal “Tax Cuts and Jobs Act” to fund programs for lower- and middle-income Californians. State Assembly members Kevin McCarty from Sacramento and Phil Ting from San Francisco introduced ACA 22, which would amend the state Constitution and create a 7 percent tax surcharge on corporations’ net income over $1 million, beginning January 2018. Revenue from the tax would be allocated to education spending and to services targeted to support lower- and middle-income Californians, including expanding the state’s earned income tax credit and providing funding for child care and healthcare programs.
California’s current corporate tax rate is 8.84 percent of net income; S corporations pay a tax of 1.5 percent of their net income. Schanz said the tax surcharge would apply to C corporations and S corporations but not limited liability companies, in order to protect small businesses. If approved by two-thirds majorities in the State Legislature, A.C.A. 22 would go before voters on the November 2018 ballot.
According to Ting and McCarty, the measure is in response to the recent federal tax reform that reduced the federal corporate tax rate from 35 percent to 21 percent, a 14 percentage point reduction. A release from McCarty’s office explained that the proposed 7 percent surcharge would be equivalent to half the savings California companies will realize from the reduced rate. The Sacramento Bee has reported that proponents of the measure estimated it could raise as much as $15 billion to $17 billion annually.
The lawmakers said the corporate tax cut will force reductions to federal spending on programs for the poor and for middle-income earners. “It is unconscionable to force working families to pay the price for tax breaks and loopholes benefiting corporations and wealthy individuals,” Ting said in a statement. “This bill will help blunt the impact of the federal tax plan on everyday Californians by protecting funding for education, affordable healthcare, and other core priorities.”
The measure isn’t the only legislation California lawmakers have proposed in response to the new federal tax law. One high-profile proposal by Senate President Pro Tempore Kevin de León, D-Los Angeles — S.B. 227 — would circumvent the new federal cap on state and local tax deductions by providing a state individual income tax credit in exchange for taxpayers’ charitable contributions to California. Taxpayers could then claim the federal charitable deduction instead of the capped SALT deduction.
Legislation that would have reinstated the Estate Tax in California if the Federal government repealed the tax died last week.
SB 726, by San Francisco Democrat Scott Wiener, would have asked voters to reinstate California’s estate tax if the federal government had repealed it. The bill became difficult to justify after the final federal tax reform legislation doubled the estate tax exemption for a period of eight years, forgoing an outright repeal.
After fierce opposition led by the Family Business Association, Senator Wiener was forced to amend the bill to prescribe procedures for fiscal review on any tax legislation considered that exempts products from sales and use taxes.
“Defeating this effort to reimpose the death tax in California has been our top priority for the past year, and we’re pleased that Senator Wiener has removed the language from his bill,” said FBA Executive Director Robert Rivinius.
“However, there is already an initiative campaign under way to reinstate the Death Tax to pay for higher student aid benefits — and given the costs associated with numerous legislative proposals, it is quite likely that resurrecting the death tax will be proposed again. FBA will remain vigilant and be ready to fight any new proposal.”
The combination of solid, widespread global growth; strong labor markets; low inflation; improving commodity prices; a slightly weaker dollar; and continued easy monetary policy from most central banks sets the stage for a good year. Moreover, the recently passed front-loaded tax cuts here in the U.S. will help by adding a pleasant tailwind to the domestic economy. The possibility of increases in infrastructure and defense spending, along with the continued deregulatory efforts of the Trump administration, make the domestic economic landscape heading into 2018 as strong as it has been since the end of the Great Recession.
However, there are also economic headwinds. The fear of inflation could spook the Federal Reserve to raise rates more rapidly than expected, which would slow growth and unsettle financial markets. A large confidence-shattering drop in the stock market, for any number of reasons, might hurt the economy. With the now-low tax rate on repatriated earnings, American firms might bring back substantial profits from abroad, and in the process, boost the dollar, which will hurt manufacturing activity. Lastly, geopolitical problems always lurk and could easily have negative growth implications.
With all this in mind, I expect full-year 2018 GDP to come in at 2.6%, slightly higher than the 2.3% growth experienced last year and the 2.1% average rate of growth since the end of the Great Recession. Headline inflation looks to pick up from roughly 2% to 2.3% in 2018, while core inflation (which excludes food and energy) will edge up only slightly. Because of the slow rise in core inflation, the Federal Reserve will probably have the luxury of time to raise the federal funds rate from where it is now, at 1.375%, to 2.125% by year’s end, with a quarter-point rate increase roughly every three or four months with the first one in March.
Turning our attention to the labor market, I expect net new monthly job growth to average 150,000/month, which, while down from 167,000/month in 2017, is excellent given that we are late in the business cycle and few potential workers remain on the sidelines. The unemployment rate will fall from 4.1% today to 3.6% or even 3.5% by year end, a rate not seen since the late 1960s! As the labor market tightens, nominal wage growth should increase in 2018, with average annual wage increases rising from 2.4% to 2.75% and as much as 3% by the end of the year: a healthy rise.
Because of faster GDP growth and the falling unemployment rate, 10-year Treasuries will end 2018 at 2.75%, and the rate on 30-year mortgages will be at or near 4.40%. However, continued easing of credit conditions and rising consumer spending due to continued strong employment growth and better wage growth will keep the economy and housing market on track.
Despite passage of the new tax bill, which is likely to modestly slow home sales and house price appreciation in some high-cost areas because of the reduced benefits of homeownership, housing starts should increase by about 7%, to 1.29 million. Single-family starts will likely total 930,000, up from 850,000, while multifamily starts should flatline at about 360,000. New and existing home sales should collectively rise by about 3% and end the year at 6.35 million, with mortgage purchase volume advancing by $100 billion, and refinance activity falling by about $200 billion due to the rise in mortgage rates.
Housing inventories will, regrettably, remain unchanged, and combined with limited new home building, home prices will rise by 5%. Motor vehicle sales will slip to 16.5 million from 17.1 million and the chances of a recession in 2018 is low given the very solid global economic conditions that currently prevail. I peg the chances of a recession in 2018 at just 15%.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.
In addition to the FBA priorities for 2018, here are some other issues that will impact businesses and the people of California in the coming year:
PAGA – the Private Attorneys General Act has been a disaster for many businesses in California. It can cost hundreds of thousands or millions of dollars to settle PAGA claims with the great majority of the money going to the state and the plaintiff’s lawyers while the supposedly harmed employees receive little. The Legislature has refused to deal with the issue, so a coalition of business leaders, including FBA, have been developing a ballot initiative to deal with it. Such initiatives are very costly including gathering qualifying signatures and then running an effective campaign. Fundraising is a major issue, as always.
Poverty – even though the published unemployment rate in California is around 5 percent, the gap between the “haves” and the “have nots” continues to widen, which is not a healthy situation for California. One gubernatorial candidate, Democrat Antonio Villaraigosa, has called for a revamping of California’s “Byzantine and bureaucratic regulatory framework” that impacts all businesses in the state. The hidden costs of doing business in California hits those below the poverty line especially hard.
Taxes – in addition to the proposed California estate tax measure, there will be other tax issues in play. There is never enough money for those in the public sector and they will be looking to weaken Proposition 13 by creating a “split roll” where commercial properties would pay taxes based on current market value. Such a scheme is estimated to create a $9 billion windfall and the costs would have to be passed on to consumers if businesses were to stay viable. In addition, much of California’s budget money come from the top 1 percent of earners through the personal income tax, which tops out at 13.3 percent. With the recent federal tax reforms, this will create yet another problem for California, with lots of creative solutions being kicked around, many of which don’t make much sense.
Housing – California needs hundreds of thousands of new housing units for its nearly 40 million residents. The recent efforts of the Legislature to solve the problem are more of a Band Aid than a cure. When you add in the new federal tax limitations on deductibility of property taxes and mortgage interest, you only exacerbate the problem.
Transportation – even though promising in his 2010 campaign that there would be no new taxes without voter approval, Governor Brown last year signed legislation that added 12 cents per gallon to the gas tax, 20 cents per gallon to the diesel tax, and created additional vehicle fees. There is an effort underway for a referendum on that legislation and polling for the repeal runs as high as 75 percent in favor of it.
Education – nearly half of California’s discretionary funds go to education, but there is still much to be desired in the ultimate success of students. Rather than push for reforms that would better spend the available funds, organizations like the California Teachers Association (union) just keep pushing for more money.
Public Pensions – With hundreds of billions of dollars of debt hanging over state and local governments due to the unfunded liability of public pension funds, something will have to give at some point.
In addition to all of this, we have other major issues like crime, healthcare, and the environment to deal with. It makes one wonder if California is a governable state, but organizations like FBA will keep fighting to make improvements for the business climate in the Golden State and do our best to kill proposals harmful to family businesses.
