Newsom to Limit Corporate Tax Breaks to Curb California Deficit

May 14, 2020, 10:19 PM

California Gov. Gavin Newsom (D) wants to scale back corporate tax breaks to help close the pandemic-induced budget deficit.

The governor’s revised budget plan for the fiscal year that begins July 1 would temporarily suspend net operating loss deductions for medium and large businesses, and prohibit use of the research and development tax credit and other incentives for corporations and individuals to offset more than $5 million in tax.

The changes would increase state revenue by $4.5 billion and help close a deficit that Newsom estimates will be $54 billion through June 2021.

The rollbacks “recognize the disproportionate tax relief that has been provided to larger corporations, compared to small businesses, which has resulted in relatively lower tax payments,” Newsom said in the summary of his revised budget plan released May 14.

The changes would be in effect for three years, with the definition of a medium or large business to be determined during negotiations with lawmakers.

Newsom’s overall plan calls for cutting $20 billion from his $153 billion January proposal for the state general fund, through a 10% cut to state workers’ pay and other adjustments. His plan would reduce general fund spending by $15.8 billion compared to the current year’s budget. But he said he would try to reverse some cuts if Congress and President Trump approve more federal aid.

When Newsom first proposed next year’s budget in January, he was working with a $5.6 billion surplus and a $17 billion reserve fund. The drastic drop in tax revenue due to the pandemic is likely to erase the surplus and gobble up the state’s reserves over the next three years, Newsom said.

Personal income tax revenue will decline 25.5%, corporate income tax by 22.7%, and sales and use tax 27.2% in the 2020-21 fiscal year compared to the current year, Newsom said at a press briefing.

Despite the dire fiscal picture, Newsom plans to keep several tax proposals from January in his overall proposal, including:

  • a new tax on vaping products that would generate about $33 million a year;
  • exempt new small businesses organized under personal income tax rules from the annual $800 minimum franchise tax in their first year for a revenue loss of $100 million a year;
  • sales and use tax exemption for diapers and menstrual products through 2026; and,
  • extend the carryover period for film tax credits from six years to nine years.

Newsom said he is delaying his plan to shift collection of excise tax on marijuana products from the last distributor to the first, and shift the retail excise tax collection from the distributor to the retailer to simplify the tax system and possibly boost collections until 2021.

Lawmakers will debate the plan over the next few weeks and must enact a budget by June 15. Newsom must sign it by the start of the fiscal year July 1.

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; Yuri Nagano at ynagano@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.