SACRAMENTO – California-based companies received billions of dollars from the federal government during the coronavirus pandemic. This money helped many survive the public health restrictions that were affecting their livelihoods. But now, Governor Gavin Newsom's administration fears that a new federal law could mean the state can't exempt this money from taxes.
The U.S. government changed the law so companies wouldn't have to pay federal income tax on the money, and California lawmakers are keen to do the same at the state level.
However, a bill that would do this has been delayed due to a provision in the recent federal coronavirus bill that states that states cannot use aid money to lower taxes. By exempting federal economic aid from state taxes, the legislature's pending bill would save money for businesses and cost the state about $ 2.3 billion in revenue.
Gavin Newsom's administration is concerned that the US Treasury Department would view this as a tax cut. If so, federal bureaucrats could withhold part of the federal aid money from California as a penalty. California is said to receive around $ 26 billion.
"I think (Members of Congress) tried to solve one problem and maybe created another problem for states," Kristin Shelton, director of research and analysis for the California Department of the Treasury, told lawmakers Thursday. "We are working tirelessly to achieve this clarity and hope to achieve it in the coming weeks."
Congress has approved three economic aid packages since the pandemic began last year. Last fall, California law passed a bill that provides for much of the state aid to businesses that are exempt from state taxes. But then, in December, Congress approved more aid and asked California to pass another law that complies with this one.
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 cut taxes.
It has mainly been a problem in Republican-led states with lawmakers wondering how to deal with various tax cut proposals that were in the works prior to the signing of the relief bill.
A Treasury Department spokesman told The Associated Press earlier this week that the provision was not intended to prohibit states from passing tax cuts. Instead, the aim is to prevent states from using federal aid to pay for these cuts. The ministry said states would have to return some aid money if they used it to offset tax cuts.
"The law doesn't say states can't cut taxes at all, and it doesn't say that if a state cuts taxes, it must repay all federal funds it receives," the Treasury Department said. "It just told them not to use that money to offset net income when the state cuts taxes."
California Treasury Department spokesman H.D. Palmer said the Treasury Department's statement was insufficient to answer the state's questions and said they were awaiting "official, final guidance."
On Friday, Treasury Director Keely Martin Bosler sent a letter to Treasury Secretary Janet Yellen asking her to allow the state to proceed with the tax cut. Bosler noted that these cuts already exist in states that automatically comply with federal tax law.
"We believe California shouldn't be punished for exactly the same policies either," wrote Bosler.
California legislators were ready to pass the tax break in February. But lawmakers took the bill at the last minute to make some changes that took several weeks. By then, President Joe Biden had signed the Aid Act.
"It just doesn't make sense to hinder a state's ability to make technical corrections that dictate our own tax policies to create the very best," said vice chairman of the State Assembly's Budget Committee, Vince Fong, R-Bakersfield.
The delay is especially frustrating for business owners, many of whom only paid their taxes to meet the March 15 deadline. California moved the deadline for filing individual taxes from April 15 to May 17 because of the pandemic, but did not postpone the deadline for business tax.
“Small business owners need that compliance, and they need it as soon as possible. We cannot afford to see the federal government or other leaders diligently doing this critical help that is needed to get them back on their feet, ”said John Kabateck, director of the California Chapter of the National Federation of Independent business.