State Budget

Corporate Tax Hike Proposed by Senate Leader, Quickly Nixed by Governor

state capitol

Senate Democrats this week proposed increasing California’s corporate tax rate to 10.99 percent for income over $1.5 million, but the April 26 proposal was immediately dismissed by Governor Gavin Newsom’s office.

“Governor Newsom cannot support the new tax increases and massive ongoing spending proposed by the Senate today,” spokesperson Anthony York said in a statement released within two hours of the Senate announcement. “It would be irresponsible to jeopardize the progress we’ve all made together over the last decade to protect the most vulnerable while putting our state on sound fiscal footing.”

The proposed tax increase, released by Senate Pro Tem Toni Atkins and Senator Nancy Skinner as part of a “Protect Our Progress” budget that includes “$26 billion in solutions and builds total reserves to $38.1 billion,” had not been introduced in bill form as of this publication.

The proposal, described as having the support of Senate Democrats, would increase the state corporate tax rate from 8.84 percent to 10.99 percent – a tax increase of more than 24.3 percent – for any business with net income over $1.5 million.

The plan would lower the rate to 6.63 percent on the first $1.5 million of taxable income.

CalTax President Robert Gutierrez praised Newsom for opposing the tax hike, and noted that the Senate proposal would exacerbate the state’s operating deficit.

“California’s business tax climate already is among the worst in the United States, and employers face higher operating and regulatory costs than in other states,” Gutierrez said. “This large tax hike is a non-starter for solving California’s budget shortfall and will only make things worse. Tax revenue increases dramatically when the economy is thriving, and when entrepreneurs are building businesses and dreams in California and hiring more Californians. We should encourage growth to happen here, not chase it away with tax increases like this.”

The Senate proposal estimates that the corporate tax increase would cost employers approximately $7.2 billion in 2023-24.

The proposal also includes a “budgetary resiliency tool” that will “allow net operating loss (NOL) deferrals for businesses’ tax liabilities during budget emergency years and allows for dollar-for-dollar tax credit for future.”

The proposal also includes more than $4 billion in tax reductions for select groups of taxpayers. The tax reductions include the corporate tax rate cut for income below $1.5 million; reducing the minimum limited liability company tax (from $800 to $600 every year); increasing the renters’ tax credit and making it refundable (totaling $700 million); setting a $275 minimum for the refundable California earned income tax credit (initial cost of $600 million); and authorizing a new “Workers Tax Fairness Tax Credit” that would change union dues from being a tax deduction to a tax credit (cost of $400 million).

Newsom is scheduled to release a revised budget proposal by May 14 that will provide more detailed projections of the state’s financial situation and estimated revenue. The announcement by the Senate Democrats indicates their position as Newsom, Assembly Democrats, and Senate Democrats begin the final stage of negotiating and drafting the 2023-24 budget, which must be approved by June 15.