Due to California’s significant budget deficits in the current and future fiscal years, businesses will pay higher taxes to help bridge the gap between spending and revenues.
At issue are taxes businesses pay to the state, including no longer being able to take net operating loss deductions—which have allowed them to carry losses forward and pay fewer taxes—and debts owed to the federal government for unemployment benefits paid during the pandemic.
According to a May report from the nonpartisan Legislative Analyst’s Office, not being able to take the operating loss deduction could cost businesses statewide up to $2 billion in the current fiscal year and more than $5 billion subsequently.
Such places “California out of step with every other state in the country that levies a corporate income tax,” a coalition of business advocates and chambers of commerce from across the state wrote in a letter—shared July 12 with The Epoch Times—to the Legislature in May. “While other states are trying to jump-start job creators, these provisions would do the opposite to California employers.”
Some businesses’ taxes could increase significantly in the current and future years, according to experts.
Analysts said businesses benefit by using the accounting method to carry forward losses and deduct them from income in future years.
“This allows businesses to smooth profits and losses such that businesses with similar profits over time pay similar taxes,” analysts wrote in the report. “Without this smoothing, businesses in riskier or more innovative industries ... could end up paying more taxes than businesses with similar but more stable profits.”
The analyst’s office said certain industries—including technology, transportation, and entertainment, among others—will be disproportionately affected by the change, leading to a “less equitable tax system.”
Starting in 2024, the rules will apply to all businesses with at least $1 million in annual revenue.
One state lawmaker said the suspension of the deductions will negatively impact businesses.
“It’s grossly unfair,” Sen. Roger Niello, vice-chair of the Senate’s Budget Committee, told The Epoch Times. “When a business is losing money, that means they’re deleting their capital, and the net operating loss is intended to allow the businesses to replenish their capital while they start making money again.”
Lawmakers have used the so-called net operating loss suspensions repeatedly since the Great Recession in 2008 to balance the budget. The deductions were also paused during the pandemic.
Such have negatively impacted businesses statewide, analysts said.
“The frequency at which this approach has been used is now starting to raise questions,” analysts wrote. “At this rate, it seems reasonable to ask whether suspensions have begun to meaningfully undermine the purpose of allowing [such] deductions in the first place.”
Other changes that will cause some businesses’ taxes to increase are limits to credits of $5 million—even if companies would normally be eligible for more.
Some experts believe the higher taxes will disincentivize investment in California and could spur some existing businesses to flee the state.
“This is the kind of thing that will make you not want to be in California,” Susan Shelley, president of communications for the Howard Jarvis Taxpayers Association—a Sacramento-based organization that advocates for taxpayers—told The Epoch Times July 12.
Also impacting businesses is debt from overdue loans the state owes the federal government.
California defaulted in 2021 on $18.6 billion in unemployment debt which originated during the pandemic.
Additionally, the state paid billions of dollars in fraudulent claims at the time, due to antiquated systems and limited oversight, according to audits by the state’s Economic Development Department.
Analytics firm LexisNexis estimated the total cost of the fraud at $32.6 billion, which will likely never be recovered due to the use of stolen identities by criminals to file illegitimate claims.
Such resulted in the Internal Revenue Service increasing the unemployment tax rate for California businesses by an additional.3 percent annually beginning in 2023. The rate will continue to spike until the loan is paid off.
The new 2024–25 fiscal year budget allocates funding to cover the interest on the loans but leaves businesses responsible for the debt.
Negotiations persisted for months between Gov. Gavin Newsom and the Legislature regarding how best to handle the state’s fiscal dilemma.
In the final days before the Legislature’s summer recess began July 4, lawmakers passed a budget with dozens of additional so-called trailer bills—which include additional amendments to further define expenditures and revenue sources.
Gov. Gavin Newsom subsequently signed the bills into law.
“This agreement sets the state on a path for long-term fiscal stability—addressing the current shortfall and strengthening budget resilience down the road,” Mr. Newsom said in a press release.
While presenting his revised budget proposal in May he repeatedly rejected the idea of raising taxes when asked if he supported such a plan.
“No, I’m not prepared to increase taxes,” Mr. Newsom said in May at his budget revision press conference. “I feel strongly that we have to live within our means.”
He cited the state’s existing corporate tax rate of 8.84 percent and personal income tax as high as 13 percent as reasons he preferred not to rely on new revenues to balance the budget.
“We have among the highest tax rates in the United States of America for high wage earners,” Mr. Newsom said “We have among the highest tax rates ... for corporate taxes.”
Mr. Newsom did not respond to requests for comment on deadline.
