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California Senators Offer $25 Billion Income Tax Prepayment Plan

May 12, 2020, 9:44 PM

Corporations and individuals could prepay their California income tax for 2024 through 2033 at a discount to help the state build a $25 billion economic recovery fund under a proposal from California Senate leaders.

Senate President Pro Tempore Toni G. Atkins (D) and other Democratic senators crafting the state’s budget want to create the program in the next few months so the state can offer about $3 billion in total vouchers for each year from 2024 to 2033 to taxpayers who voluntarily prepay. The senators said the option would help them avoid tax increases and budget cuts during the economic downturn.

Senators offered the proposal two days before Gov. Gavin Newsom (D) is scheduled to issue a revised budget proposal for the fiscal year that begins July 1. Lawmakers will debate the budget plan in the next month and must enact a final version by June 15.

The $25 billion raised through the proposal wouldn’t go into the state general fund to help close the budget deficit created by the economic fallout from the coronavirus pandemic. Newsom said he expects the deficit to be $54 billion through June 2021.

Instead, the money would be placed in a recovery fund to be spent on assistance for small businesses and nonprofits, worker retraining, acceleration of infrastructure projects, and other items that would boost the economy.

Proposal Details

Details are yet to be worked out, but the discount for prepayment could be about 2% to 3%, which is the range that the state now gets on its sales of municipal bonds.

“You’re just paying in advance to be able to have the state have some money, and then you have a voucher to pay your taxes in the future, so it’s literally looking like any financial instrument,” Sen. Robert Hertzberg (D) said during a media briefing on the proposal.

Participants could sell their vouchers to others at any time without paying California tax on gain from those sales. It’s unclear whether they would be tax-exempt for federal tax purposes.

Senators also want to offer tax credits to landlords as part of a plan to help stabilize housing during the downturn. Under the proposal, renters and landlords would enter into agreements with the state allowing renters to defer rent and repay it, without interest, over 10 years beginning in 2024.

Landlords would receive tax credits equal to the amount of lost rent to be spread equally over the same 10-year period. They could also sell the credits if they need cash immediately.

The rent and tax prepayment proposals could be included in the budget plan or could be enacted as separate legislation.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Sony Kassam at skassam1@bloombergtax.com