Too Soon for Taxes in State Budget

Loren Kaye
President of the California Foundation for Commerce and Education

Despite facing a June 15 deadline to pass a state budget, Governor Newsom and legislative leaders are, prudently, deferring a number of major fiscal decisions until they receive better information on the intention of Congress on state assistance and the actual level of state income tax payments that were deferred for three months.

Given those uncertainties, plus the unknown shape of the economic recovery, the question of whether to base the budget on tax increases should also be deferred.

The Governor has proposed, and legislative budget writers have included, more than $4 billion annually in tax increases to support state spending through the 2022-23 budget cycle.

Similar to solutions proposed during the Great Recession, lawmakers and the Governor would suspend the ability of medium and large business taxpayers to utilize net operating losses, as well as business incentive tax credits that offset more than $5 million in tax liability, for 2020, 2021 and 2022.

While certainly preferable to a permanent increase in tax rates, these proposals are still problematic.

Raising taxes in the present economic environment should be a last resort option. Tax increases of any sort will dampen business investment and employers’ ability to rehire workers. This is especially true of targeted tax incentives that are themselves designed to encourage specific economic activity and hiring.

Policy makers will have more information in the ensuing months about income and corporate tax receipts from the delayed filing schedules and will know whether and by how much Congress will provide additional revenue support for state and local governments. Raising taxes now is precipitate and unnecessary.

The next several months should also provide better information about the shape of the economic downturn – and how soon and how sharply it will become an upturn. The pace and shape of the recovery is important in determining for how long any of these tax increases should be imposed.

The Legislature will adopt at best an interim budget next week. It would be premature to set in stone several tax increases that may turn out to be unneeded to support critical state functions and harmful to the employers we depend on to lead us out of this economic crisis.

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