Failed 2020 Bills Could Reemerge in 2021
Taxpayers should watch several failed bills from the 2019-2020 legislative session that could be reintroduced in the coming session.
A number of bills that were vetoed or failed to advance during the 2019-2020 legislative session could be reintroduced in the coming year. These include bills that would have created a state tax database, increased top income tax rates, imposed new taxes on wealth and CEO compensation, established a Tax Expenditure Review Board, and extended California’s False Claims Act to cover taxes.
Vetoed bill
State Tax Database
Governor Gavin Newsom vetoed SB 972, which would have created a database of state taxes paid and tax subsidies used by companies with more than $5 billion in annual gross receipts. The Franchise Tax Board would be required to provide the Senate and Assembly tax committees with annual reports that list company names, the amount of state tax owed, and the amounts and types of state tax credits claimed in the previous year. In vetoing the bill, Newsom said current law already authorizes the tax board to disclose taxpayer data to legislative committees upon request. Business groups led by the California Taxpayers Association opposed the bill, arguing that lawmakers already have similar, aggregated data and that access to company-specific information would violate taxpayer confidentiality rules.
Stalled bills
Increased top income tax rates
AB 1253 would have imposed additional taxes on incomes of more than $1 million. It would have added to the current top marginal rate of 13.3%:
1 percent on adjusted income of $1 million to $2 million
3 percent on adjusted income of more than $2 million up to $5 million; and
3.5 percent on adjusted income of more than $5 million.
The bill would have applied retroactively to tax years beginning on or after January 1, 2020. Income thresholds would have been recomputed for each tax year beginning on or after January 1, 2021. Because it is a tax increase measure, the bill would have required a two-thirds vote of both houses of the Legislature pursuant to Article XIIIA, Section 3 of the California Constitution.
Wealth tax
AB 2088 would have imposed an additional 0.4 percent tax on net worth above $30 million or more than $15 million if married filing separately. Under the bill, the tax would apply to all assets and liabilities except for real property. Valuation methods used to calculate the taxpayer’s net worth would include a mix of end-of-year market value for publicly traded assets and other methods. The portion of an individual’s wealth subject to the tax would be dependent on the number of years as a resident (numerator is years of residence in California over past 10 years, denominator is 10). Notably, residents who have left the state would be subject to the tax.
Governor Gavin Newsom opposed the bill, stating: “In a global, mobile economy, now is not the time for the kind of state tax increases on income we saw proposed at the end of this legislative session and I will not sign such proposals into law.”
CEO compensation tax
SB 37 would have increased tax rates for corporations and financial institutions based on the company’s “compensation ratio.” Under the bill, corporations with net income of $10 million or more would be subject to an increased rate with a range from 10.84% to 14.84%; financial institutions would be subject to increased rates ranging from 12.84% to 16.84%. Corporations currently pay corporate income tax at a rate of 8.84%, and financial institutions pay 10.84% tax.
The compensation ratio would be determined by taking the greater of the compensation of the CEO, COO, or highest paid employee divided by the median compensation of all employees of the corporation. The bill would mandate that the new rates increase by a factor of 1.5 for those taxpayers that have greater than a 10% decrease in full-time employees in the United States compared to the previous year with an increase in domestic contracted employees or an increase in foreign workers. It would also make the tax increases temporarily inoperative in any tax year in which the federal corporate tax rate is 35% or more.
California Tax Expenditure Review Board
SB 956 would have established a California Tax Expenditure Review Board to examine the goals, beneficiaries, and costs of nine tax breaks that cost $8.2 billion a year. The bill would request the University of California to perform a comprehensive assessment of the major tax expenditures and to present a comprehensive, peer-reviewed assessment at a public hearing of the board by July 1, 2022. After the board issues the report, lawmakers could alter or repeal the tax breaks if they decide they are not meeting the state’s goals.
Personal and corporate tax breaks proposed for review:
Water’s edge election that international companies can use to assign California income;
Research and development credit;
Like-kind exchanges for real estate;
Tax treatment of subchapter S corporations; and
Deduction for dividends paid to employee stock ownership plans.
Sales and use tax exemptions proposed for review:
Animal life, feed, seeds, plants, fertilizer, drugs and medicines;
Farm equipment machinery;
Jet fuel for international flights;
Custom computer programs.
In 2019, Newsom vetoed SB 468, an earlier version of the bill that would have established a state board to review California tax breaks that cost at least $1 billion a year, such as the research and development credit for corporate income taxpayers and the mortgage interest deduction for personal income taxpayers. In his veto message, Newsom said the board was unnecessary.
Also in 2019, Newsom signed AB 263, which expanded an existing law that requires tax credits enacted since 2015 to include plans to measure performance. That bill applies to all tax breaks, including credits, deductions, exclusions, and exemptions that are introduced and enacted after January 1, 2020.
Extension of California’s False Claims Act
AB 2570 would have authorized the Attorney General, local prosecutors, and whistleblowers to pursue qui tam lawsuits for tax fraud cases under the California False Claims Act (CFCA) for cases involving individuals or companies with gross receipts above $500,000 a year and potential damages of more than $200,000. The bill includes anti-retaliation protections for the whistleblower.
The CFCA is a whistleblower statute that encourages employees, contractors, or agents to disclose information about any false or fraudulent claims submitted to the government, but the law does not apply to false claims under the Revenue and Taxation Code. Assemblyman Mark Stone and Attorney General Xavier Becerra have tried to pass an extension to the CFCA to boost revenue. Becerra believes the state has lost hundreds of millions of dollars in revenue due to tax fraud.
Opponents argue that the whistleblower cases would disrupt fair tax administration from state agencies and would likely be brought by attorneys seeking to enrich themselves rather than uncover fraud. The Multistate Tax Commission also opposes such bills and holds that tax issues should be carved out of state false claims acts.
In 2019, a similar bill, AB 1270, was introduced but stalled in the legislature.
Other bills
Headcount tax: AB 398 would have imposed a tax of $275 per employee on a business with more than 500 employees that does business in the state.
California Competes refundable tax credits: SB 51 would have made the California Competes tax credits refundable to the extent the credit amount exceeds a qualified taxpayer’s tax liability for the year.