Gov. Gavin Newsom and the Democrat Supermajority are Coming for Your $$$

California Governor Gavin Newsom has a gaping $73 Billion budget deficit.

Gov. Newsom and the Democrat supermajority Legislature will be searching in every crevice and corner of the Capitol, under every couch cushion, and coat pocket in order to backfill the $73 billion budget deficit. And they won’t stop at the billionaires.

The State of California also owes the federal government more than $21 Billion after borrowing billions to pay unemployment benefits during the Covid pandemic. And while California already has paid more than $650 million in interest on the loan, there is another $550 million due Sept. 30, 2024, the Los Angeles Times reported.

Adding to the pain, The California Employment Development Department admits that $55 billion was lost in the pandemic, the Globe reported.

Gov. Newsom didn’t have to borrow the money from the feds – California could have used federal American Rescue Plan Act funds to pay the debt. Instead, Newsom sent stimulus checks to California residents, and spent the relief money on new projects.

The LA Times reports:

Data also show that jobless workers in California stay on unemployment significantly longer than the national average, which adds to the total payout amount. And California workers claim unemployment benefits in disproportionately high numbers.

The state accounts for about 20% of the nation’s jobless claims, far in excess of its 11% share of the labor force population. That partly reflects the state’s higher unemployment and accompanying increases in layoffs and jobless claims in the tech industry and other sectors, but also its comparatively easier eligibility rules and low re-employment rate.

“Businesses are going to continue to see the slow boil eating into their margins,” said Robert Moutrie, senior policy advocate for the California Chamber of Commerce, Yahoo Finance reported. “Higher taxes will hit small and midsize companies in sectors such as restaurants and tourism especially hard,” he said. “It just adds to the burden and the costs of operating here and makes companies look at operating elsewhere,” Moutrie said.

What can employers, faced with huge unemployment taxes do?

Some have left the state. Others are planning an exit. However that is problematic as well, as California is a “throwback state,” the Tax Foundation reports.

“Under throwback rules, sales of tangible property that are not taxable in the destination state are ‘thrown back’ into the state where the sale originated, even though that is not where the income was earned. This means that if a company located in State A sells into State B, where the company lacks economic nexus, State A can require the company to ‘throw back‘ this income into its sales factor.”

The Tax Foundation explains:

“Throwback and throwout rules can substantially increase corporations’ tax liability and influence business decision-making. Throwback rules have multiple negative effects on state business activity, including reduced new corporate investment and lower rates of economic efficiency. Throwback rules and throwout rules erode the competitiveness of states that impose them by incentivizing firms to relocate to non-throwback and throwout states to avoid higher corporate income tax burdens.

Throwback rules are a case of the wrong tax, at the wrong rate, in the wrong state. They cause businesses to be taxed at potentially many multiples of the income they have in the state imposing the throwback rule, motivating these businesses—or at least certain aspects of their business—to locate elsewhere. This effect is so robust that studies find throwback rules actually decrease tax revenue over time, since they do more to drive out business activity than they do to tax the nowhere income from remaining businesses with exposure to the provision.”

California even has lawmakers again proposing an Exit tax “on the wealthy;” a wealth tax on billionaires to recover anticipated lost revenue on stock earnings by existing residents or residents moving out of the state.

However, this is unconstitutional under interstate commerce laws, as well as due process clauses, as the Globe has reported. Berkeley’s Hastings Law School Scoca Blog reports that the exit tax violates the right to travel, violates the federal Commerce clause, and Due Process clauses.

And, a “wealth tax” is a secondary tax on wealth already taxed at the point of acquisition, consumption, or on income already made. The reason a wealth tax ends up not impacting the wealthy is because it gets passed down to the consumers. This double or triple taxation should be illegal.

In 2020, Democrats proposed an exit wealth tax, AB 2088, and one which would follow any and all businesses leaving California for greener economic pastures.

The bill’s author, then-Assemblyman Rob Bonta (D-Contra Costa), now California’s radical Attorney General, blamed coronavirus for creating “inequality” in California, and not on Democrats’ legislation, policies, and their lockdowns, the Globe reported. “Families are hurting right now. COVID-19 has only made matters worse,” Bonta said. “In times of crisis, all Californians must step up and contribute their fair share. Asking these well-resourced Californians to give a little more to keep our people working and support our most vulnerable is the right thing to do.”

This first-in-the-nation net worth tax was estimated to generate $7.5 billion per year in new “revenues” to the state coffers.

But that proposal took a lot of direct hits and Gov. Gavin Newsom discovered it wasn’t good for his national optics. He assured California business owners that the wealth tax was dead-on-arrival.

However, another “wealth tax” was proposed in January 2023. Assembly Constitutional Amendment 3 by Assemblyman Alex Lee (D-Palo Alto) begins with six WHEREAS clauses including that California has long-term needs that are not being met by existing revenue sources.

The Globe reported that ACA 3 would make three big changes:

The first change that ACA 3 would make is to amend Article XIII, Section 2 to provide that the Legislature may provide for the taxation of all forms of personal property or wealth, tangible or intangible and classify personal property or wealth for differential taxation or for exemption.

The second change that ACA 3 would make is to amend Article XIII B, Section 1 to modify the Gann Limit or the State Appropriations Limit (SAL).

The third would determine that California is no longer among the top 10 states with the highest percentage of households whose costs are in excess of 50% of household income.

Financial Advisor Magazine covered this exit tax:

“California is basically looking for unrecognized capital gains for wealthy persons leaving the state,” said Mary Kay Foss, a CPA in Carlsbad, Calif. “Gains on California real estate are taxed here in any case, so the tax would be imposed either on unrecognized gains on other assets or wealth other than real estate. It doesn’t smell constitutional to me.”

Exit taxes seem to be connected to wealth taxes. Seven states—New York, California, Connecticut, Hawaii, Illinois, Maryland and Washington—have some sort of wealth tax, said Miklos Ringbauer, CPA and founder of MiklosCPA in Los Angeles.

“It’s not legal for states to implement a real exit tax on their citizens simply as a result of moving to another state,” Ringbauer said. But “states like New York, Massachusetts and California have implemented robust exit-tax audit techniques such as automated programs to track a citizen’s activities—cellphone use, the location of credit card charges, use of toll roads and so on—to help determine whether the taxpayer actually moved out of the state or has spent sufficient number of days in the state and is now subject to state income taxes.”

ACA 3 has been stalled in the Assembly Revenue and Tax Committee – the bill has not been killed, which means the Governor and Democrats are keeping this one in their back pocket. Expect to see it suddenly shoved through committees quickly, or reappear as language in a spot bill, or shoved through by the budget committee’s budget bill, if they think they can.