The California Legislature adjourned on September 10 and ended the 2021 legislative session without passing any major tax increase bills during the session. Several proposals were under consideration during the early part of the session, but were not revived before adjournment. To the surprise of many and despite Covid-19 complications, California ended the recent fiscal year (in July) with a significant revenue surplus. Also, Governor Newsom had communicated earlier this year (and early in the legislative session) that he would not support tax increases during this session. The legislature apparently got the message. Further, Governor Newsom faced a recall election on September 14, and increasing taxes around the time of an election is never a good political idea. The governor is now considering approximately 800 bills and has until October 10 to act on them. He can act by either signing them or vetoing them, or allow a bill to become law without his signature (possible, but rarely done). The important tax measures are briefly described below.
No Wealth Tax. The most radical tax proposal of the session was for a wealth tax. Assembly Bill (AB) 310 would have applied to tax years beginning on or after January 1, 2022. The bill would impose a 1% tax on a California resident’s “worldwide net worth” in excess of $50 million (or $25 million if married filing separately) and a 1.5% tax on residents with a worldwide net worth greater than $1 billion (or $500 million if filing separately) “on the activity of sustaining excessive accumulations of wealth as a resident” of California. The wealth tax would apply not only to all California residents, but also to part-year residents and temporary residents who meet the wealth thresholds identified above. “Temporary residents” are individuals who spend more than 60 days in California during the current taxable year and have spent either at least 120 days in the state over the prior two taxable years or at least 150 days in the state over the prior four taxable years. The tax also would apply to certain former residents (i.e., nonresidents) who were subject to the tax in one of the preceding four years, but who now are nonresidents with no expectation of returning to the state to reside. (An earlier version of the bill provided for 10 preceding years.) On April 6, the bill was referred to the Assembly Revenue and Tax Committee for hearing, but no hearing was ever held and the bill died in committee. A wealth tax bill (AB 2088), albeit in a different form, had been introduced in the prior 2019-2020 legislative session, and had also died in committee. The bill had little support this year, but do not be surprised if a similar bill is introduced in the next session.
No higher personal income tax rates. California already has the highest personal income tax rate of any state, at 13.2% (and no capital gains rate). AB 1253 would have increased California’s top personal income tax rate to 16.8%. Specifically, the bill, for taxable years beginning on or after January 1, 2021, would impose an additional personal income tax at the rates of 1%, 3% and 3.5% on that portion of a taxpayer’s taxable income over specified thresholds. On March 26, the bill was referred to the Assembly Revenue and Tax Committee for hearing, but no hearing was ever held and the bill died in committee. As with AB 310 for a wealth tax, this bill had little support this year, but do not be surprised if a similar bill is introduced in the next session.
No GILTI tax increase. This was the big corporation tax bill of the session. AB 71 would have conformed California law to the federal tax provisions to tax Global Intangible Low-Taxed Income (GILTI) and required certain taxpayers to include a portion of GILTI and/or a portion of repatriated income. The funds would be used to finance the Bring California Home Fund to focus on preventing and ending homelessness in California. According to the author’s office, “corporations are taking advantage of a tax loophole to evade taxes by claiming they make most of their profits overseas in low or no-tax countries.” The bill was active and moving through the committees in the earlier days of the session. However, on June 3, the bill was sent to the Assembly inactive file and was never revived.
Other notable tax developments in the session were:
SALT cap workaround enacted. AB 150, which the Governor signed into law on July 16, allows for a workaround of the $10,000 SALT deduction cap in the TCJA. For tax years beginning on or after January 1, 2021, and ending before January 1, 2026, the bill allows some pass-through entities taxed as S corporations and partnerships that do business in California to elect to pay a 9.3% entity-level tax on income that California would normally tax as personal income when passed through to the owners. The owners must consist solely of individuals, fiduciaries, trusts, estates or entities taxable as corporations (i.e., cannot have owners that are partnerships). The entity cannot be publicly traded and cannot be part of a combined reporting group for corporate tax purposes. California then provides a corresponding personal income tax credit to qualifying partners, shareholders or members in an amount equal to 9.3% of the taxpayer’s “pro rata share or distributive share” of the pass-through income subject to the entity-level tax. The election is irrevocable and must be made on an annual basis on a timely filed original (not amended) return for the year of the election. FTB already has issued some guidance on its website on the legislation and will be creating new forms, and expect more guidance to come.
Proposition 19 property tax implementation. On September 13, the legislature sent to the Governor Senate Bill (SB) 539. The bill requires the California State Board of Equalization to adopt emergency regulations and further implement the constitutional provisions found in Proposition 19, which was passed by the voters at the November 2020 election. Proposition 19 changed the property tax valuation rules for intergenerational property tax transfer and base-year property tax value transfer for property owners who are over age 55, disabled or impacted by a disaster. One of the most important provisions of SB 539 (and Proposition 19) involves the property tax valuation consequences of transferring a “residence” and requires the residence transferred to have been the principal residence of the transferor and to become the principal residence of the transferee within one year of the transfer. The governor is expected to sign the bill.
As an aside, on August 26, the Howard Jarvis Taxpayers Association filed a ballot initiative, called the “Repeal the Death Tax Act,” which (if passed by the voters) would repeal Proposition 19. The initiative would restore and increase to $2.4 million the (previous $1 million) exclusion from property tax reassessment for non-primary residence property passed on to children and grandchildren, indexed to inflation going forward. It also would restore the unlimited exclusion from reassessment for an inherited primary residence. If the required signatures (about 1.5 million) are collected, the initiative would appear on the November 2022 ballot.
Proposed new collection obligations on marketplace facilitators. On September 9, the legislature sent to the governor AB 1402. The bill expands Wayfair tax collection obligations under existing California law for “marketplace facilitators,” as defined, to also collect and remit state fees on lead-acid batteries, fees on lumber products, sales of new tires and covered eWaste, such as certain video displays. The governor is expected to sign the bill.