Crazifornia: Franchise Tax Board kills the Golden State Goose

Crazifornia book coverJan. 22, 2013

By Laer Pearce

California’s hostility towards business, and willingness to tax it into oblivion, is storied. As State Senator Ted Gaines, R-Roseville, is quoted in my recent book, “Crazifornia“:

“I am tired of my constituents and other business owners here being treated like pinatas by regulators and politicians who smack them around until some fine or penalty falls out.”

Or, for that matter, some newly created tax liability — like the new retroactive (to 2008) tax that’s going to smack the Golden State’s golden goose upside the head. Henry Blodget explains in Business Insider:

“As a way of encouraging entrepreneurs and investors to start companies in California, the state has long offered a tax deduction for those who start, invest in, and eventually sell companies.

“This tax deduction allowed entrepreneurs and [investor] angels to exclude 50 percent of any gain on the sale of ‘Qualified Small Business’ (QSB) stock.

“California’s capital gains taxes are a high 9 percent, so the deduction reduced the capital gains rate to 4.5 percent. This encouraged the entrepreneurs to start and keep their companies in California, instead of decamping to lower-tax states.

“And, for many years, California entrepreneurs and investors have taken advantage of the deduction.

“But now the state has apparently decided that it no longer needs to encourage entrepreneurs to start and keep their companies in California.

“So it is eliminating the tax deduction.

“Far more startling, the state is eliminating the deduction retroactively–going all the back to 2008.” (Emphasis in original)

As you can imagine, those QSBs, the companies that qualified for the reduction in taxes but now suddenly don’t qualify, are not reacting positively to this news.

Retroactive taxes

Retroactive tax increases — a recent passion of our revenue-hungry governor and his Democrat allies in the legislature — should be unconstitutional. They’re certainly unconscionable. Business people make decisions based in part on tax implications, and to change those implications after the fact is akin to double jeopardy and an apparent  violation of the ban on ex post facto laws in the U.S. Constitution. An affected party would have to go back in time to protest the change, which of course had not yet been changed.

It’s taxation without representation stuck in a time loop.

The impacts of this criminal behavior by the state will be swift and profound. For starters, a lot of entrepreneurs who sold their businesses after 2008 are going to be very, very angry at the state, and will become much more likely to leave the state. Worse, hundreds or thousands of other entrepreneurs who plan to sell their companies will relocate to states with less onerous tax policies.

Like Proposition 30, which increased income taxes retroactively after voters passed it last November, the net effect will be not more money for the state, but less — as we soon will find out. Will Sacramento ever learn that bullying the successful has consequences?

Playground politics

In an article in Xconomy, California entrepreneur Brian Overstreet explains how this crazy situation came to be.

It concerns a business that a few years ago had taken the tax advantages due it as a Qualified Small Business. The Franchise Tax Board, the state tax collector, told the company that it was in fact not qualified for the deduction, and would have to pay the higher 9 percent capital gains tax. The FTB had determined that the company failed to meet one of the qualification points — having 80 percent of its workforce and assets in California.

The company sued and won, with the court ruling that the FTB’s action was an unconstitutional violation of the Commerce Clause.  Overstreet picks up the story from there:

“Since the FTB lost the case, you might think that they would strike the unconstitutional requirement and keep the rest of QSB statute intact. Not a chance.

“What the FTB did instead was to take their ball and go home. They decided that since they could not impose the ’80 percent requirement,’ no one would be entitled to the QSB exclusion. They put out an announcement terminating the Qualified Small Business exclusion and retroactively disqualifying all exclusions and deferrals going all the way back to 2008.”

True to form, California is alone in its stupidity.  The federal government, tone deaf as it is on the economy, realized that encouraging fast-growing businesses is a good thing and extended its QSB program.

Who could disagree with Overstreet when he concludes: “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

Laer Pearce, a 30-year veteran of California public affairs, is the author of “Crazifornia: Tales from the Tarnished State.

24 comments

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  1. Ronald Stein
    Ronald Stein 22 January, 2013, 09:42

    The federal government is setting the tone and California is right in line, i.e., Government Dependents Outnumber Those With Private Sector Jobs In 11 U.S. States

    Those with jobs in the private sector generate the revenue to support those that work in government and those that are dependent on government subsidies. California is 1 of 11 states where the collective government dependents “takers”, outnumber the private sector ”givers” to the economy. In California, there are 139 “takers” for every 100 private sector workers. Of those 11 states, 4 are major populated states such as California, New York, Illinois, and Ohio.

    The takers, outnumbering the givers, obviously control this uneven “retirement” playing field where the takers retire at an earlier age (50 to 55) than the givers (62+).

    The big hammer on the economy is the fact that California leads all states in total debt weighing in at $617 billion in unfunded liabilities. Other states are lining up to see where they rank for their unfunded liabilities.

    With the huge and growing budget deficits in California and other states, and nationally, the majority of the voting public is quickly shifting over to the takers. Our elected politicians need to keep spending to insure their reelections.

    The challenge to our elected officials will be how to reverse this “entitlement” momentum when reelection votes are controlled by the takers, as the minority private sector givers are shrinking and becoming less and less of a voice in our election process.

    Reply this comment
  2. Joe
    Joe 22 January, 2013, 10:57

    It’s hard to believe but Greece has a better economy than California does. and Greece has almost 30% unemployment. If you add up the people on the dole and the unemployed in California you have 47% to 52% unemployed. What a joke the Democrats are nothing but scoundrels.

    Reply this comment
  3. us citizen
    us citizen 22 January, 2013, 11:56

    Ca never stops to astound me with their stupidity. Do we have no one with a math degree working for this state!

    Reply this comment
  4. BobA
    BobA 22 January, 2013, 12:53

    us citizen:

    Math degrees? My friend, you ask to much. What we do have are people working for the state with degrees that requires no competence in math or science beyond that which is required to graduate from high school.

    And for the record:

    If you & I ran our household budgets the way the state run theirs, we would be bankrupt and sitting in a prison cell.

    Reply this comment
  5. BobA
    BobA 22 January, 2013, 13:21

    “Three-fifths to two-thirds of the federal budget consists of taking property from one American and giving it to another. Were a private person to do the same thing, we’d call it theft. When government does it, we euphemistically call it income redistribution, but that’s exactly what thieves do — redistribute income. Income redistribution not only betrays the founders’ vision, it’s a sin in the eyes of God.” –Dr. Walter E. Williams

    “If you have been voting for politicians who promise to give you goodies at someone else’s expense, then you have no right to complain when they take your money and give it to someone else, including themselves.” –Dr. Thomas Sowell

    Reply this comment
  6. RT
    RT 22 January, 2013, 13:35

    California is fine, just fine. Sure it is going bankrupt and yes is has billions of dollars of debt that no one wants to address, but it is California! We have shown that pouring millions that we cannot afford into our schools, the welfare system, and for our health care programs does not make them better, but it is California!
    California is fine! That is until we open our eyes and see how lost we are, but it is California! So it may already be too late.

    Reply this comment
  7. Bob
    Bob 22 January, 2013, 18:55

    RT:

    Truer woulds have never been spoken. California is proof that if you dumb down enough people, you can convince them that $hit is Shinola shoe polish and they will argue with anyone who says otherwise. Which is, by the way, a damning and defining statement about the state of our public education system. People who are illiterate in the things that matter don’t make wise and informed decisions.

    That’s also why it’s easy for politicians in California and elsewhere to convince enough citizens that there is no problem that a tax increase can’t fix. Besides, when you robbing Peter to pay Paul, you can always count on Paul’s support.

    More appropriately, when you’re feeding at the public trough, who cares where the slop comes from or who paid for it?

    Reply this comment
  8. Hondo
    Hondo 22 January, 2013, 22:45

    Phil Mickelson, the golfer, is being forced to either move or retire. Either way it is a huge loss of tax revenue for the state, compared to a small business. Its people like him, who have to pay the most, who can afford to sell out and move to low tax Florida. The whole notion that it is more profitable for him to ‘retire’, at the prime of his ability to make money and pay more taxes, is a direct assault on the notion that raising taxes on the wealthy, gets you more revenue.
    Phil is one of the most loved and beloved people in golf for he is truly a gentleman. Tiger is a better golfer but is a far worse human being. Most of the tour thinks he is a jerk. Phil is noted for going thru the drive thru at In and Out for a burger meal and paying with a 100 dollar bill and telling the teller to keep the change. Phil is by no means a tight wad. In fact he is just the opposite, one of the biggest tippers around.
    But that only goes so far. He said he is expected to pay over 60% of his income in taxes. That’s heading towards France’s 75%. Just like King James, expect him and his huge tax paying ability to end up in Florida.
    Hondo…….

    Reply this comment
  9. Marten Purdy
    Marten Purdy 23 January, 2013, 07:34

    Now, that’s not what we need to create jobs and really bolster and heat up our economy. We do need the private sector to be able to keep more of what we earn and produce. Government is going to have to learn to be more efficient and live with less if that’s what it takes to reign in the government growth that we’ve seen today. But we do need tax relief and Barack Obama even supported increasing taxes as late as last year for those families making only $42,000 a year. That’s a lot of middle income average American families to increase taxes on them. I think that is the way to kill jobs and to continue to harm our economy.

    Reply this comment
  10. BobA
    BobA 23 January, 2013, 07:42

    Hondo :

    Parallel that to the ever increasing salaries of state employees and you’ll get a feel of what those higher taxes are paying for.

    With the way taxes are rising in this state and where the money is going, it’s just a matter of time when landing a job with the state of California and membership in the democrat party will be “the” ticket into the upper class income bracket (or more appropriately, “the ruling class”).

    Doesn’t that remind you of how things work in communist countries and the old Soviet Union?

    Reply this comment
  11. double l
    double l 23 January, 2013, 12:43

    Is anybody in Sacto or Washington DC listening to the comments of the Grass Root Givers as quoted above? Apparently they only listen to the takers and special interest groups that grease their palms.

    Reply this comment
  12. Adios Cali
    Adios Cali 23 January, 2013, 12:57

    GOP Failures = Higher Taxes

    Reply this comment
  13. Donkey
    Donkey 23 January, 2013, 13:34

    It is clear that the Demonrats are devoid of math skills and common sense. All posters refering to the foolishness of the state leaders understand how stupid they are acting, the state is on the short road to ruin. 🙂

    Reply this comment
  14. Tom Chapman
    Tom Chapman 23 January, 2013, 13:48

    Who is John Galt?

    Reply this comment
  15. eck
    eck 23 January, 2013, 19:07

    Folks, it all comes back to the politboro (aka CA legislature) who made the law that enables the FTB to unilaterally do this. “No ex post facto” laws unless the politburo sets it up that way. We are truely doomed.

    Reply this comment
  16. BobA
    BobA 23 January, 2013, 20:35

    Tom Chapman:

    A character in Ayn Rand’s famous novel “Atlas Shrugged”.

    Reply this comment
  17. BobA
    BobA 24 January, 2013, 09:35

    Folks:

    California’s state constitution is now a single page document with 2 words written on it in a 20-point Arial font that simply says:

    “Simon Says”

    The rest of the page is blank.

    The Franchise Tax Board is simply following the letter of the law.

    Reply this comment
  18. Linda Y
    Linda Y 24 January, 2013, 13:48

    RT: Wow ! You are so right on about this. California is a mess and no one cares. Pouring millions that we cannot afford into our schools, the welfare system, and for our health care programs does not make them better !
    I had hoped that California would get it right before it is too late, but that ship has sailed. It is to late, now all we can do is either move out or wait around for it all to come crashing down. For me(I am stuck here) I’ll just be waiting.

    Reply this comment
  19. BobA
    BobA 24 January, 2013, 17:14

    RT, Linda Y:

    According to Jerry Brown today, all is well in California. The budget is balanced, jobs are coming back, taxes are low, crime is down, our schools are in excellent shape, business is good, the air and water is clean, the sky is blue and life in California has never been better.

    Don’t worry; be happy. Pass the joint and chill out. Jerry Brown’s fairy tales are the bomb!!

    Reply this comment
  20. Rex the Wonder Dog!
    Rex the Wonder Dog! 24 January, 2013, 23:25

    Bob, stop it, that hurts from laughing so hard 😉

    Reply this comment
  21. Marten Purdy
    Marten Purdy 25 January, 2013, 06:19

    BobA:
    classic example- and origin- Jerry Brown in his race for California governer left a message for campaign contributions, thought he hung up, but went on to call Meg Whitman(his opponent) a Whore.

    Reply this comment
  22. BobA
    BobA 25 January, 2013, 08:39

    Marten Purdy:

    That’s akin to the pot calling the skillet black. A professional political prostitute calling a wannabe political whore a whore.

    Jerry Brown spent years on his back humping his way to the top and he has the nerve to call Meg Whitman a whore??

    Reply this comment
  23. TomK
    TomK 9 February, 2013, 10:18

    This has nothing to do with the politicians of the state of CA, IL, NY, etc. They can only make these monumental mistakes if they have the power to do so. They only have the power to do so if idiots keep voting them in. It’s unbelievable how stupid people continue to get year after year. Californians continue to vote in the most liberal, nonsensical politicians year after year, even though they are living the nightmare that those decisions create. They live there, they watch the news, they read blogs, papers, etc. They can see what’s happening when businesses leave or don’t hire, when their property taxes aren’t far behind their mortgage payment (like in Illinois) and when they’re paying $5/gallon for gas. Does it make a dent though? Nope. As soon as they can, they run in droves to the polls and vote in the same do-nothings as they did at the last election. And, because CA, NY, IL and other high tax, high stupid states have such big populations, they are able to vote in the biggest imbecile of all time, Obama, who would love to see the US become another CA or IL. High taxes, punish hard working, job creators and then think there will always be enough money floating around that they can redistribute it to the “poor” (replace with lazy, do-nothings, entitlists). Pathetic!

    Reply this comment

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