California Senate’s “Protect Our Progress” Plan: Impact on Taxpayers and Policy Considerations

California Senate’s Budget Proposal

In an April press release, California’s Senate Pro Tem Atkins (D) and Budget Chair Skinner (D) outlined their “Protect Our Progress” budget plan which includes, among other things, a significant increase in the corporate income tax rate — from 8.84 percent to 10.99 percent on net income over $1.5 million. The rationale for this increase is that it would partially reverse the tax cuts received by “2,500 of the biggest corporations (just 0.2 percent of all business filers)” from the federal Tax Cuts and Jobs Act of 2017. The press release also touts that over 99 percent of businesses, or more than 1.6 million tax filers, will receive a tax cut by reducing the rate on C corporations to 6.63 percent on the first $1.5 million of taxable income.  S corporations would receive a corresponding 25 percent tax reduction on the first $1.5 million of taxable income, with no corresponding tax increase on income over $1.5 million.

The press release states that the plan includes a “modest state level [tax] increase to ensure that big corporations begin to pay more of their fair share,” which would be used to fund tax cuts for small businesses, renters, and low income workers, as well as investments in schools, homelessness reduction, health access, and child care. 

However, the plan hit a roadblock when Governor Gavin Newsom (D) rejected the plan within hours of the Senate leadership’s press release. 

How many taxpayers would the Protect Our Progress plan impact?

It’s difficult to see how the Protect Our Progress plan would represent a tax reduction for 1.6 million filers. According to the Franchise Tax Board’s 2021 Corp Annual Report (the latest publicly available data), there were just over 1 million corporate filings in California. 

Of the 1,048,600 corporate returns, approximately 456,000 of those filers had no income. A taxpayer having no income cannot benefit from a tax rate cut. This leaves only 574,000 corporate filers, or about 54 percent, with taxable income below $1.5 million that could therefore benefit from the tax reduction. This is significantly lower than the claim that 99 percent, or 1.6 million filers, would receive a tax cut.

C corporation filers who would be subject to the tax increase (those with income over $1.5 million) numbered 6,262, representing nearly 2 percent of C corporation filers and 0.6 percent of all corporate filers. Thus, the proposed tax increase, as outlined in the press release, would apply to these 6,262 business filers — again a significant difference from the claim that only 2,500, or 0.2 percent, of all business filers would be impacted by the proposed tax rate increase. 

Policy Considerations of the Protect Our Progress Plan 

The Protect Our Progress plan would bump California from the 7th highest corporate income tax rate in the nation in 2023, to the highest corporate income tax rate in 2024 at 10.99 percent. The top rate would be a full percentage point higher than Minnesota, who, in 2024, will have the highest rate in the country at 9.8 percent. New Jersey currently has the highest rate but their 2.5 percent surtax expires at the end of 2023. 

This tax increase would also be in contrast to the current trend of reducing corporate income tax rates. Since 2018, thirteen states have reduced their corporate income tax rate, and several of those states have done so more than once. These reductions have come from Republican trifectas, one Democratic trifecta (Colorado), and several divided government states. 

One year ago, California had a budget surplus of $97.5 billion. Today, the Legislative Analyst’s Office is projecting a $24 billion operating deficit for the 2024 fiscal year at current spending levels, and up to $74 billion if there is a recession. According to the National Association of State Budget Officers (NASBO) Summaries of Proposed and Enacted Budgets, California’s general fund expenditures in FY17 were $125.1 billion compared to $242.9 billion in FY22; a spending increase of 94 percent over a five-year period. Some of that is related to federally provided COVID-19 aid, but COVID-19 appropriations don’t make up the full picture. This year, Governor Newsom is proposing general fund spending of $223.6 billion for FY24, a slight decrease from the two prior years, but still 79 percent higher than FY17.  

Despite slowing economic conditions and the volatile nature of the corporate income tax, a few policymakers, including some in California, continue to attempt to fund their large spending increases by raising corporate tax rates.