State legislators are considering a measure to reduce the franchise tax for businesses with 100 or fewer employees, but so far the bill has been stalled by cost concerns.
Currently, any new business that incorporates within California must first pay $800 to the state Franchise Tax Board. Most of the money goes into the state general fund, and cannot be used as a credit toward the new corporation’s tax liability.
Critics say the tax discourages start-up businesses and far exceeds the amount charged by other states.
“Other states don’t charge this they welcome you with open arms,” said Ron Roach, an analyst with the California Taxpayers Association. “In California, you walk through the door and they slap you with a tax bill. This sets the tone for first impressions.”
Other states levy start-up taxes that are far less: Oregon, $10; Idaho, $20; Arizona, $50 and Utah, $100. Even Rhode Island the state with the second highest start-up tax after California charges just $250, Roach said.
Senate Bill 890 by Sen. Jack O’Connell, D-Santa Barbara, would cut the $800 franchise tax in half for companies with 100 or fewer employees.
The measure was approved by the Senate Revenue and Taxation Committee, but is stalled in Appropriations amid cost concerns, according to Olivia Morgan, an aide to Lt. Gov. Gray Davis, who is backing the legislation.
The bill would cost the state up to $20 million a year in lost revenue.
“The price-tag was a little too steep, but we’re confident that this will come back one way or another,” said Morgan. “There are a few competing bills in the Assembly that address business taxes, so many of the lawmakers are waiting for joint-committees to approve something. This is on everyone’s radar screen because politicians realize that small business is the backbone of the California economy.”
If approved, SB 890 would reduce taxes for an estimated 27,000 small businesses that incorporate each year or nearly half the 60,000 businesses that incorporate in California each year, Morgan said.
Fred Maine, a lobbyist with the California Chamber of Commerce, believes legislators will make some move to lower the tax this budget year. He said it will likely be brought up during joint meetings of the Senate and Assembly’s tax committees.
Also, it might be discussed when top legislators meet with Gov. Pete Wilson during budget negotiations this month. Though rarely followed, the Legislature is supposed to pass a budget by June 15 to meet a July 1 deadline for it to be signed into law.
“I bet something is going to happen with this before the budget is passed,” Maine said. “They are expecting a large windfall this year, and many are saying the cost of a franchise tax cut can be absorbed through that.”
But he added, “This is California politics so one never knows.”
Davis and O’Connell said they introduced the measure because of concerns that start-up fees for new business were unfair lowering the number of new businesses each year. They contend that small business is at the heart of the state’s economic recovery, making up 90 percent of all businesses in the state and generating two-thirds of all net jobs in the private sector.
Between 1987 and 1997, the minimum franchise tax rose 400 percent. As a result of that increase, the state’s new corporate filings dropped from 62,279 in 1986-87 to 54,000 in 1996-97, according to Morgan.
The bill also calls for reducing the one-time $600 prepayment of tax due the state upon incorporation. The incorporation tax later applied towards the new company’s first tax bill would be reduced to $300 under the legislation.