Bill with Multiple Tax Hikes Passes Senate Policy Panel

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A California Chamber of Commerce-opposed job killer proposing multiple tax hikes on state employers, making California even less competitive, passed the Senate Governance and Finance Committee this week.

SB 567 (Lara; D-Bell Gardens) was identified as a job killer because it will significantly increase taxes on California businesses, who already have one of the highest tax burdens in the country.

Family-Owned Businesses Hurt

Specifically, SB 567 targets family-owned businesses that transfer the business upon death to other family members. Under SB 567, the family members who inherit the business/property, would be forced to pay capital gains on the property that has appreciated in value, if the family member(s) have an adjusted gross income of $1 million or more.

This change would take California out of conformity with federal law, and place another layer of taxes on a small group of Californians paying the highest personal income tax, at 13.3%.

Recent data from the Legislative Analyst’s Office indicates that the top 1% of income earners in California paid half of all income taxes received. These top income earners upon which the General Fund is so reliant, are also the same individuals who would be exposed to this tax increase under SB 567, and who have the most resources to change their residences to another state to avoid even higher taxes.

California should not continue to target these high earners with additional taxes, when they already contribute such a significant amount of revenue into the General Fund.

Harms Corporations

SB 567 also seeks to eliminate the current deduction allowed for compensation paid to executive officers for achieving performance-based goals. This proposal would harm all corporations, but more specifically, those companies incorporated in California.

While CEO compensation is an ever-popular debate topic, this legislation fails to recognize the enormous responsibility placed on these individuals to maintain or improve the success of a company that creates jobs for hundreds or thousands of workers, and value for thousands of shareholders, including pension funds.

This current deduction was created to allow companies to incentivize CEOs to achieve important performance goals for the benefit of the company, employees and shareholders.

The Internal Revenue Service already has strict guidelines on this deduction to prevent any abuses, including:

• written, pre-established, objective performance goals that are substantially uncertain at the time the goal is established;

• the goals are approved by a compensation committee comprised of two or more outside/independent directors; and

• the goals are also separately approved by shareholders.

Eliminating this deduction for California publicly traded companies, would unfairly penalize companies incorporated in California. Moreover, this proposed change is retroactive, meaning companies who will be harmed by the elimination of this deduction will not even have an opportunity to mitigate any tax exposure it creates.

Punitive Taxes

Finally, California already has the highest personal income tax and sales tax rates in the country, and one of the highest corporate tax rates as well. Californians just approved various tax increases and extensions on the November 2016 ballot. Additionally, state appropriations may exceed the Proposition 4 (Gann) limit, which over the next two years may trigger significant tax reductions.

Substantially increasing California’s revenue again by targeting high earners and businesses, as proposed by SB 567, is punitive and will ultimately harm California’s economy and General Fund.

Key Vote

SB 567 passed Senate Governance and Finance, 5-2, on May 17:

Ayes: Beall (D-San Jose), Hernandez (D-West Covina), Hertzberg (D-Van Nuys), Lara (D-Bell Gardens), McGuire (D-Healdsburg).

Noes: Moorlach (R-Costa Mesa), Nguyen (R-Garden Grove).

Action Needed

SB 567 will be considered next by the Senate Appropriations Committee.

The CalChamber is asking members to contact their senator and members of Senate Appropriations to urge them to oppose SB 567 as a job killer.

An easy-to-edit sample letter is available at www.calchambervotes.com.

Staff Contact: Jennifer Barrera

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Jennifer Barrera
About Jennifer Barrera
Jennifer Barrera, senior policy advocate, works with the executive vice president in developing policy strategy and represents the CalChamber on labor and employment, taxation and legal reform issues. Before joining the CalChamber in September 2010, she worked at a statewide law firm that specializes in labor/employment defense. She also advised small and large businesses on compliance issues, presented seminars on employment-related topics, and authored articles in human resources publications. Barrera earned a B.A. in English from California State University, Bakersfield, and a J.D. with high honors from California Western School of Law.