How is the governor going to do this? By having California’s tax law conform to federal tax policy. With the 2017 federal Tax Cuts and Jobs Act, the federal government was able to close a substantial number of tax loopholes. By aligning California’s tax laws with the 2017 federal Act, Newsom hopes to do the same on the state level.
This move to maintain California’s progressive tax system would primarily affect corporations and wealthy individuals, affecting less than 0.1% of households. According to the Governor’s office, the tax changes are expected to raise $1.7 billion that will go into funding the CalEITC expansion.
Conforming to the federal tax law will also simplify accounting rules for many small businesses. Under the tax conformity, small businesses with up to $25 million in revenue can elect to use cash rather than accrual accounting. Previously this was capped at small businesses making up to $5 million in revenue. The tax changes will also simplify inventory valuation and simplify other bookkeeping processes. Economic Security Project Action estimates that the tax changes will provide $280M in relief to small businesses.
The CalEITC expansion will include individuals making up to $30,000 annually. This new limit would cover many low-income entrepreneurs. Small and micro business owners are fundamental to California’s robust economy. California’s culture of entrepreneurship has created jobs and economic opportunity throughout the state. While entrepreneurs are at the heart of California’s economy, their path to financial stability is often hard-fought. The proposed CalEITC expansion will make business ownership and entrepreneurship a reality for more Californians.
CAMEO and Small Business Majority issued a joint letter of support for the EITC expansion because it gives small and micro business owners more security while also being paid for through the tax conformity proposal.
An expansion of the CalEITC is a clear way to support entrepreneurs and simplify the tax law. It is a win-win.