Federal Relief Delays Tax Break for California Businesses

By making the federal business aid exempt from state taxes, the bill pending before the state Legislature would save money for businesses while costing the state about $2.3 billion in revenue

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California businesses got billions of dollars from the federal government during the coronavirus pandemic, money that helped many survive public health restrictions that hobbled their livelihoods. But now Gov. Gavin Newsom's administration worries a new federal law could mean the state can’t exempt that money from taxes.

The U.S. government changed the law so businesses don't have to pay federal income tax on the money and California lawmakers are eager to do the same at the state level.

But a bill that would do that has been delayed because of a provision in the latest federal coronavirus relief bill that says states can't use relief money to cut taxes. By making the federal business aid exempt from state taxes, the bill pending before the state Legislature would save money for businesses while costing the state about $2.3 billion in revenue.

Gov. Gavin Newsom's administration is worried the U.S. Treasury Department would view that as a tax cut. If that happens federal bureaucrats could withhold some of the federal relief money from California as a penalty. California is scheduled to get about $26 billion.

“I think that (Congress members) were trying to solve one problem and perhaps created a different problem for states,” Kristin Shelton, chief of the research and analysis unit at the California Department of Finance, told lawmakers Thursday. “We are working tirelessly to be able to get that clarity and hope to get it in the coming weeks.”

Congress has approved three economic relief packages since the pandemic began last year. Last fall, the California Legislature passed a law making much of the federal aid for businesses exempt from state taxes. But then Congress approved more aid in December, requiring California to pass another law to match it.

But before they could do that, Congress approved even more aid — $1.9 trillion — only this time it banned states from using federal relief dollars to pay for tax cuts.

It's mostly been an an issue in Republican-led states, where lawmakers are wondering how to handle various tax cut proposals that had been in the works before the relief bill was signed.

A treasury spokesperson told The Associated Pressearlier this week the provision is not meant to ban states from passing any tax cut. Instead, it's meant to stop states from using federal aid to pay for those cuts. The department said states would have to return some relief money if they used it to offset tax cuts.

“The law does not say that states cannot cut taxes at all, and it does not say that if a state cut taxes, it must pay back all of the federal funding it received,” the Treasury Department said. “It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes."

California Department of Finance spokesman H.D. Palmer said the statement from Treasury was not enough to answer the state's questions, saying they were waiting on “official, definitive guidance.”

On Friday, Department of Finance Director Keely Martin Bosler sent a letter to Treasury Secretary Janet Yellen, urging her to allow the state to proceed with the tax cut. Bosler noted those cuts already exist in states that automatically conform to federal tax law.

“We believe California should also not be penalized for the exact same policy,” Bosler wrote.

California lawmakers were prepared to pass the tax break in February. But lawmakers pulled the bill at the last minute to make some changes that took several weeks. By then, President Joe Biden had signed the relief bill.

“It just doesn't make any sense to be able to hamstring a state's ability to do technical corrections that dictate our own tax policy to provide relief, of all things,” said state Assembly Budget Committee Vice Chair Vince Fong, R-Bakersfield.

The delay is especially frustrating for business owners, many of whom just paid their taxes to meet a March 15 deadline. California delayed the individual tax filing deadline from April 15 to May 17 because of the pandemic but did not delay the business tax deadline.

“Small business owners need that conformity and they need it as soon as possible. We can't afford for the federal government or any leaders to dilly dally with this critical help that they need right now to get back on their feet,” said John Kabateck, director of the California chapter of the National Federation of Independent Business.

Copyright AP - Associated Press
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