Close Loopholes, Open Opportunities Coalition Supports Conformity

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