BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 1372 (DeSaulnier) - Corporation Tax: Tax Rates: Publicly Held
Companies
Amended: April 29, 2014 Policy Vote: G&F 5-2
Urgency: No Mandate: No
Hearing Date: May 23, 2014 Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: SB 1372 would modify the Corporation Tax (CT) by
establishing a series of tax rates based on compensation ratio,
as defined.
Fiscal Impact:
The Franchise Tax Board (FTB) estimates that this bill
would result in revenue gains of $100 million in 2014-15,
$320 million in 2015-16, and $340 million in 2016-17
(General Fund).
The FTB would incur increased administrative costs to
incur the provisions of the bill. Specifically, the bill's
requirements would impact FTB's programming, printing,
processing, mailing, and storage costs for tax returns.
These costs are currently unknown, but would likely amount
to a minimum of low millions of dollars annually (General
Fund).
Background: California is one of 46 states to levy a broad-based
tax on corporate profits, and its CT is the State's third
largest source of General Fund revenues. In 2012-13, it raised
$7.5 billion, or 7.8 percent of total General Fund revenues. The
CT applies to all corporations which earn income derived from,
or that is attributable to, sources in California. Nonprofit
corporations (such as churches and charitable organizations) are
exempt, as are insurance companies (which instead pay a gross
premiums tax).
Of the more than 700,000 corporations filing CT returns in
California, only about 55 percent actually report profits, and
thus, pay CT taxes. The remaining firms report losses, and thus,
SB 1372 (DeSaulnier)
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are subject only to the state's minimum tax. Those firms making
profits are distributed among a variety of industry sectors.
The CT actually encompasses three different taxes-the corporate
franchise tax, corporate income tax, and the bank tax. The
corporate franchise tax is paid by most businesses in the State
for the privilege of doing business in California, while the
corporate income tax is paid by businesses which do not have
sufficient presence or activity in the State for franchise tax
purposes. The bank tax is paid by banks and financial
institutions. All three components of the CT are assessed based
on income. The corporate franchise tax is by far the most
significant component. In 1997, the corporate franchise tax rate
was 9.3 percent. In 1997, the rate was reduced to 8.84 percent.
The corporate income tax rate is also set at 8.84 percent.
Corporate CEO compensation has increased sharply over the past
few decades for a variety of reasons. The Bureau of Labor
Statistics reports that the inflation-adjusted average annual
salary for production workers in the United States went from
$18,187 to $19,552 between 1990 and 2009 (in 1990 dollars), an
increase of 7.5 percent. At the same time, the
inflation-adjusted average annual compensation for CEOs has
grown from $2.9 million to about $5.2 million, an increase of
nearly 80 percent.
Proposed Law: SB 1372 would change California's corporation tax
rate of 8.84 percent on publicly held corporations to a tax rate
based on the salaries of each corporation's highest paid
employee as compared to its median-salaried employee. Beginning
in tax year 2015, the bill would impose a corporate tax rate
ranging from 7 percent to 13 percent, based on "compensation
ratio," The applicable tax-rate percentage would be:
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| | |
|If the compensation ratio is: |The applicable tax rate is: |
|--------------------------------+--------------------------------|
| | |
|Over zero but not over 25 |7 percent upon the basis of net |
| |income |
|--------------------------------+--------------------------------|
| | |
SB 1372 (DeSaulnier)
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|Over 25 but not over 50 |7.5 percent upon the basis of |
| |net income |
|--------------------------------+--------------------------------|
| | |
|Over 50 but not over 100 |8 percent upon the basis of net |
| |income |
|--------------------------------+--------------------------------|
| | |
|Over 100 but not over 150 |9 percent upon the basis of net |
| |income |
|--------------------------------+--------------------------------|
| | |
|Over 150 but not over 200 |9.5 percent upon the basis of |
| |net income |
|--------------------------------+--------------------------------|
| | |
|Over 200 but not over 250 |10 percent upon the basis of |
| |net income |
|--------------------------------+--------------------------------|
| | |
|Over 250 but not over 300 |11 percent upon the basis of |
| |net income |
|--------------------------------+--------------------------------|
| | |
|Over 300 but not over 400 |12 percent upon the basis of |
| |net income |
|--------------------------------+--------------------------------|
| | |
|Over 400 |13 percent upon the basis of |
| |net income |
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The bill defines compensation differently for employees and
executives. Employee compensation is calculated according to the
Internal Revenue Code's methodology for Social Security Taxes,
and includes almost any kind of compensation paid by the
taxpayer to the employee, such as wages, benefit contributions,
the value of stock options and deferred compensation. For
executives, compensation is determined based on the Summary
Compensation Table the firm reports to the Securities and
Exchange Commission, and includes salary, bonus, grants of stock
options and stock appreciation rights, long-term incentive plan
awards, pension plans, and employment contracts and related
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arrangements.
The bill also would increase the corporation tax rate by 50
percent for taxpayers that have a specified decrease in
full-time employees in the United States, while increasing the
number of contracted and foreign full-time employees.
Taxpayers must furnish a detailed compensation report to FTB.
FTB may prescribe rules and regulations to implement the bill
that are exempt from the Administrative Procedures Act.
Staff Comments: This bill would completely restructure the
State's corporation tax; any related revenue estimate is subject
to considerable uncertainty, and would depend on how
corporations respond to the change in Corporation Tax Law. To
the extent that corporations narrow the compensation spread
between their highest paid employee and their median employee to
a factor of 100 or less, their tax rate would fall below the
current 8.84 percent, and revenues would thus be lower than what
would occur on the natural.
Alternatively, if corporations do not change their compensation
patterns, then their tax rate would increase, and corporation
tax revenues could also increase, by hundreds of millions of
dollars annually. To the extent that firms exit the State upon
passage of the bill, revenues would decline.
FTB's duties with respect to tax administration of this proposal
would be daunting. FTB would have to verify both compensation
calculations for every corporation tax return filed to ensure
the proper tax rate was used, which would likely necessitate
major enhancements to its personnel and information technology
systems. The related costs are currently unknown, but could be
substantial.