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.“

Jan. 18, 2013

By Chris Reed

That California is extraordinarily hostile to business is accepted as a given by just about everyone who is an executive, manager or small-business owner in the state.  But Democrats and some in the media routinely challenge this assumption, and some genuinely seem to believe it’s nothing but a talking point used by business interests to gain undeserved favor.

I once saw a labor official even suggest there was something sinister or rigged about the CEO survey that comes out every year and always ranks the Golden State last in business-friendliness, as if there was a national conspiracy to put California down.

To a degree, Gov. Jerry Brown seems to believe that the business community’s gripes have some merit. So he’s taken to criticizing excessive regulation and to urging bureaucrats to help, not hinder, job creation.

Brown now faces an acid test for his alleged interest in helping the private sector: an insanely capricious and destructive decision by the state’s Franchise Tax Board to impose four years of retroactive taxes on hundreds of businesses because it lost a court fight with one business. It was a fight that started in 2008 over whether the company qualified for a tax break that encourages entrepreneurs — a partial state income tax exclusion on sales of stock of a “Qualified Small Business.”

Tax decree

At xconomy.com, victimized businessman Brian Overstreet shares his horrific story of facing a huge ex post facto tax decree, and explains its genesis:

“The company at issue in that lawsuit did not meet one of the QSB requirements—that it maintain 80 percent of its employees and assets in California. In August of 2012, the California Court of Appeals sided with the plaintiff, ruling that denying him the QSB exclusion based on the ’80 percent requirement’ was an unconstitutional violation of the interstate commerce clause.

“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.”

This is bonkers. You don’t get much more anti-business than punishing business owners out of pique over losing a lawsuit that those business owners had nothing to do with.

Overstreet’s takeaway from this assault on sanity:

“1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

“2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

“3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.”

The governor should clean house, right? Well …

If Jerry Brown really means what he says about wanting to help grow jobs in California, here’s what he should do: Clean house at the Franchise Tax Board.

FTB Executive Director Selvi Stanislaus? He should be gone, for starters. And so should everyone at FTB who thought this made sense.

But there’s a little problem with the let’s-clean-house theory. According to the FTB’s website, who are the three members of the agency’s governing board?

1) Ana Matosantos. As in Jerry Brown’s director of finance.

Evidently word of the governor’s desire to help the private sector hasn’t reached his Cabinet.

2) Jerome Horton. As in the former Democratic lawmaker from Inglewood appointed by Brown to the FTB oversight post.

Evidently word of the governor’s desire to help the private sector hasn’t been shared with his board appointees.

3) John Chiang. As in the state controller, elected by the voters.

Evidently breaking trust with job-creating entrepreneurs in such grotesque and extreme fashion isn’t a big deal to the veteran Democrat who fancies himself as governor material.

I look forward to watching this story play out. Most mainstream media in California have little sympathy for business complaints. But everyone can relate to the story of people hit with four years of dubious back taxes because of childishness and stupidity from tax bureaucrats. And their bosses.

Your move, Gov. Brown. Yo, Jerry: Do you think this is fair? Tolerable? Honorable?

We shall see.