A Quick Look at the Tax Proposals in the Democratic Budget Plan

While much of the attention about taxes in the budget-balancing plan presented by Democrats on June 18 has focused on creation of an oil severance tax and boosting the tax on a pack of cigarettes to $1.50, there are 11 other tax increases, accelerations and changes.

The biggest – compared to the estimated $1.1 billion the severance tax will yield and the $1 billion the cigarette tax generates – is a repeal of actions taken in the February budget that would allow businesses to use net operating losses that occur after January 2011 to offset earnings during 2009 and 2010, the two-year period the February budget suspends use of the net operating loss tax break.

The Democrats’ plan would also eliminate the ability of a corporation to assign unused tax credits to an affiliate company.

The change saves the state $80 million in the fiscal year, which begins July 1, increasing to $850 million in 2014.

Quarterly estimated corporate tax payments – already accelerated in the February budget are accelerated even more under the Democratic plan, an idea first presented in the governor’s revised budget in May.

Instead of making four equal quarterly payments of 25 percent, businesses now pay 30 percent in April and June and 20 percent in September and December. The Democratic plan would boost the June payment, starting in 2010, to 40 percent. The September payment would be eliminated and 30 percent would be paid in December.

Another tax increase proposed by the governor and adopted by Democrats is a 4.8 percent surcharge on property insurance to raise $120 million to cover the costs of state emergency response, particularly fire-fighting in unincorporated, largely rural areas.

Payroll withholding would be increased by 10 percent, starting in January 2010 – another proposal by the GOP governor – to collect $1.7 billion in income tax revenue sooner.

Another acceleration move requires businesses and the public sector to withhold 3 percent of any payments to independent contractors. The change brings in nearly $2 billion for the fiscal year starting July 1, falling off to $130 million the following year.

Out-of-state sellers that pay commissions to California firms or residents for sales referrals – the budget conference committee cites Amazon as an example – would collect sales tax on purchases by California residents. That would yield $110 million annually.

 Businesses that provide services – non-retailers – would file use tax returns with the Board of Equalization. Use tax returns apply to purchases in which no sales tax was collected – generally from out-of-state sellers, the committee says. A revenue gain of $28 million in the upcoming fiscal year and $57 million the following year, according to the committee’s figures.

A broader definition of what constitutes an “abusive tax shelter” would boost annual state revenue by $10 million to $15 million.

 Delinquent taxpayers could have their licenses revoked. Suspension could be avoided by entering into an installment payment plan with the Franchise Tax Board. Yields $10 million in the upcoming fiscal year and up to $20 million thereafter.

Banks and other financial institutions would be required to conduct quarterly matches of their account records with the file of tax delinquents. The idea is to more swiftly identify assets that can be used by the Franchise Tax Board to pay down delinquent tax debts. An estimated $27 million would be raised in the next fiscal year, $60 million the following year and $100 million in subsequent years, according to the committee.

And businesses ordered by the Internal Revenue Service to report non-wage payments such as interest, dividends and compensation for services – would need to withhold 7 percent of those payments.

The conference notes that the provisions of many of these proposals are contained in other bills, several of which failed to win passage in the Legislature’s normal committee hearing process.

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