Close Loopholes, Open Opportunities Coalition Supports Conformity

Honorable Toni Atkins
President pro Tempore, California State Senate

Honorable Holly J. Mitchell
Chair, Senate Budget and Fiscal Review Committee

Honorable Anthony Rendon
Speaker, California State Assembly

Honorable Phil Ting
Chair, Assembly Committee on Budget

 

Dear Legislative and Budget Committee Leaders:

When nearly 40% of households cannot afford a $400 unexpected expense, but large corporations and
the already wealthy are able to buy expensive art and courtside tickets to the Kings to avoid paying
taxes, something is very wrong.

That’s why our organizations — the Close Loopholes, Open Opportunities Coalition — strongly
support expanding California’s EITC to $1.2 billion and to pay for it by closing loopholes that
benefit large corporations and wealthy investors. The breadth of our coalition demonstrates the
sweeping support for this proposal: labor, economic justice, immigrant rights, faith-based, social
services and small business organizations all agree that there is no better way to support working
Californians right now than this proposal.

Our communities — all of us — benefit when we have enough to take care of our families and be a part
of the local economy. But for too many, economic stability is out of reach. Just this week we saw
another report confirming what we know too well: 40% of Americans do not have enough cash on hand
to cover an unexpected $400 expense. For many, even regular expenses prove too much: 17% of
Americans are unable to pay their bills each month, foregoing payments for housing or utilities because
they just can’t make ends meet. For communities of color, the hardship is considerably worse.1

1 Federal Reserve Board, Report on the Economic Well-Being of Households in 2018, (May 2019), pages 19-22,
https://www.federalreserve.gov/publications/default.htm

At the other extreme, California’s large corporations and wealthy investors have never had it so
good. Because of tax cuts and breaks, large corporations and wealthy investors pay significantly less
in state income taxes than they did in the late 80’s.2

2 California Budget Center, “The Governor’s Tax Conformity Package” (May 2019)

Putting cash into the pockets of working people helps creates economic stability for millions of
Californians who desperately need it. Money to boost low wages or smooth inconsistent earnings
can mean the difference between paying the bills and covering that unexpected expense — or falling
further behind. There is no simpler or better-tested policy to accomplish this than the Earned Income
Tax Credit (EITC). Thanks to previous policy changes, CalEITC is on track to put money in the pockets
of two million households this year.

Governor Newsom’s proposal to expand CalEITC — tripling California’s investment to $1.2 billion next
year to benefit three million households — that’s nearly seven million people – – shows a bold
commitment to achieving California for All. And with inclusion of ITIN filers in both Senate and
Assembly budgets, “All” will truly mean ALL .

We support Governor Newsom’s proposal to pay for the entire CalEITC program now and in the
future by closing loopholes in California’s tax code in conformity with federal law.

These loopholes were closed by the Trump Administration and Congressional Republicans in the 2017
Tax Cuts and Jobs Act, meaning that if California does not conform to this part of federal law, California
will continue to give tax breaks that even the Trump Administration and Congressional Republicans
deemed unjustifiable. But while Congress turned around and gave the proceeds from these loophole
closures to the already-wealthy, California will give a boost to millions of hard-working Californians who
strive mightily to pay their bills on time and maybe have money to buy a new pair of shoes for their
growing children. Closing loopholes is the right thing to do.

Furthermore, because proceeds from closing loopholes will create sufficient funds to pay for the Cal
EITC program going forward, CalEITC is better able to weather an economic downturn, which is
inevitable. A recession-resilient program means that California can maintain CalEITC at levels the will
help families now and in the future. It also alleviates the pressure to compete for general funds with
other critical programs that help Californians, like housing, child care and health care. Closing
loopholes is the responsible thing to do.

Specifically, the conformity package proposes the following:

  • Limit on losses for non-corporate business taxpayers: saves $850 million
    Closes the loophole that allows taxpayers with “pass-through” businesses (S corporations,
    LLCs, partnerships, sole proprietorships) to deduct business losses to offset income, thereby
    reducing or even eliminating their state tax liability. Closing the loophole would put a limit on the
    deductions ($250K single/$500K married filers) and require any excess loss to be carried
    forward and treated as excess business loss in those years, subject to the same limits.
  • Limit on Like-Kind Exchanges: saves $210 million
    Closes the loophole that allows taxpayers to avoid paying capital gains taxes on the sale of property as long as they use the sale proceeds to buy a similar (“like-kind”) type of property. Closing the loophole means the sale of property triggers a capital gains tax, except that real property is still exempted.
  • Elimination of Net Operating Loss “Carrybacks”: saves $190 million
    Closes the loophole that allows taxpayers to use current year deductions (usually from losses) to offset income and state tax liability in previous years, effectively getting a “refund” of taxes paid in the past. Closing this loophole would mean that taxpayers could no longer use current deductions to claw back previous years’ tax payments. Taxpayers will still be able to carry deductions forward.
  • Limits on deductions for fringe benefits: saves $160 million
    Closes the loophole that allows businesses to deduct food, entertainment, amusement, recreation and transportation costs associated with conducting business. Closing this loophole means that businesses may not deduct these expenses.

All together, closing these loopholes would recover $1.4 billion in lost revenue from the
wealthiest individuals and corporations, which would more than pay for the entire expanded
CalEITC expansion, benefitting nearly seven million hard-working Californians.

Sincerely,

The Close Loopholes, Open Opportunities Coalition

Alameda County Community Food Bank
AFSCME CA
California Asset Building Coalition
California Association of Food Banks
California Catholic Conference
California Church Impact
California Food Policy Advocates
California Immigrant Policy Center
California Partnership
California Reinvestment Coalition
Coalition for Humane Immigrant Rights
County Welfare Directors Association
Economic Security Project Action
Friends Committee on Legislation of California
Golden State Opportunity
GRACE Institute/End Child Poverty in California
Interfaith Movement for Human Integrity
John Burton Advocates for Youth
Justice in Aging
Lutheran Office of Public Policy California
National Association of Social Workers,
California Chapter
National Council of Jewish Women CA
NextGen California
SEIU CA
UFCW CA
Western Center on Law & Poverty
Young Invincibles