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Proposed Major California Tax Increases

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Proposed Amendment to California Constitution Would Create Significant New Taxes to Fund Single-Payer Health Care System

On January 5, 2022, California Assembly Members Ash Kalra (D-San Jose) and Alex Lee (D-San Jose) introduced a proposed amendment to the California Constitution, A.C.A. 11, which would create major tax changes in order to fund Cal-Care, a single-payer California healthcare system.  The proposed amendment would create a new 2.3% business gross receipts tax, a new 1.25% payroll tax on businesses with at least 50 employees, an additional payroll tax on employers with employees earning at least $49,000, and a personal income tax surcharge for individuals earning $149,509 or more.

The business gross receipts tax of 2.3% would be imposed on annual gross receipts exceeding $2 million.  The 1.25% payroll tax would be imposed on employers with 50 or more California resident employees for services performed within or without California.  The additional payroll tax would be withheld from employees by employers with California resident employees for services performed within or without California at the rate of 1% of wages or other compensation exceeding $49,900.  The personal income tax surcharge would be imposed at progressive rates starting at 0.5% for individuals with taxable income exceeding $149,508; 1% for individuals with taxable income of $299,509 to $599,012; 1.5% for taxable income of $599,013 to $1,299,499; 1.75% for taxable income of $1,299,500 to $2,484,120; and 2.5% for taxable income of $2,484,121 and above.  The tax rates would be adjusted annually for inflation.  The Legislature would also be empowered, based on a majority vote of both houses, to suspend the inflationary personal income tax surcharge increases or to increase the rates for any of the taxes adopted pursuant to A.C.A. 11.

As a proposed tax increase, the new taxes would require an amendment to the California Constitution, and as such, A.C.A. 11 would have to pass both houses of the California Legislature by a two-thirds vote in order to be referred to the ballot (likely in 2024), and then would have to be approved by a simple majority of California voters.

The companion legislation, A.B. 1400, would create Cal-Care as a regular bill that would proceed through the normal legislative process.  Cal-Care would offer comprehensive, universal single-payer health care coverage and a health care cost control system.  On January 6, 2022, A.B. 1400 was referred to the Assembly Committee on Health, which revised, passed, and re-referred the bill to the Assembly Committee on Appropriations on January 12, 2022.

If adopted, the proposed new taxes are estimated to result in major increase of $163 billion in additional California taxes.  Proponents of the proposals believe that the single-payer healthcare system would reduce overall healthcare costs and provide needed health insurance coverage to all Californians.  Opponents of the tax argue that major increases to the California tax regime would hurt employment and the California economy, and would continue to drive additional business and wealthy individuals out of California.  Critics also believe that the estimated revenue would still be insufficient to fund the proposed single-payer healthcare system.

Taxpayers should continue to monitor the progress of these proposals, and should consider how these amendments, if enacted, would impact their businesses and/or personal income tax obligations.  While these new taxes would have a long process to pass before being adopted, the potential impact of the new taxes is very substantial, so Taxpayers would be well-advised to consider the potential exposure when planning California investments or changes to their business structure.

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