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As owners of two child care centers, we have shared a front-row seat to the economic woes of families in our community. When our parents have their work hours cut, or are laid off, they no longer can afford the preschool and child care services our centers offer their children. Now is not the time to raise our taxes on working families and small business.
But that is exactly what would happen under a proposal by the Commission on the 21st Century Economy, whose members were appointed by the governor and the legislative leaders to suggest an overhaul of California's tax system.
The centerpiece of the commission's plan is a new tax that would have grabbed more than 40 percent of our 2008 net income had it been law last year. There are incentives in the plan favoring businesses that replace employees with machines. And the plan includes tax breaks that could place our small business at a competitive disadvantage compared with big corporations.
Most importantly, the proposed tax – known as a business net receipts tax – would eliminate our ability to deduct employee compensation, including benefits. If applied to our 2008 income before taxes, we would have paid nearly $26,000 in new taxes on income of approximately $61,000. Although the commission also proposed a cut in the personal income tax, our savings would have been at most $1,800, for a net tax increase of over $24,000.
Some have suggested we pass the new tax on to our customers. That sounds simple, but as job losses have mounted recently, and parents have had to cut back on educating their preschoolers, we froze our tuition rates this year to help as many parents as we could.
If the tax plan is adopted, we would be forced to raise our rates to make ends meet, and more families would be unable to afford our services. Other child care centers like ours would also have to increase tuition, resulting in fewer families being able to afford quality care. As a result, qualified preschool teachers would lose their jobs as more and more families are forced to move their children into less expensive alternatives (a.k.a. baby-sitters). New taxes couldn't come at a worse time for the families we serve and the teachers we employ.
The tax on net receipts disproportionately hurts service businesses like ours. Since employee-related expenses, including benefits, are not deductible under the plan, staff-intensive businesses will pay more than their fair share of taxes compared with businesses that rely more heavily on equipment. And if the cost of a machine is not taxed, but employee-related costs are, there will be an even greater incentive than there is now for businesses to lower wages, reduce benefits, and if possible, replace employees with computers or other automation or to contract out for services. That's not much of a jobs program.
There also are trade-offs in the tax plan in the form of tax cuts that seem to favor big corporations over small business. Large corporations currently pay a corporate income tax that would be eliminated under the plan. Small businesses like ours don't pay a corporate tax, but instead report our business income on our personal tax forms.
There is a "small business credit" in the plan to help level the playing field, but it phases out pretty quickly, and is based on how much we charge instead of how much we make. Large corporate child care operators have cost advantages with advertising, personnel costs, and supply purchasing, and may not need any further help from the tax code. We don't mind competing with them, but bigger is not necessarily better when it comes to educating children.
We know that something needs to be done to fix the current tax system, but a system based upon how much we charge, like the net receipts tax or a sales tax on services, is not the way to go.
We should be taxed on the income we take out of our business for ourselves, and given extra tax credit for money spent creating jobs. Under the new system, we would get a tax break for going to Europe for an education conference, but nothing for hiring new employees or giving our teachers raises.
To get more tax revenue, you need more taxpayers. To get more taxpayers you need more jobs. The tax system should give more credit to business owners that hire additional employees, pay better wages, and provide better benefits.
The Maddys are owners of the Angels in Action Learning Centers in Citrus Heights and Rocklin.
