California report: Is all quiet on the legislative front?
This edition of Inside Deloitte summarizes various pending tax-related legislative proposals in California and provides taxpayer considerations regarding the potential effect of each proposal if enacted.
- Tax-related legislative proposals in California
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Tax-related legislative proposals
Legislatively, things seem fairly quiet in California of late. Taxpayers seem to have settled into the new normal since the whirlwind of regime changes in the first half of the decade, including a significant corporate franchise tax overhaul that enacted factor presence nexus;1 mandatory single-sales factor apportionment;2 market-based sourcing for sales of services and intangibles;3 a strict liability penalty on understatements of tax;4 the elimination of the long-running enterprise zone credit;5 the California Competes credit;6 a temporary sales tax increase;7 a new specialized manufacturing use tax exemption;8 and a temporary personal income tax increase.9
Indeed, the corporate franchise tax provisions, except for the aforementioned penalty, have become the norm across a number of jurisdictions. Uniquely for California, however, many of these changes came to be via voter ballot propositions. Ironically, the voters have both strengthened California’s constitutional requirements for a two-thirds vote by each house of the State Legislature for a tax increase, thus making it more difficult to raise taxes, and provided the votes necessary to enact many of the provisions listed above. Although voters have been mobilized to make big things happen, arguably more mundane legislative efforts, such as periodically updating the date of California’s conformity to the Internal Revenue Code, can sometimes take a back seat.
Specifically, regarding the two-thirds vote requirement, the passage of Proposition 26 in November 2010 expanded the definition of the terms ‘‘tax’’ and ‘‘tax increase’’ so that more proposals regarding taxes would require a two-thirds vote of the California State Legislature or approval from local voters.10 Although the 2012 and 2014 election cycles changed the number of Republicans and Democrats in the California State Senate and State Assembly, neither party has the two-thirds supermajority necessary to unilaterally enact new tax legislation.11 Accordingly, it remains difficult to pass new tax law in California.
Nevertheless, interesting legislative tax proposals and related matters are afoot in the Golden State. With the 2015-2016 legislative session underway, the primary pending developments to watch include:
- An update to California’s conformity to the IRC;
- An update to California’s large corporate understatement penalty (LCUP);
- California’s response to the federal mobile workforce bill;
- Proposals seeking to increase California’s tax revenue; and
- Tax-related changes to California’s Health and Safety Code.
This article summarizes these and other significant proposals and their related background, as well as potential implications for taxpayers if some or all of the pending measures become law.
If you have questions regarding this edition of Inside Deloitte, please contact any of the following Deloitte Tax professionals:
Marc Shayer, senior manager, Deloitte Tax LLP, Los Angeles, +1 213 593 4455
Frederick Thomas, senior manager, Deloitte Tax LLP, Los Angeles, +1 213 593 3741
Ricky Lin, senior, Deloitte Tax LLP, Los Angeles, +1 213 593 4423