Walters: Is Corporate Tax Hike Too Hot to Handle?
Assembly Bill 71 is one of the year’s most contentious pieces of legislation —a hefty increase in corporate and personal income taxes to finance new efforts to end homelessness.
Assemblywoman Luz Rivas, an Arleta Democrat, is carrying the bill with backing from dozens of left-of-center social service organizations.
“Now is the time to take big, bold steps in addressing the number one policy issue Californians stress they want the Legislature to take action on,” Rivas said after the Assembly Revenue and Taxation Committee approved AB 71 last week. “Rural and urban local governments throughout the state need this financial support immediately to prevent this current crisis from becoming a full-blown catastrophe.”
However, an equally large number of business groups oppose the bill, citing recent corporate moves to Texas and saying it would encourage even more employers to shun high-cost California.
Disagreements About the Uncertainty of How Much Would be Raised
“The companies that remain will be placed at a tremendous competitive disadvantage,” the opposition coalition told legislators. “Their only response will be to reduce or not increase wages and benefits for their workers, and move new hires to lower cost jurisdictions to stay competitive.”
The disagreements extend to uncertainty over how much AB 71 would raise. Rivas says it could be “up to $1 billion a year,” opponents say it could be $2.4 billion a year and the state Franchise Tax Board puts it at $950 million for a couple of years, then dropping to $600 million.
The variation stems from the very complex nature of the legislation and the impossibility of calculating how corporations would react to undoing a major change in corporate tax policy enacted in 1986.
The Unitary Taxation Controversy
For many years, California utilized a “unitary” approach to taxing multinational corporations —requiring them to report their global earnings and, using a rigid formula, calculate how much should be attributed to California for taxation.
Foreign-based companies, especially those in Japan and the United Kingdom, hated the reporting requirements, which they regarded as intrusive, and pushed California to change it. The issue arose during Jerry Brown’s first governorship and initially he defended California’s system, only to do a 180-degree flip after visiting Japan.
Brown attributed his change of heart to “flaky data” from the Franchise Tax Board’s top executive, Martin Huff, but Huff publicly called Brown a liar. Huff had also angered legislators by saying their “per diem” expense payments should be taxed and eventually, Brown and legislators forced Huff to resign.
Meanwhile the unitary taxation controversy continued to simmer until Brown’s successor, Republican George Deukmejian, and the Legislature decreed in 1986 that corporations could opt to report data only on their California operations for taxation, known as a “water’s edge” method.
Decades later, the system was tweaked again to favor California corporations that had multi-state or multinational operations.
AB 71 would severely limit the “water’s edge” option by requiring corporate and personal taxpayers to include income from foreign operations deemed to have been inequitably sheltered from taxation, partially adopting new federal taxation rules signed by former President Donald Trump in 2017.
Newsom Under Pressure to Address the Measure
The measure could put Gov. Gavin Newsom on the spot. Facing a recall election later this year, he’s told the Legislature not to send him any new major personal or corporate tax hikes, but at the same time has declared homelessness to be a high-priority problem.
Democratic legislators have attempted to shield Newsom from controversy by suspending action on high-profile measures that he had endorsed in principle, such as a ban on fracking and single-payer health care.
AB 71 could also fall into that too-hot-to-handle category.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.