Changes in the California Legislature Create Potential for Significant Tax Changes in 2017

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Tax Policy

Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Dan De Jong discusses recently introduced tax legislation in California.

Dan De Jong

By Dan De Jong

Dan De Jong is a senior manager in the State and Local Tax group of KPMG LLP's Washington National Tax practice.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

As the dust settled from the elections in November, it became clear that the Democrats in California had won enough seats in the Legislature to pass tax measures without Republican support—even with the state's constitutionally mandated supermajority requirement for passing tax increases. This shift in power could usher in a wave of tax legislation in California that has been blocked by Republican resistance for years, making 2017 a year for California taxpayers to watch closely.

Already in January, Democratic legislators have introduced legislation that could hit the pocketbook of California businesses. On Jan. 5, 2017, Senator Wieckowski introduced S.B. 66, which would deny taxpayers a deduction for “any amount paid or incurred for punitive damages.” This provision would clearly result in a greater tax burden for businesses necessitating a supermajority to pass through the legislature. Sen. Wieckowski has introduced this legislation in prior years without success, but the Democratic gains from the 2016 elections may provide the required votes needed to enact the provision into law.

Several other bills affecting taxes have also surfaced in the opening weeks of the new year. For example, A.B. 151 would reauthorize California's cap and trade system for greenhouse gases to remove any uncertainty about whether the current system is an impermissible tax (because the original law was passed without a supermajority). Another measure, A.B. 1 would increase the state's gas tax to help pay for improvements to transportation infrastructure.

These early bills likely represent the tip of the iceberg for what taxpayers can expect in California this legislative session. Even more controversial proposals from prior years, such as expanding the sales tax to include services, may finally have a path to becoming law. Businesses with operations in the Golden State should pay close attention to avoid unpleasant surprises.

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