Committee Approves Tax Increases Targeted at Family-Owned Businesses and Others

The Senate Governance and Finance Committee voted 5-2 on May 17 to approve a tax increase measure that takes California out of conformity with federal tax law, prohibits the corporate income tax deduction for performance pay for a corporation’s five highest-paid executives, raises the charitable remainder for trusts and increases the capital gains tax paid on inherited property tax increases (SB 567, Lara).

The bill, opposed by a large coalition of taxpayer and business groups led by CalTax, now goes to the Senate Appropriations Committee.

Senator Ricardo Lara, a Democrat from Long Beach, said his bill would “close three loopholes that benefit millionaires and ensure that high income earners pay their fair share in taxes,” and leveled a rapid-fire barrage of criticism at high-earning individuals and corporations.

“So, you’re just kind of mad at people that have been successful?” Republican Senator John Moorlach asked his colleague shortly after Senator Lara said wealthy people use laws related to charitable giving “to be able to continue to shelter their monies, and be able to use it as a slush fund for their children and their family.”

“Aren’t you?” Senator Lara replied.

Although Franchise Tax Board statistics show that in the 2014 tax year, the top 5 percent of income earners paid 68.2 percent of the state’s total personal income tax revenue collections (see chart  from “California Tax Facts: An Overview of the Golden State’s Tax Structure,” published by the California Tax Foundation), Senator Lara said that because “California’s wealthiest 1 percent pays a lower percentage of their income in state and local taxes than the poorest 20 percent,” they are not paying their “fair share.” He did not specify what level of tax increase he considers necessary to achieve his definition of fairness.

The bill would de-conform California from federal law by disallowing a corporate income tax deduction for performance pay in excess of $1 million to a publicly traded company’s top five highest paid executives. The bill also de-conforms from federal law by requiring taxpayers who earn in excess of $1 million to pay capital gains tax on the appreciation of inherited property.

A representative of the Family Business Association of California said the elimination of the ability to step up the basis on assessment values when property is passed through to the next generation would result in some families having to sell off assets to pay the taxes. “One of the biggest impediments to the succession of family businesses is tax law,” the representative added.

 “If the top 1 percent are contributing almost a third of the state’s total revenues, this is just not one group you really want to upset, because it has such a major bearing on our total revenues … ,” Senator Moorlach added. “It doesn’t take much to move a corporate headquarters and to relocate to another state. … The wealthy are so mobile, they could leave in a snap.”

Senator Moorlach also expressed concern that the bill would lead to reductions in charitable contributions, including major gifts to the University of California and California State University systems.


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