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California Lawmakers’ Tax Voucher Stimulus Plan Poses Risks

Aug. 24, 2020, 8:45 AM

An untried idea to boost the pandemic-stricken economy by selling vouchers to people and businesses willing to pay their California incomes taxes years ahead of time would pose risks to the state and to buyers if Democratic lawmakers get it off the ground.

Lawmakers have until they adjourn for the year Aug. 31 pass a bill directing the Franchise Tax Board, Treasurer, and Department of Finance to hammer out the voucher plan. Those authorities would submit a proposal by March 1, 2021 that irons out the details—including the size of the discount for buyers, possible tax consequences, and whether the vouchers would be considered a security or a debt.

If it works, lawmakers estimate the plan would accelerate $25 billion in tax revenue they would use immediately to help small businesses, working families, and the green economy. If it doesn’t work, the Legislature and Gov. Gavin Newsom (D) may be forced to take a closer look at tax increases, more cuts, or borrowing to weather the economic downturn.

“It’s a way to invest in California now,” Assembly Budget Committee Chair Phil Ting (D) told Bloomberg Tax. “We think it’s very doable if we put our minds to it.”

Lawmakers are counting on people who could buy the vouchers—tech executives with large capital gains taxes on the horizon, for example, or companies with plenty of cash on hand—to assume risk and help the economy. Buyers would need confidence that they could use the vouchers for future tax liabilities or sell them, hopefully for a profit.

Newsom’s office didn’t respond to a request for comment on the proposal.

Not everyone is as optimistic as the legislators who are working on the plan.

A Workaround

“It seems like a workaround to avoid more difficult political discussions,” said Chris Hoene, executive director of the California Budget and Policy Center.

It’s unclear whether the voucher plan would raise the expected revenue, especially compared with options such as raising taxes or borrowing, Hoene said. Some of the budget center’s funders, including labor unions, support other recent proposals to raise income taxes or impose a tax on wealthy Californians as the best way to weather the economic hits.

Although those tax proposals aren’t likely to advance this year, the specter of their gaining traction could dampen enthusiasm for the vouchers, Clay Stevens, director of Aspiriant, a wealth management firm in Irvine, Calif., told Bloomberg Tax.

“With this ‘soak the rich’ mentality, people will be less anxious to do this even if it is a good investment,” Stevens said.

Under the broad outlines of the proposal, the state treasurer would sell vouchers that could be redeemed for tax liabilities as soon as the following year, and could be carried over to future years. A total of $3 billion in vouchers could be offered for each year from 2024 to 2033. Although the discount rate isn’t set yet, lawmakers have said it would likely be about 2% to 3%.

Voucher holders would be able to sell them without paying California tax on any gain, but it is unclear whether they would be tax-exempt at the federal level.

The tax consequences are less important than the rules for transferring the vouchers to others, Stevens said. Without solid trading rules, a voucher holder who wants to move out of California or has no tax liability on which to apply the voucher in the designated year would lose the investment.

The voucher proposal is “unusual,” said Josh Goodman, senior officer with the state fiscal health project at the Pew Charitable Trusts.

Fiscal Stress

It’s more common for states in times of fiscal stress to pull revenue from the next fiscal year to the current year—moving up the payment date for sales taxes, for example, Goodman said.

“The question is will you have the revenue to support what you want to support in the future years where you’re pulling money from?” he said.

The $3 billion annual cap would minimize the risk of pulling revenue from future years, California Deputy Treasurer Tim Schaefer told Bloomberg Tax.

State personal income tax revenue was $94.7 billion in fiscal year 2020, and the annual voucher amount is small enough that “it’s not something that would put the state into a tailspin,” he said.

Howard Cure, head of municipal research at Evercore Wealth Management, said the voucher proposal leads to the state taking on more risk and replacing the role of the federal government in spurring economic recovery.

“These are expensive, noble programs that they’re trying to do,” Cure said.

He said credit ratings companies might downgrade the state’s ratings because of the program’s risks.

While he doesn’t think California would default on its bonds, the program could lead to the state’s borrowing costs rising relative to benchmark debt, Cure said. And it may result in his firm “scaling back on our holdings” of California bonds.

But the idea is worth trying, especially since the federal government’s response to the pandemic has been uneven, California Treasurer Fiona Ma (D) told Bloomberg Tax.

Stimulus Package

“This proposal offers credible aid and stimulus to our economy—presently the fifth largest in the world,” Ma said. “It deserves a thorough analysis and when passed, will offer tangible benefits to our state.”

The voucher proposal is part of a larger stimulus package that includes rent relief and a tax credit for landlords. The rent relief plan could be part of another agreement being negotiated between lawmakers and Newsom to extend an eviction ban that expires Sept. 1.

The stimulus plan also calls for securitizing revenue from three different sources: a 2017 gasoline tax increase, the state’s cap and trade program for emissions of greenhouse gases, and fees the California Public Utilities Commission levies on broadband services.

Bonds issued against gas tax revenues could be at least $5 billion, but it is unclear yet how much the state could securitize from cap and trade or broadband revenues, Schaefer said.

To contact the reporters on this story: Laura Mahoney in Sacramento, Calif. at; Romy Varghese at

To contact the editors responsible for this story: Jeff Harrington at; Yuri Nagano at