(June 15, 2009) The California Chamber of Commerce and other employer groups have been pointing out to state decision-makers that the last two state budget compromises mean a $10+ billion increase in employer tax payments during the next two budget years.
The increased tax burden is the result of a combination of tax increases, borrowing and acceleration of tax revenues from businesses in the next two years and beyond.
While some economic recovery reforms were also adopted, many companies investing in jobs and operations in California—or attempting to recover from the economic downturn—will suffer permanent harm from these tax increases.
Following is a recap of increased tax liabilities for employers due to tax changes adopted as part of the 2008-09 budget in AB 1452 (Chapter 763, Statutes of 2008) and SBX1 28 (Chapter 1, Statutes of 2007-08), as well as ABX3 3 (Chapter 18, Statutes of 2009-10) for the 2009-10 budget.
September 2008 Tax Increases/Accelerations
1. Strict Liability Penalty that Punishes Reasonable Tax Disputes (SBX1 28): Estimated to raise more than $2.5 billion from employers as of June 1, 2009.
This imposed a new, 20 percent strict liability penalty in addition to all existing penalties, which applies to “understatements” of tax liability of $1 million or more. It applied retroactively to tax year 2003, with a May 31, 2009 deadline, and, prospectively, is permanent. No other state has this penalty. It applies even to reasonable taxpayer behavior where there is no culpability, forcing companies to overpay their taxes every year, to take into account amounts reasonably in dispute or outside of their control, in order to ensure no 20 percent penalty is imposed. Overpayments will eventually be partially refunded, but the state will have received a low-interest loan from businesses, with no deadline for refunds.
2. Limit on Research and Development Tax Credit and Enterprise Zone Program Credits (AB 1452): Estimated to raise $900 million from employers.
This bill imposed a two-year limit on the use of all business tax credits, including research and development and enterprise zone credits, California’s only remaining statewide investment incentive tax credits. For tax years 2008 and 2009, these credits are capped at one-half of the taxpayer’s liability, with only very small businesses exempted. This limitation will result in a mid-stream change and tax increase for companies that made investment decisions and plans in reliance upon them. Credits that could have been used during the limitation period are permitted to be carried over, but the lost time-value of money to companies is permanent.
Offsetting Improvement: Effective January 2010, tax credits (but not enterprise zone credits per SBX1 28) may be shared among a related group of affiliate or subsidiary companies, referred to as “unitary utilization.” This will help some but not all companies, due to individual circumstances.
3. Suspension of Net Operating Loss (AB 1452): Estimated to raise $1.6 billion over two years.
This bill suspends for two years, tax years 2008 and 2009, the ability of businesses and individuals to deduct net operating losses (NOL). Very small businesses are exempted. The NOL deduction gives businesses more flexibility to manage losses they experience within timeframes and cycles that differ from the arbitrary and rigid government tax filing deadlines. The suspension will have a direct impact on marginally profitable businesses attempting to emerge from losses due to increased tax liability and reduced cash flow.
Offsetting Improvement: After the two-year suspension period, treatment of losses will partially conform to federal carryover and carryback, which benefits some but not all companies, due to individual circumstances.
4. Accelerated Estimated Tax Payments (SBX1 28): Estimated to raise $2.3 billion over two years.
Beginning January 2009 and ongoing, business and individual taxpayers must pay more of their estimated taxes earlier in the year. The bill imposes a new 100 percent accuracy requirement on taxpayers with incomes over $1 million. Instead of four payments of 25 percent, the first two payments will be 30 percent and the last two 20 percent. This will reduce cash flow for independent contractors and other businesses, small and large.
5. Accelerated Limited Liability Company Fee (AB 1452): Estimated to raise $360 million from employers.
Limited liability companies (LLCs) must pay their annual fees during the first six months of the current tax year, beginning January 2009 and permanently thereafter. A 10 percent penalty will be assessed if businesses underestimate. The new fee deadline will result in a double payment of the fee in the early part of 2009—the prior year’s LLC fee and the current year’s fee are due. This will pose a hardship for small companies with limited cash flow. Also, LLCs must accurately estimate the following year’s fee liability, or be subject to a 10 percent penalty.
February 2009 Tax Increases
The February 19, 2009 state budget included $12.5 billion in tax increases in ABX3 3, including more than $3.5 billion having an impact on the California business community.
1. Sales and Use Tax Rate Increase (ABX3 3): Estimated to raise more than $2.4 billion from employers.
Businesses in California pay more than 40 percent of the sales tax. The budget accord increased the sales tax rate starting April 1 by a full one cent in order to raise almost $6 billion over the next two years, of which businesses will pay roughly $2.4 billion.
2. Vehicle License Fee Increase (ABX3 3): Estimated to raise $425 million from employers.
Businesses in California pay approximately 25 percent of the vehicle license fee (VLF). The budget agreement increased the VLF rate to 1.15 percent starting May 19 in order to raise about $1.7 billion on an annual basis, of which businesses will pay about $425 million annually.
3. Personal Income Tax Rate Increase (ABX3 3): Estimated to raise $1 billion from employers.
Many businesses in California are organized as limited liability companies, Subchapter S corporations, and partnerships, among others, all of which pay under the Personal Income Tax Law. Accordingly, these businesses will also pay the increases in the personal income tax rates of .25 percent. Almost all will now pay the highest marginal rate of 9.55 percent for the 2009 and 2010 tax years (which does not include the 1 percent surcharge for mental health funding). As such, the business community will pay more than $1 billion during this two-year tax increase.
Staff Contact: Kyla Christoffersen