The California Legislature approved a major tax break for small businesses on Monday, voting to give up as much as $6.8 billion in revenue over the next six years so that struggling business owners can have smaller bills.
The federal government loaned more than $97 billion to California small businesses during the coronavirus pandemic, and most business owners did not have to pay that money back. Business owners used most of that money to pay the salaries of their employees, which prevented — or at least delayed — layoffs during the pandemic.
In December, Congress said business owners could deduct expenses associated with those loans from their federal taxes. The bill that passed the California Legislature on Monday would let business owners deduct those expenses from their state taxes, too.
But the tax break won't help everybody. While the federal government lets every business owner deduct these expenses from their taxes, the bill that passed the California Legislature on Monday only lets business owners do this if they had a loss of 25% or more during at least one three-month period during 2020.
That leaves out about between 15% and 25% of business owners who got the federal loans, according to Assemblywoman Autumn Burke, chair of the Assembly Revenue and Taxation Committee.
The change means “the vast majority of new car dealerships will not benefit,” said Anthony Samson, a lobbyist who represents the California New Car Dealers Association. Samson said new and used car sales fell 21.7% in 2020. By excluding businesses with losses less than 25%, Samson said the bill “harms the very businesses that used these funds to retain their California workforce during difficult times.”
State lawmakers, both Democrats and Republicans, said they wanted to give the tax break to everybody. But Burke said Gov. Gavin Newsom's administration refused because it would have cost the state too much money — more than $8 billion over six years. Lawmakers could have done it anyway, but if they did they feared Newsom would have vetoed the bill.
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Burke said lawmakers, including Assembly Speaker Anthony Rendon, “put as much pressure as anyone could put" on Newsom for the tax break to apply to everyone, but said “sometimes you just can't quite get there.”
“The reality is at some point you run out of money,” she said.
California has extra money this year. So far, the state has collected $16.7 billion more in taxes than they had expected. Newsom says the state has at least a $15 billion surplus. The independent Legislative Analyst's Office says that figure could grow by another $4 billion next month when Newsom updates his budget proposal. On top of all that, the federal government has given the state an extra $26 billion in coronavirus aid.
But the surplus is available only this year. The tax break will reduce the state's revenues over the next six years. Plus, the state Legislature has already approved $14.2 billion in coronavirus aid this year, including $600 payments to people earning $30,000 per year or less, $2 billion in grants for small businesses and $6.6 billion to help schools return students to the classroom in-person.
H.D. Palmer, spokesman for the California Department of Finance, said the bill is “a joint agreement between the administration and the Legislature,” calling it “a shared set of priorities on providing additional and substantial tax relief to help California businesses recover and re-hire after the COVID-19 recession.”
The bill passed the state Assembly by a vote of 73-0 on Monday. Assemblyman Kelly Seyarto, a Republican from Murrieta, said while he wanted all businesses to benefit, the bill was too important to vote against.
“There's a lot more businesses that are going to be helped by this than are going to be hurt,” he said.
The legislation is AB 80.