The Republican tax plan Congress delivered to President Donald Trump on Wednesday has been blasted as a plague on the California economy. It’s wildly unpopular with most residents, Gov. Jerry Brown labeled it “a monstrosity,” and experts say it will take money from Californians who have little choice but to spend huge amounts for a home.
Then there’s the other side of the coin.
Business owners and economists said the $1.5 trillion in tax cuts should produce a surge in capital investment and improve job growth. Corporate income taxes will be reduced drastically, and there’s a special tax break for small-business owners. The bill also will cut taxes for businesses that invest in new plant and equipment.
“As a business owner in California and Sacramento, does it make me want to invest more to grow the infrastructure of my business? Absolutely,” said Greg Bauer of Ground Control Systems, a Sacramento manufacturer of bike racks installed on school campuses and other locations. “We can’t wait.”
Bauer said he plans to plow the extra money into research and development “to be able to come up with better products.”
The reduction in the corporate tax rate, from 35 percent to 21 percent, has received lots of attention in the weeks leading up to Wednesday’s votes in Congress. But Sung Won Sohn, a business professor at California State University, Channel Islands, said it’s a lesser-known aspect of the plan that could create a major share of the economic growth: the provision that lets companies fully deduct their investments in plant and equipment in one year. Under current law, those deductions are spread over the anticipated life of the equipment, which reduces the tax benefit when the purchases are initially made.
“This is when you buy equipment such as computers or pickup trucks or machines,” he said. “It will spur more investment.”
All told, he said the plan “from a business perspective ... is a Christmas tree loaded with lots of ornaments and candy canes.”
Just how much investment will be generated remains to be seen. House Speaker Paul Ryan acknowledged Wednesday that “nobody knows” if the tax cuts will produce enough economic growth to pay for themselves.
“There’s a lot of debate about how will corporations respond to this,” said economist Jeff Michael of the University of the Pacific. “Will they invest ... will they sit on the cash? To some extent that’s kind of unknown.”
Corporate executives insisted they’ll put the money to good use.
“All the savings that I may make from the tax bill will go to investment in our business, 100 percent,” said Chris Rufer of Morning Star Co., a massive tomato-processing company based in Woodland.
“When it goes to investment in our business, that means we produce more stuff – in our case, food,” said Rufer, an outspoken champion of limited government.
Not all business executives are so enthusiastic. For many companies, the tax plan offers equal doses of good and bad news.
In the Bay Area, the epicenter of much of California’s economic growth in recent years, the two most prominent business associations said they welcome the tax cuts for business but worry about the impact on individuals.
The reduced corporate rates should “spur economic growth and increase our competitiveness globally,” the Bay Area Council and Silicon Valley Leadership Group said in a letter to Congress earlier this month.
However, they warned about the impact on their employees, who already are struggling with “high housing and mortgage costs.”
The GOP plan places a $10,000 cap on the amount Americans can deduct from their federal taxes for state, local and property taxes. That cap could be particularly harmful to Californians, who pay some of the highest state and local taxes in the country.
Similarly, the Republican plan could punish Californians buying homes in the red-hot Bay Area and, to a lesser extent, in the Sacramento region. Current law allows homebuyers to deduct the interest they pay on mortgages of as much as $1 million; the new law lowers the ceiling to $750,000. The new law takes effect with homes purchased after Dec. 15 of this year.
About 1,200 homes in the four-county Sacramento region sold for $750,000 or more in the past six months, according to Zillow.com. Most of the high-end home sales were in Placer County.
Democrats and other critics of the tax plan have said it provides little or no relief for the middle class while drastically cutting taxes for the wealthy. A poll released this week by the UC Berkeley’s Institute for Governmental Studies showed 52 percent of Californians believe the legislation will hurt the state, while just 17 percent believe it will help.
Sohn said the plan is already helping California pension funds by generating more fuel for the stock market rally. “The stock market has been sizzling,” said Sohn, who is on the board of the Los Angeles City Employees’ Retirement System.
If the rally continues, that could boost the fortunes of CalPERS and CalSTRS, the giant state pension funds based in the Sacramento area. Both pension systems are significantly under-funded, which has forced taxpayers to contribute more in recent years.
CalPERS Chief Investment Officer Ted Eliopoulos, speaking at the system’s board meeting this week, said “you’re certainly seeing the equity markets in the U.S. reward the corporate tax cut component of the bill, at least here in the short term.” But he cautioned that the long-term effects of the tax plan on CalPERS’ fortunes remains to be seen.
“One will know more in two years,” he said.
The impact on health insurance markets could hurt the greater Sacramento area, where health care has become one of the drivers of economic growth. The Republican plan repeals the Affordable Care Act’s requirement that individuals purchase health insurance or face a financial penalty.
Officials at Covered California, which runs the Affordable Care Act’s health insurance marketplace in California, said Wednesday that enrollments have remained strong, but they warned that the tax plan could bring havoc once the repeal takes effect in 2019.
“That’s one of the uncertainties of the bill, and that has to have some people in Sacramento nervous,” Michael said.