Due to the massive budget deficits in the current and upcoming fiscal years in California, businesses in the state will be forced to pay higher taxes to help the government narrow the budget gap.
One of the controversies is that businesses will no longer be able to carry forward losses to the next year and deduct net operating losses in future tax filings to reduce their tax burden. According to a report released by the Legislative Analyst’s Office in May, eliminating the “net operating loss deduction” could result in businesses incurring losses of up to $20 billion in the current fiscal year and potentially over $50 billion in the future.
This practice “sets California apart from other states that levy corporate income taxes,” a letter written by a statewide business advocacy group and chamber alliance to the legislative body in May mentioned. The letter, shared with Epoch Times on July 12, stated, “While other states are striving to incentivize entrepreneurs, these policies could have the opposite effect on California employers.”
Experts predict that some businesses may face significantly increased tax burdens in the current and upcoming years.
Armanino, a financial services company based in San Ramon, Northern California, posted on LinkedIn last month about these changes, stating that “businesses must stay vigilant and proactively address” them, as these changes “might bring significant tax burdens to affected businesses.”
Analysts believe that allowing businesses to carry forward losses through accounting methods and offset income in future years is beneficial. The analysts’ report noted, “This allows businesses to balance profits and losses, enabling companies with similar long-term profits to pay similar tax amounts,” and “without this balance, companies in high-risk or innovative industries… may end up paying more taxes than similarly profitable enterprises.”
Starting from 2024, all businesses with annual revenues exceeding $1 million will be subject to the new rules. The Legislative Analyst’s Office stated that various industries such as technology, transportation, and entertainment will be disproportionately affected, leading to an “unfair tax system.”
Roger Niello, Vice Chairman of the Senate Budget Committee, told Epoch Times in an interview, “This is extremely unfair,” and “When businesses incur losses, they are actually depleting their capital. The purpose of the net operating loss deduction is to help them restore capital when they become profitable again.”
Since the 2008 financial crisis, lawmakers have repeatedly suspended the “net operating loss deduction” to balance the budget – it was also halted during the pandemic, impacting businesses across the state. “This practice, which was frequently used, is now starting to raise questions,” analysts pointed out. “Following this trend, people have reasons to question whether the suspension is truly undermining the original intent of the deduction.”
Other changes that will lead to increased tax burden for some businesses include limiting tax credits to $5 million, even though some companies could originally claim more. Some experts believe that higher taxes will discourage investment in California and may prompt some existing businesses to relocate out of the state.
“This situation makes people not want to stay in California,” Susan Shelley, Communications Director of the Howard Jarvis Taxpayers Association based in Sacramento, told Epoch Times on July 12.
Businesses are also affected by outstanding federal government loan debts. California failed to repay the $18.6 billion unemployment benefits debt incurred during the pandemic in 2021.
Furthermore, according to an audit by the State Economic Development Department, California had paid out hundreds of billions of dollars in fraudulent claims due to outdated systems and inadequate oversight. Analysis from LexisNexis estimated the total losses at $32.6 billion, with little possibility of recovering the money as criminals filed false claims by stealing identities.
Starting from 2023, the IRS has increased California businesses’ “unemployment tax rate” by an additional 0.3% annually due to this, and the rates will continue to rise until the loan is fully repaid.
As of July 8 according to U.S. Treasury data, California’s current unemployment debt (including interest) is close to $19.3 billion. The new budget for the 2024-2025 fiscal year will cover loan interest, but businesses will be responsible for repaying the debt.
Governor Gavin Newsom and the legislature engaged in months-long negotiations on how to properly address California’s fiscal challenges. On July 4, just before the legislature went on summer break, lawmakers passed the budget bill. The dozens of additional provisions included further clarified revenue sources. Newsom subsequently signed these bills into law, solidifying the agreement.
“This agreement lays the groundwork for long-term fiscal stability in our state, not only addressing the current fiscal shortfall but also strengthening the budget’s resilience for the future,” Newsom stated in a press release.
When submitting the revised budget proposal in May, Newsom repeatedly rejected proposals for tax increases. When asked about supporting such plans, he stated, “No, I don’t intend to raise taxes.”
“I firmly believe that we must live within our means,” he mentioned in a press conference. He highlighted that California’s current corporate tax rate is 8.84% and personal income tax can go as high as 13%, citing reasons he is unwilling to rely on levying new taxes to balance the budget. “Our tax rates for high-income earners are among the highest in the United States,” he said, “and the same goes for corporate taxes.”
Requests for comments from the media to Newsom were not responded to prior to the deadline.