This revolutionary tax proposal has the potential to drastically benefit the lives of over 1.6 million business owners in California.
Raising Taxes for Major Corporations to Extend Savings to Smaller Businesses
In April of 2023, Democrats in the California Senate announced that they plan to raise taxes for some of the largest corporations in America to cut taxes for nearly every other business. This Robinhood-inspired approach, while lauded by many, has been met with heavy opposition from the business community, even those within the Democratic party.
Democratic Governor Gavin Newsom brought attention to the idea that the budget would likely be very rocky, considering that the state is facing an approximate budget deficit of $22.5 billion.
All California-based businesses must pay a state-mandated tax rate of 8.84% on all income. This rate remains unchanged since 1997. However, the advent of this new proposal would split this into two separate tax rates. Companies would be required to pay 6.63% on the first $1.5 million of revenue. Any income above that initial sum would be taxed at the higher rate of 10.99%.
Instead of taxing the same across the board, this would provide a tax cut for a vast majority of businesses in California. In contrast, the tax increase would only apply to an estimated 2500 companies. After running the numbers, it was determined that this change would bring California an additional $7.2 billion in revenue. In contrast, a staggering 1.6 million companies would benefit from the lowered tax rate, reducing the state’s overall revenue by approximately $2.2 billion.
What Happens with the Extra $5 Billion in State Revenue?
With the remaining $5 billion estimated profit from making these tax adjustments for businesses in California, the state would help poor folks who claim tax credits. This would also be utilized to boost state-run programs that foster public education and childcare and help those facing homelessness.
While this sounds ideal for many, the proposal is far from becoming a law. All proposed tax increases require a two-thirds vote in both houses of the Legislatures. While Democrats control the majority of the seats in both chambers, leaders within the California state Assembly have not agreed to the plan as of yet.
If it receives a passing vote, it then makes its way onto the desk of Democratic Governor Gavin Newsom, who would also have to sign off on the proposal. Based on his historical behavior of resisting increasing taxes in the past, it is unclear whether or not he would choose to progress this proposal into law. He has been working to build up his national profile in his endeavor to potentially run for the presidency after 2024 and, therefore, may choose not to “rock the boat” with this tax change. In fact, in 2022, Newsom actively campaigned against a ballot initiative that suggested an increase in taxes for the rich in an effort to pay for environmental programs.
Anthony York, a spokesman for Newsom, made his feelings clear when he expressed that he believed it would be an irresponsible choice to jeopardize a decade’s worth of progress toward protecting the most vulnerable people while aiming to get California on solid fiscal footing.
Democrats in the Senate are Facing the Opposition Head-On
Despite the potential opposition, Democrats in the Senate still aim to sell the benefits of the tax proposal by framing it differently as the partial reversal of the Trump-era federal tax cuts signed into law in 2017.
While the California Chamber of Commerce initially opposed the plan, claiming that it would send the wrong message to investors of the state economy, those in favor of the proposal continued to soldier on.
Democratic state Senator Nancy Skinner of Berkley, chair of the Senate Budget Committee, believes this is a step toward a fairer economy for all. She believes that the Senate’s plan will provide much-needed tax relief for small businesses which act as the backbone of our economy that were deeply affected by inflation. She also went on to explain how it would reverse the effects of Trump’s tax cuts whereby massive corporations pocketed millions by forcing them to pay their fair share.
Others seem to like the idea behind the proposal but not the plan to execute it. Republican state Senate leader Brian Jones expressed his agreement that he appreciates that Democrats were hoping to give back to small businesses while also wondering, “Where have they been all these years when Senate Republicans have been putting forth real proposals to get this done?”
How Likely Are These Tax Changes Likely to Pass into Law?
While we cannot speculate on the likelihood that this tax proposal will become law, we can report that California’s leaders still appear undecided. The chamber’s president and CEO, Jennifer Barrera, is hesitant to agree to the approach at this time, stating that she believes it is a poor time to choose to test California’s ability to keep its head above water in terms of withstand the impact of an economic downturn.
Some folks, such as John Kabateck, the California state director for the National Federation of Independent Businesses, believe it is not wise to give a tax break to some at the expense of others. He agrees that the proposal looks promising upon initial glance, but he isn’t certain that it is taking the right approach.
It is also important to note that this proposal was based on the estimated budget deficit of $22.5 billion, which was released in January 2023. Since then, these numbers have likely changed, and therefore, a larger deficit could render the tax cut proposal nearly impossible to enforce. Additionally, there is difficulty surrounding the issue based on the fact that lawmakers will have to pass a spending plan before they know how much money the state has in its coffers because many California residents won’t pay their taxes until mid-October due to an extension that was offered after several winter storms caused immense damage throughout the state.
While the fate of this proposal remains to be seen, Democrats in support continue to move forward to pass it into law.
