Will the California Business Community Get Hit with New Tax Increases?

Chris Micheli
Chris Micheli is a Principal with the Sacramento governmental relations firm of Aprea & Micheli, Inc.

As the 2017 California Legislative Session gets underway, and with the newly-acquired super-majority status of Democrats in both the State Assembly and State Senate, the business community is concerned about potential tax increases brewing in the Legislature, despite the massive tax increases adopted by voters in early November.

Similar to when Democrats captured their super-majority status after the 2012 statewide elections (although that was short-lived for several reasons), many elected officials and Capitol insiders have recently been discussing the need for “tax reform.” However, that seems to be a euphemism for finding additional sources of revenue. Or will tax reform mean “revenue neutrality”?

This approach of seeking new sources of revenue seems counter-intuitive after the electorate adopted multi-billion tax increases last month by passing Prop. 55 (12-year extension of the Prop. 30 personal income tax increases), Prop. 56 (a $2 tax imposed on each pack of cigarettes), and Prop. 64 (which includes several tax increases on marijuana and marijuana products).

What is different for the just-commenced 2017 Session is that Democrats have achieved the necessary 2/3 majorities in the State Senate and Assembly to pass tax increases without any Republican involvement under the requirements of Prop. 26 (amending Article XIIIA, Section 3(a) of the California Constitution), assuming signature by the governor.  California is one of just a handful of states that requires a 2/3 majority for increasing taxes by a vote of the Legislature.

So what might be contemplated by the Legislature during the 2017 Session?

Targeted tax increases have been of particular interest in prior years, such as those targeting soda, candy and specific industries. Gas tax increases have been debated throughout the transportation funding special session, as well as consideration of a car mileage tax (generally called a vehicle miles traveled – VMT – tax) and vehicle license fee increases. Other measures might allow regional gas tax increases to be voted upon by local electorates, or allow local voters to increase their vehicle license fees within a county.

Oil severance tax, which is taxing petroleum as it is extracted from the ground, is likely to be advocated by those who see an opportunity to target an unpopular industry. In addition, now that tobacco taxes have been substantially increased, will alcohol tax increases be next? Some states are looking at hotel room surcharges, increased telecommunications taxes, and others.

Split roll property tax system will undoubtedly continue to be a hot topic in any tax reform debate. After 2012 informational hearings, there was legislation the last few years, but none of those measures were heard in committee. Nonetheless, proponents of a split-roll system will continue to advocate for increased commercial and industrial property taxes.

Taxing services has been a popular topic of Capitol conversations regarding “tax reform” during the past two years, particularly with Senator Bob Hertzberg authoring legislation in this area. Extending the sales tax to services could take several forms, such as taxing all services or a select number of them, and possibly combining a broadened base with a lowered tax rate for all purchases.

Taxing intangibles (intellectual property, for example) could also be part of this proposal. California currently has the highest base sales tax rate in the nation. Depending on the number and types of services that would be subject to a proposed sales tax expansion, such a proposal could result in billions of dollars in new revenues to state and local governments.

Parcel taxes were the subject of several proposed constitutional amendments to reduce the vote threshold required for passage of these local taxes. We are likely to see these measures again, with funds usually intended for either educational purposes or transportation needs that would either allow a 55% or simple majority approval of local voters, rather than the current 2/3 majority vote required.  Other proposals dealt with allowing local vote thresholds to be lowered for increased funding of fire and police protection services.

Disclosure of taxpayer specific information is another area that has been a hot topic in the past few years as there have been calls for increased corporate tax disclosure. For example, prior legislation would have required annual disclosure on the FTB website of the 500 largest corporate taxpayers and the individual taxpayer’s state tax liability, charitable contributions, and income apportionment method.

Businesses and individuals need to keep abreast of pending legislation during the upcoming 2017 California Legislative Session because there will be increased efforts to enact long-sought state tax law changes now that Democrats control a super-majority of seats in the two houses of the California Legislature. Ironically, the federal government will be debating tax reform as well — but they anticipate significant reductions in personal income and corporate taxes, rather than increases.

Chris Micheli is a Principal with Aprea & Micheli, Inc., a Sacramento-based government affairs firm where he specializes in taxation and budget issues.  He can be reached at [email protected].

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