Business Tax Conformity and the Earned Income Tax Credit

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

The legislature is struggling with Gov. Gavin Newsom’s proposal to expand the Earned Income Tax Credit (EITC) for working families that would be funded by conforming some of the state tax code to the federal tax law signed by President Trump. The major issue is that the conformity would result in a $1.7 billion tax boost to the state to fund the program and tax increases in the time of plenty  presents problems for some legislators.

It is noted that the conformity measure brings in new tax revenue while the state sits on a large surplus. Yet, the business community, which will be affected by the tax changes, has yet to make much noise about the measure. In fact, some in the business community suggest that if the conformity bill becomes law it could take pressure off other tax plans aimed at business—perhaps wishful thinking but there it is.

When Gov. Newsom introduced his proposal in January I applauded the idea.

At the time I wrote, that while there is a cost to the EITC there is also value to the idea. “It’s the idea that work matters. And despite work, if a family still finds itself at the lower end of the economic ladder, the state will provide an incentive to keep working so they can improve their skills and thus rise.”

Conforming the state’s tax code to the federal code happens almost yearly. Check out the page at the Franchise Tax Board’s website titled: Archive—California Conformity to Federal Law. Run down the page and you’ll find numerous examples of tax conformity.

For business, the advantage of conformity with federal law means less paperwork, not having to fill out so many forms that are different for the state and the feds. Business often embraces tax conformity because they have enough regulations and paperwork issues to deal with.

There will be some in the business community that will object to the conformity move if they are particularly hit hard by the tax change. However, it is telling that there has been minimal protest from business. Maybe business is comfortable sitting on the sidelines because they expect that tax issue might sink the proposal without lifting a finger. Maybe business buys into the argument that if this bill passes there will be a shield against future tax increases on business. And, on top of that they save from the reduced accounting.

But, the other side of this debate is that the Earned Income Tax Credit has been praised as a device to help people accept work while fighting to escape the lower rungs of the economic ladder. It is a worthy goal and one that deserves support.

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