As California has rolled out additional tax incentives for businesses, the debate over their value has endured. Are they good for the state budget? Do they help give businesses reasons to stay? Keep reading to see two common opinions, as well as how we think California should continue.
For Tax Incentives
In a recent Lodi News-Sentinel article, Steve Hansen writes that California needs to become more business friendly and it seems legislators prefer to turn, “A blind eye.” His piece calls for the state to encourage business, rather than to make it so difficult.
As he points out:
- For every 100 people in the private sector, there are now 114 people receiving a government check who are dependent on income created by large and small businesses.
- [California] has been labeled by “Chief Executive” magazine as the worst state out of 50 for doing business. California has received this “award” for the last 10 years in a row.
- [Legislators’] solutions have been to raise taxes, along with adding additional burdens, regulations and restrictions to those companies still trying to survive here. California has the highest income tax rate in the nation. Another has been to raise the minimum wage to one of the highest in the country.
He ends the article by writing, “If we have any hope for our once great state, it is that Californians demand from Sacramento real solutions to our most important issue…without question, that issue is job-creation. Financial support for all other concerns and needs are tied to just that.”
As you can tell, he has a very dire outlook on the current state of California’s business climate, despite the various tax incentives and credits recently created.
Against Tax Incentives
Dan Walters at the Sacramento Bee, however, has a very different outlook on California. As he writes in this article, “If they ever get around to truly reforming California’s convoluted and dangerously imbalanced tax system, they should start by cleaning up tax expenditures.”
His take on California’s tax incentives and credits are that there are too many. He cites that if California eliminated its tax expenditures, it could collect approximately $70 billion more, and criticizes various incentive programs like the credit for Southern California’s movie industry and the sales tax exclusion for custom computer software.
Miles Consulting’s Take on Tax Incentives
Although we don’t believe the state’s outlook is as severe as Steven Hansen, we definitely agree California needs to encourage business within the state. One way the legislature is doing this well is by providing tax incentives and credits; in fact, we’d love to see more, rather than fewer. Recall that approximately three years ago, the legislature wiped out California’s enterprise zone (EZ) tax program. These tax credits encouraged expansion by offering hiring tax credits in over 40 communities all across the state. The program also offered incentives to community banks making loans to businesses in these economically distressed areas. The EZ benefits had been around for over 20 years, when they were suddenly axed by the state legislature at the encouragement of the Governor.
In place of the enterprise zone benefits, companies can now “take advantage” of:
- A hiring credit that is very difficult (if not impossible) to qualify for.
- A partial sales tax exemption for manufacturers purchasing equipment used in manufacturing (most states offer a full exemption for such transactions).
- The California Competes Tax Credit program – a program allowing for a small panel of governor appointees to subjectively dole out approximately $200 million per year to companies expanding business within CA.
At the risk of sounding cynical, the only reason these benefits were added at all was because doing away with the EZ program would have been deemed a tax increase, and would have required a two-thirds majority vote. Since that likely would not have passed, this version – which added some new credits and incentives, thereby not increasing overall taxes – was passed.
So, our take? California should continue to be aware of the fact that it is seen as unfriendly to business, and our legislators should continue to promote business and offer incentives to those who hire employees and expand in California through more incentives, lower taxes and fewer restrictions on employers. That’s our take.
Want to know more about California’s tax incentives and credits (or those in other states – in case you’re tired of the Golden State), and how your business can take advantage of them? Contact us today! We’re happy to answer your questions about eligibility as well as provide guidance around other multi-state tax issues your company may face.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Partial Manufacturer’s Exemption for Sales Tax. To learn more, contact us today at www.MilesConsultingGroup.com.
