When you are renting a car, the rental fee is based on the number of miles driven and time utilized.  It makes sense that the small user pays less than someone who utilizes the car for a longer period of time.  The same should be true for the state franchise tax, small business owners who utilize fewer state services and require less oversight should pay a smaller fee than larger businesses that require more state resources.  Legislation (SB 349) by Senator Anthony Portantino, adjusts the franchise fee for small business to relate more to the size of the company rather than requiring the same fee for all businesses regardless of their size.

California’s 3.6 million small businesses make up the state’s economic backbone, employing roughly half the state’s workforce. Individually, however, small businesses are stretched facing higher tax burdens and seeing no relief from federal tax changes. Existing California law imposes an annual minimum franchise tax (MFT) of $800 on any business incorporated in California, regardless of whether their gross revenue is $2.5 million or $25 billion – a small coffee shop in the Central Valley is on the hook for the same minimum franchise tax fee as a tech giant in Silicon Valley.

Instead of one flat fee for every business regardless of their size, SB 349 establishes a more equitable schedule:  $200 for a corporation (a California microbusiness) with less than $2.5 million in gross receipts, $400 for a corporation with more than $2.5 million in gross receipts but less than $7.5 million, $600 for a corporation with more than $7.5 million in gross receipts but less than $15 million, and $800 for a corporation with more than $15 million in gross receipts.

Historically, small business owners have operated their businesses without incorporating but the tax and liability benefits of incorporating have led many small business owners to reorganize as corporations. While this change has occurred over time, many of the state’s laws governing businesses, including the MFT, have remained the same.  This modest effort to build fairness into the state tax system should be the start, not the culmination of tax adjustments. Moreover, any potential loss in state revenue will be offset by the larger pool of taxable small businesses that incorporate by virtue of this more equitable tax schedule.

California is fortunate to be home to the tech giants of Silicon Valley, big entertainment company in Southern California, and premier tourism industry in San Diego and small business benefits greatly from the bigger companies. Small business owners understand that the MFT and other state taxes pay for schools, health care, public safety and other vital public services and are willing to pay their fair share of the MFT and other taxes.  But a state as progressive as California, should also have an equally progressive tax policy that is fair and equitable to all businesses not a “one size fits all” formula.

The State Assembly needs to pass Senator Portantino’s SB 349 and make a small but important change to ease the burden on small business owners.