California’s Biggest Tax Breaks Aren’t Corporate Give-Aways

The change in how taxes are computed for companies doing business in California and other states – the so-called “single sales factor” – approved in the February 2009 budget — will cost the state $900 million in lost revenue starting in the fiscal year that begins July 1, 2012.

Republican lawmakers and Gov. Arnold Schwarzenegger insist the tax break become effective on January 1, 2011. Branding it a “corporate giveaway,” Democratic lawmakers want to postpone its implementation two years to help balance this year’s budget, now a month overdue with little sign of progress on a compromise.

While $900 million is a sizable annual revenue loss for the state, there are 13 other “tax expenditure programs,” as they’re called, that cost the state more each year.

In some cases, four, five and six times more.

None of those tax breaks are being considered for elimination or reduction by either party to help close the state’s budget gap.

The ability to deduct home mortgage interest robs state coffers of $5.7 billion, according to a 2008 study of the impact of various tax expenditure programs by the Legislative Analyst.

The housing market meltdown might have lowered that figure during the past two years although the state’s growing population may have increased it.

The most generous tax breaks for employers are excluding from taxation contributions to employee pension plans and payments for employee health care and accident insurance. The pension contributions are a nearly $5 billion revenue loss. The health care and accident contributions, $3.7 billion.

California homeowners don’t pay taxes on capital gains when they sell their primary residence – another $3.7 billion.

California’s use of the “basis step-up” on inherited property has a $3.2 billion price tag for the state. The reason it does is that “basis step-up” calculates the value of property on the date of the death of the person it is being inherited from, rather than its initial purchase price.

If the property is subsequently sold, rather than paying taxes on the difference between the sale price and the initial purchase price, the tax liability falls only on the amount between the value at the person’s death and the sale price secured by the heirs.

A home purchased in 1980 for $100,000 is valued at $500,000 at the owner’s death and sold for $550,000 shortly thereafter. Under “basis step-up,” the tax liability is on $50,000 rather than $450,000.

Social Security, railroad retirement benefits are also not taxed, a loss of $1.7 billion.

Allowing a full write-off for charitable contributions costs the state $1.6 billion.

Proceeds from life insurance or annuities also are exempted from taxation, a $1.2 billion hit to the general fund.

The Franchise Tax Board’s personal exemption costs $1.2 billion. The state’s standard deduction, another $1.1 billion.

Lawmakers and the GOP governor did reduce one of the over-$1 billion tax credits and exemptions – that for dependents.

Prior to the 2009 budget, each dependent was a $309 tax write-off, costing the state $1.7 billion, the analyst estimated. Now, each is $102, saving the state roughly $1 billion each calendar year or half that during a fiscal year.

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