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State Tax Problems

CA Companies Could Face Higher Taxes Each Year For the Next Decade

by
Rebekah Barton
on
7/14/2023
CA Companies Could Face Higher Taxes Each Year For the Next Decade

In March 2023, California Governor Gavin Newsom unveiled a budget plan that anticipated a $31.5 billion deficit for the Golden State, up from $22.5 billion projected in a January proposal.

Now, business owners could find themselves facing tax consequences as a direct result of the state's deficit. According to an Associated Press report, the problem stems from job loss during the coronavirus pandemic. 

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Credit: dszc/Getty Images

Legally, business owners are required to pay taxes on all of their employees. These funds are deposited into a fund that states use to pay unemployment benefits when someone is laid-off or loses their job for another eligible reason. As COVID-19 battered the economy, however, there was so much job loss that unemployment accounts in some states ran out of funding.

Twenty-two states took loans from the federal government so they would not have to halt unemployment benefit payments. Now, those states are required to pay back the loans, plus interest. The majority have already paid what they owe in full. However, California is among the five states that have an outstanding balance -- to the tune of $18.9 billion.

This is where possible consequences for business owners come into play. If California fails to pay back what it borrowed, businesses will be forced to do so via higher taxes each year for the next decade. Per the state's agreement, it should have paid $1.5 billion in 2023 -- $1 billion toward the balance owed, plus $500 million to help small businesses pay their increased taxes.

This agreement, however, was put in place prior to the budget deficit problem. Now, per the AP, Governor Newsom wants to cancel $1.25 billion in a bid to cover the budget shortfall. This would result in business owners paying an extra $21 per employee in federal unemployment tax insurance this year. That number would increase by an additional $21 every year the debt remains for the next ten years. 

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Credit: slobo/Getty Images

Newport Beach Mayor Pro Tem Will O'Neill weighed in on the situation on Instagram. O'Neill noted:

[The report] last week from the Legislative Analyst’s Office shows that UI payments out (~$6.8 Billion) are expected to greatly eclipse taxes coming in (~$5.3 Billion)In other words, CA’s UI fund is underwater by at least ~$1.5 Billion … in a good economy! As one business leader described it, we will all be paying for the incompetence of CA’s government yet again.

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O'Neill's sentiments echo those of many business leaders and local politicians throughout the state. 

The California Legislature's Legislative Analyst's Office (LAO) reports that Governor Newsom's administration currently forecasts that "the state's Unemployment Insurance (UI) Trust Fund is now paying out more in UI benefits than it receives in UI payroll taxes."

Key drivers of this imbalance are the fact that UI payroll taxes have "remained flat from 2022 through 2024 at about $5.3 billion" each year. This is indicative of the fact that annual UI payroll taxes have typically increased at a slower rate than benefit payments. In this case, UI benefit payments are estimated to balloon "from $5 billion in 2022 to $6.8 billion in 2024 due mainly to recent wage growth." 

The LAO's report confirms that they find the UI fund to be "structurally insolvent" at this time. 

The AP previously spoke to Rob Lapsley, president of the California Business Roundtable, “Yeah, we have the biggest deficit. But you have to start paying it down somewhere."

“It’s just like it doesn’t exist. I think they’re just going to let employers pay it," Lapsley continued. "They just intend to push through a hidden tax increase.”

What do you think about the impact this tax increase could have on California small businesses?

You Might Also Enjoy:

-  California Quietly Raises State Income Tax Rate to 14.4%

- California Experiences Financial Red Flag as Tax Revenue Falls

Feature Image Credit: DustyPixel/Getty Images

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Rebekah Barton

Rebekah Barton

Rebekah's search engine optimization career began completely by accident as a college student. Over the course of her career so far, she has "grown up" with the SEO industry, from writing content while juggling classes to managing her own teams of writers and overseeing SEO strategy in subsequent roles. She is excited to bring her passion for high-quality content to CountingWorks, Inc.

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