Tax Opposition Crosses Aisle

Charles Crumpley
Editor of the Los Angeles Business Journal

Maybe the most difficult task in America is to achieve bipartisan agreement. But California’s Franchise Tax Board appears to have pulled it off.

Democrats and Republicans alike hate the board’s recent decision that not only revoked a state tax break for small-business investors, but is making everyone who claimed that break in the last five years pay it all back, with interest. That claw-back provision is what’s truly galling.

“California is not a banana republic,” said State Sen. Ted Lieu, a Democrat from Torrance. “California government should not punish innocent, law-abiding taxpayers retroactively just because it may have the power to do so.”

“As an elected official and taxpayer advocate, I cannot remain silent while state tax officials punish California taxpayers who in good faith followed our laws,” said state Sen. George Runner, a Republican who’s also on the state Board of Equalization. He called on the tax board to rescind its decision.

Basically, the tax break allowed investors in some California startups and small businesses to sell stock in that company and, so long as certain provisions were met, exclude half their gain from state taxes.

But in a lawsuit last year, the tax was deemed unconstitutional and the tax board then took it a giant step further and decided everyone who took that tax break as far back as 2008 (the cutoff for the statute of limitations) had to pay back all the taxes they got under the break, plus interest.

A look at the raw numbers suggests the average bill will be somewhere in the $50,000 range. That’s a surprise to get in the mail, no?

And, of course, these bills are landing on the kitchen tables of investors – those who took a chance on California’s startups and small businesses.

So the tax board’s decision is frosting off Democrats and Republicans, sure, but mostly investors and small businesses, too. For that matter, it’s angering just about anyone who has a sense of justice.

Stop and think what a rare and difficult achievement that is, to elicit near universal, bipartisan disgust with one bureaucratic decision.

Congratulations Franchise Tax Board!

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