California Democrats want to give more COVID tax breaks. Why new stimulus law might block them
Gov. Gavin Newsom and California legislators want to use federal stimulus money to give tax breaks to small and essential businesses for certain expenses during the pandemic — but they’re worried that they can’t because of certain provisions in the new COVID relief law.
Newsom’s wants to match a federal tax policy that would make sure loans that businesses received through the Paycheck Protection Program are not taxable.
If California cannot bring its tax code into conformity with federal law, businesses might owe hundreds of thousands in taxes because state law counts forgiven loans as income.
Assemblyman Adam Gray, D-Merced, introduced a bill to give tax credits to small and essential businesses on any money spent to provide protection against COVID-19, including personal protective equipment used by employees or customers. That bill was supposed to be heard in committee on Monday, Gray said.
But both bills — and others like them pending in the California Legislature — have indefinitely stalled, due to a provision of President Joe Biden’s federal stimulus law. The provision says states cannot use any money they receive from the stimulus bill for tax cuts — or, more specifically, that they cannot offset lost revenue due to tax cuts with the federal money.
“We don’t have any clear answers yet. I find it shocking that this even got in here in the first place,” Gray said. “They prohibited states from tax credits, but not tax increases.”
California officials have reached out to Treasury Secretary Janet Yellen for guidance last week. So far, she hasn’t responded to that letter. But she did respond to similar concerns raised by the Arizona attorney general in a letter on Tuesday.
“It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law,” Yellen wrote. “If States lower certain taxes but do not use funds under the Act to offset those cuts — for example, by replacing the lost revenue through other means — the limitation in the Act is not implicated.”
Yellen also said the Treasury would be issuing further guidance. H.D. Palmer, spokesman for the California Department of Finance, said that “with a few billion dollars on the line” that California officials were waiting for that guidance before deciding how to proceed.
Many states already implemented tax revisions to exempt PPP money from state taxes. But California has not done so, and the stimulus law’s language says states are prohibited from “using the funds to offset, either directly or indirectly, a tax cut made since March 3, 2021.”
That could mean some states that already passed tax cuts will be able to use the money provided from the law to cover those costs, but not states such as California, Texas, Washington and others that did not institute those tax changes before March 3.
The Department of the Treasury did not respond to a request for comment. A spokesman for House Speaker Nancy Pelosi, D-San Francisco, also did not respond to a request on the intent of lawmakers in banning the money’s use for tax cuts.
For Gray, the problem illustrates why federal lawmakers should work more with local and state lawmakers before instituting sweeping laws like the COVID-19 stimulus. His bill would be a benefit to local restaurants, hospitals and agriculture industries, he said.
“I watched the evolution of the COVID crisis, I saw a lot of small business people frustrated when they tried to get PPP loans, some of them forgivable, some not,” Gray said. “So you’re trying to keep your small business afloat, and the government hands you more paperwork to fill out. So I was thinking what’s the most efficient, cost effective way to get help.”
“But now here we are, waiting on federal guidelines,” he added.
This story was originally published March 26, 2021 at 5:00 AM.
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