Taxable Talk

As I prepare to head to Sacramento for a conference, the Bronze Golden State found that it held fast this past year as the third worst business tax climate in the United States as ranked by the Tax Foundation. That said, you do have to travel to the East Coast to find the two worst climates for businesses: New Jersey and New York.

Here are the top ten business climates (numbers in parentheses are the 2008 rankings):

1. South Dakota (2)
2. Wyoming (1)
3. Alaska (4)
4. Nevada (3)
5. Florida (5)
6. Montana (6)
7. New Hampshire (8)
8. Delaware (10)
9. Washington (12)
10. Utah (11)

Here are the bottom ten:

41. Vermont (43)
42. Wisconsin (38)
43. Minnesota (41)
44. Rhode Island (46)
45. Maryland (45)
46. Iowa (44)
47. Ohio (47)
48. California (48)
49. New York (49)
50. New Jersey (50)

California’s tax system isn’t uniformly bad according to the Tax Foundation. They rank California as having the 13th best property tax system. Of course, that’s due to Proposition 13, which liberals in California still decry. We also have the 14th best Unemployment Tax system. However, that’s almost certain to fall in future years; California’s unemployment insurance fund is broke and has been borrowing from the federal government. Unemployment taxes will either rise or benefits will be cut. There’s no political will in the legislature for the latter so the former is a given sometime in the future.

California’s corporate tax system is ranked as the 34th best in the country—below average, but not horrible. It’s the last two categories where California hurts businesses: sales tax (ranking 48th) and individual income taxes (ranking 48th). California did improve in corporate tax structure from 45 in 2008; this was due to the changes made in corporate taxation as part of the February 2009 budget deal—changes already being decried by liberals in Sacramento.

One excerpt from the full report is particularly telling for California:

States do not enact tax changes (increase or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

The California Air Resources Board is looking at Greenhouse Gas Fees for all California businesses. Call them fees, but as I repeatedly state all taxes (and fees) are passed on to consumers. Assuming the report is accurate this will just add to California’s anti-competitive status and will be yet another boon to Las Vegas, Phoenix, and Denver.

The headline basically tells the story. The commission appointed by Governor Schwarzenegger to look at California’s tax structure will apparently propose a Business Net Receipts Tax. The tax would not be based on gross receipts but net receipts: gross income less cost of goods sold. The proposed tax rate is 4.2%. The commission hopes that the tax would lead to the lowering of California’s corporate and personal income tax rates as well as the state’s sales tax rate.

The article I linked to notes that there is a lot of opposition to the tax. As I’ve mentioned before, all taxes and fees to businesses are passed on to consumers. This tax would also hit intellectual property producers hard, as labor is usually a “below the line” cost and wouldn’t be deductible. That’s not good news for Silicon Valley. It would also impact apartment owners and other service businesses.

What I worry about is that the liberals in the legislature will look at this proposed tax not to replace California’s current tax system but as an additional source of revenue. Frankly, I don’t think this tax can pass given that all new taxes require a two-thirds vote; Republicans in California’s legislature have vowed to block any tax increases.

Hopefully, there will be some better nuggets in the commission’s report than this lemon of a tax.