Lawmakers Propose Major Tax Threats, Including Large Increase in Corporate Tax Rate
Major tax threats were introduced by state lawmakers last week, including proposals to more than double the corporate tax rate for targeted companies (SB 573, Smallwood-Cuevas) and to allow profit-seeking private lawyers to target taxpayers in court after state tax agency auditors determine that no wrongdoing has occurred (SB 799, Allen).
SB 573 would modify and recast California’s corporate tax rate structure based on how much employees are paid and whether they are located in or out of the United States.
The legislation would change the tax rate for publicly held corporations – currently 8.84 percent (10.84 percent for financial institutions) – to new rates of 7 percent to 13 percent (9 percent to 15 percent for financial institutions) based on the pay ratio between the highest-paid employee and the median salary for other employees.
A second prong of the bill would increase the new rates by 50 percent – to a maximum of 19.5 percent (22.5 percent for banks and financial corporations) – if the taxpayer’s total number of U.S. employees, determined on an annual full-time equivalent basis, is reduced more than 10 percent from the preceding tax year and the total number of contracted employees or foreign full-time employees increases during the same period.
“This bill would make California’s affordability crisis worse, pure and simple,” CalTax President Robert Gutierrez said. “By more than doubling taxes on targeted employers, SB 573 would increase costs for consumers as the tax gets passed down in the form of higher prices for goods and services in every area of life.”
Gutierrez said SB 573 also would put many Californians out of work, “as this bill would be the last straw for many employers, convincing them that California is simply uncompetitive when it comes to running a business.”
Corporation Tax Rates Under SB 573
If the compensation ratio is: The tax rate on net income would be*:
Over zero but not over 25 7 percent
Over 25 but not over 50 7.5 percent
Over 50 but not over 100 8 percent
Over 100 but not over 150 9 percent
Over 150 but not over 200 9.5 percent
Over 200 but not over 250 10 percent
Over 250 but not over 300 11 percent
Over 300 but not over 400 12 percent
Over 400 13 percent
*The rate would increase 50 percent if the total number of U.S. employees is reduced more than 10 percent from the preceding tax year and the total number of contracted employees or foreign full-time employees increases during the same period. For example, the 13 percent rate would increase to 19.5 percent.
Each year, corporate filers would be required to include in their combined report a “detailed compensation report” to the Franchise Tax Board with their timely filed original returns.
The new top rate of 19.5 percent is higher than the rates imposed by all other states that impose a corporate income tax. SB 573 would catapult California far past New Jersey (11.5 percent) as the state with the heaviest tax burden on corporate taxpayers. The third-ranking state, Minnesota, is at 9.8 percent.
The legislation is similar to several measures introduced and defeated from 2014 to 2020.
SB 573 was one of several hundred “spot bills” amended last week as lawmakers raced to beat the deadline for placing substantive language into placeholders that were introduced prior to the February 21 bill introduction deadline.
Other major tax threats that emerged:
Exposing Taxpayers to Frivolous Suits. SB 799, by Senator Ben Allen, would weaponize the state’s “False Claims Act” by extending it to tax matters – empowering the state attorney general and profit-seeking private lawyers to target taxpayers in court even after state tax agency auditors and lawyers determine that no wrongdoing has occurred.
Allen’s bill would apply the act to “claims, records, obligations, or statements made under the Revenue and Taxation Code if the damages pleaded in the action exceed $200,000, or the taxable income, gross receipts, or total sales of the individual or entity against whom the action is brought, as specified, exceeds $500,000 per taxable year.”
The bill is sponsored by Attorney General Rob Bonta.
A similar proposal was introduced and defeated in 2020. CalTax and others noted at that time that the legislation would open the floodgates for costly and frivolous tax litigation, similar to the experience with California’s Private Attorneys General Act (PAGA) and Americans With Disabilities Act (ADA).
Additionally, SB 799 would create double jeopardy for taxpayers, as businesses would have to defend themselves in court even after being cleared by the tax agencies.
Individuals and businesses that don’t strictly follow tax laws are penalized heavily in California. The FTB has an assortment of 79 penalties, including a fraud penalty imposed at 75 percent of the disputed amount (in addition to the actual tax liability), and large penalties for missing deadlines to file and pay taxes. Many of the penalties are imposed even if the taxpayer made a good-faith attempt to comply with the law.
Tax on Vacant Commercial Property. SB 789, by Senator Caroline Menjivar, proposes an annual tax of $5 per square foot on commercial property that was vacant for 182 days during the previous year – regardless of whether the days were consecutive – with limited exceptions relating to active renovations, natural disasters, and “legal or regulatory barriers … preventing occupancy.”
“Prolonged vacancies in commercial properties undermine local economic vitality, reduce tax revenues, and contribute to neighborhood deterioration,” the bill states.
The tax would be administered by the California Department of Tax and Fee Administration rather than the State Board of Equalization, which administers existing property taxes, and the revenue would be earmarked for the California Dream for All Program, a down payment assistance program for first-time homebuyers.
The tax would be due March 15 every year, and the state could impose a civil penalty of up to 75 percent of the taxes owed if it alleged that the property owner made an intentional misstatement or fraudulent claim.
A case pending in the First District Court of Appeal could be an issue in the debate over this bill. In that litigation, San Francisco officials are appealing a trial court judge’s ruling that San Francisco’s vacancy tax on residential property is unconstitutional. Property owners sued on the ground that, among other things, the tax violates the Takings Clause of the U.S. Constitution, which forbids the government from taking private property for public use without just compensation. Earlier this month, the San Francisco Board of Supervisors suspended enforcement of the tax pending the outcome of the litigation.