With the state facing a budget deficit of approximately $73 billion, according to the Legislative Analyst’s Office, the California Budget and Policy Center—a nonpartisan public policy research nonprofit—is proposing increasing taxes on corporations to close the gap.
“Enhancing fairness in California’s corporate tax system has the potential to raise several billion dollars in additional revenue for the state,” the budget and policy center told The Epoch Times in an April 3 email. “In conjunction with other budget tools, these revenues could help prevent cuts to vital services, safeguarding the well-being of Californians struggling to make ends meet.”
In addition to creating a progressive tax structure for corporations, the organization is also suggesting that the state limit tax breaks for corporations and eliminate a “loophole” that allows companies to offshore profits.
The amount of money generated by the changes would depend on the combination of policies adopted by the state, according to the group.
While some are concerned that raising taxes on businesses could reduce the number of companies that invest in the state and could drive existing businesses to other locations, the organization stated that taxes only represent a small fraction of expenses.
“It’s important to note that California corporate taxes constitute a very small share—just around 0.1%—of businesses’ expenses and are unlikely to be the primary determinant for corporations when choosing where to do business,” the policy center stated. “Moreover, since the portion of a corporation’s income taxed by California is based on the sales they make in the state, there is minimal incentive for them to move jobs out of the state if they want to continue capitalizing on California’s substantial customer base and robust economy.”
The proposal seeks to emulate the state’s progressive personal income tax, requiring companies making the highest profits to pay more.
“Currently, corporate profits are highly concentrated, with a tiny share of immensely profitable and powerful corporations earning the lion’s share of profits,” the proposal reads.
While accounting for 0.6 percent of corporations operating in the state, those profiting more than $10 million per year amount to 63.5 percent of all corporate profits generated in 2021, the latest data available, according to the state’s Department of Finance. Approximately 95 percent of corporations generate profits of less than $1 million per year.
Corporate profits in California totaled $368 billion in 2021, a 155 percent increase since 2002 in inflation-adjusted terms.
Highlighting the significance of California’s economic potential for businesses, in terms of population and wealth density, the budget and policy group stated that an equitable approach to taxation will benefit the state.
“Despite the current budget shortfall, California is home to great wealth,” the proposal reads.
The proposal also suggests that inequalities are detrimental to the future of California.
“Due to the enduring legacies of systemic racism, sexism, and xenophobia, this wealth remains in the hands of a select few, perpetuating entrenched gender, racial, and other inequalities,” the proposal reads. “To realize our collective vision for a just and equitable Golden State, policymakers must equitably tap California’s abundant resources to uplift Californians who have long been blocked from our state’s prosperity.”
Tax breaks that cost the state billions of dollars per year could be revisited, especially those that benefit “highly profitable corporations,” the group suggested.
“Ineffective or highly inequitable tax breaks should be eliminated or restructured to make them more effective and equitable while reducing the cost to the state,” the proposal reads.
Another area of concern is existing tax credits that permit corporations to reduce tax liabilities to zero. The nonprofit proposes limiting the amounts allowable each year.
“This would ensure that these large corporations make meaningful contributions to California’s vital public services, upon which their businesses and workers depend,” the proposal reads.
While new tax structures could prove beneficial, a focus on tax havens—including an accounting trick known as the “water’s edge loophole,” where profits are disguised as occurring offshore to avoid taxation—would also be needed to ensure that profitable corporations are paying more in taxes, according to the authors. By eliminating the loophole, the state could capture an additional $4 billion in revenue annually, the proposal states.
Given the state’s fiscal dilemma, the proposal suggests that a multifaceted approach to revenue generation is needed to close the gap and avoid making cuts to core programs and services.
“As policymakers navigate a challenging budget year and work toward a California for all, it’s crucial that fair taxation and increasing revenues be part of the solution,” the report reads. “By tapping into California’s great wealth and reallocating resources to benefit all Californians, policymakers can chart a path toward a more just and equitable Golden State—where economic opportunity, affordable housing, accessible health care, quality education, childcare, and other basic needs are within reach for every Californian.”
