With the last day for introduction of California legislation ending on February 18, a number of significant bills that could potentially affect California businesses snuck into the fray.
The new tax bills include legislation that provides for “clawbacks” and sunsets of tax incentive legislation, disclosure of some recipients of tax incentives, and the ability of local governments to impose personal and corporate income taxes. SB 364 (Yee) requires any new business tax incentive legislation to provide for the incentive’s recapture if the claimant incurs a net employment reduction. A net employment reduction is determined by comparing the average number of full-time employees over the prior three years and the number of employees in the current taxable year. SB 508 (Wolk) requires all new tax credit legislation to contain performance metrics and to sunset seven years from the date of enactment. AB 318 (Skinner) requires all publicly traded corporations that claim tax incentives to be named along with the claimed amount and posted on a searchable database on the Internet. Because the bills require a mere majority vote of both houses of the Legislature, there is a strong possibility that these bills will be enacted.
With respect to local governments, SB 653 (Steinberg) provides counties with broad latitude to enact additional taxes. Specifically, it authorizes the board of supervisors of any county to place any type of tax on its local ballot, including but not limited to personal and corporate income taxes and local sales and use taxes. While California cities have local sales and use taxes, no California localities impose income taxes. Thus, the threat of expansion of California income taxes to localities (California has 58 counties and hundreds of cities) poses potentially significant administrative and tax costs to California businesses and residents. Because this bill authorizes taxes for a subsequent public vote, it requires a mere majority of both houses of the Legislature for passage.
Apart from the tax bills introduced in the regular legislative process, the Governor has proposed a variety of tax measures for inclusion in the California budget, including: (1) a five-year extension of increases to the personal income tax, sales tax, and vehicle license fee; (2) a mandatory single sales factor apportionment formula combined with mandatory market sourcing of sales of intangibles and services; (3) the retroactive elimination of enterprise zones; and (4) a tax shelter amnesty. While California budget negotiations remain ongoing, it is unclear whether Republicans will contribute to the 2/3 supermajority needed to pass the Governor’s tax proposals. In California, a 2/3 vote is needed for any increases in state taxes, while a mere majority vote is required for budget appropriations. For now, it appears that limitations on new tax incentives, locality tax expansion, and a number of other items, including nexus expansion and the Governor’s tax proposals, remain the subject of debate.