We represent many businesses – everything from local “mom and pops” to a Fortune 150 company. What is the single biggest problem facing such a diverse group of business taxpayers? Bad tax policy; especially the lack of predictability and consistency.
If you ask the general public what’s wrong with the tax system you are likely to get one of two answers. Either taxes are “too high” or the system is somehow unfair to their particular situation. Businesses, however, are more clearly focused tax policy.
California last year imposed a retroactive increase last year on the state’s income tax. As bad as that sounds, the story gets worse.
California for years has allowed taxpayers to cut their capital gains tax by investing in certain in-state businesses. Invest in California and receive a break on your taxes. While that might sound great for the state’s economy, some outside businesses claimed the law violated the Commerce Clause of the U.S. Constitution. The purpose of the Commerce Clause is to prevent discriminatory state legislation. An state appeals court recently sided with the objectors and tossed the tax break, ruling it unconstitutional.
What was California’s reaction? A normal state would have simply followed the court’s ruling and disallowed the tax break going forward. Not California.
Proving once again that California often leads the nation in bad tax policy, the California Franchise Tax Board ordered taxpayers who used the break to invest in local businesses to repay much of their savings. To add insult to injury, these taxpayers may also have to pay interest and penalties on taxes they were never required to repay in the first place. The state is retroactively seeking $120,000,000 in taxes!
Lest you think the companies that received this tax break were corporate giants like Apple or Bank of America, they were not. They were mostly small businesses.
Good Tax Policy Equals Stability & Consistency
When I served as Maine’s state revenue commissioner from 1995 to 1998, business owners were always leery of new tax incentives being offered by politicians. Rather than a special tax break that might disappear in a year or two, they mostly wanted consistency and good tax policy.
While no one likes paying taxes, businesses frequently must make long range planning decisions when deciding to expand a factory or employ new technology. They simply want to know the rules and be sure the rules wont change several months down the road.
Think of the dozens of small businesses that relied on California’s policy of encouraging small business investment. While the court case overturning the program struck a real blow to those companies that relied on the break, the real damage was the state’s decision to demand they retroactively repay 5 years of tax breaks. Remember, these are businesses that did nothing wrong and broke no laws.
After a stunt like that, why would anyone rely on California’s tax policy?
Unfortunately, while the Golden State is unfortunately at the top of our list of states with bad tax policy, politicians in many other states have demonstrated their own ability to make bad tax policy decisions.
Businesses of every size need to engage in good tax planning and always keep an eye on the courts and state houses. Tax policy decisions at the state and local level can have as much of an impact as changes by the IRS. Before expanding, relocating or moving into new business areas, get a good read on the state’s history of honoring tax breaks, the volatility in the state’s tax policy, the state’s political stability and the stability of its tax system.
Posted by Brian Mahany, Esq.
Brian Mahany is now a tax lawyer in private practice representing businesses and individuals. His firm, Mahany & Ertl, provides tax planning, foreign reporting, IRS audit defense and U.S. Tax Court appeals. They represent businesses of every size. In addition to serving as Maine’s revenue commissioner, Brian also served as an officer of the Multistate Tax Commission and as a lobbyist for both nonprofit nursing homes and Helicopter EMS (LifeFlight). Brian can be reached at or by telephone at (direct).