CalChamber-Opposed Tax Hikes Target Family Businesses and Companies

A California Chamber of Commerce-opposed job killer bill proposing multiple tax increases on California employers is scheduled to be considered this week in a Senate policy committee.

SB 567 (Lara; D-Bell Gardens) seeks to impose significant tax increases on California employers—both family-owned businesses and publicly traded companies

The bill proposes requiring payment of capital gains on the inheritance of a family business, as well as raising taxes on publicly traded companies, when California already has the highest personal income tax and sales tax rates in the country, as well as one of the highest corporate tax rates, which will discourage job growth in California.

Family-Owned Businesses

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 by the state. These top income earners upon which the General Fund is so reliant, are also the same individuals who would be exposed to the 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 taxation when they already contribute such a significant amount of revenue into the General Fund.

Executive Compensation

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

While CEO compensation is an ever-popular debate topic, SB 567 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 would unfairly penalize California companies. 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

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.