Tax & fee proposals in Governor's budget plan
This post continues to be updated with the emerging May Revision proposals
Updated to include most of the May Revision tax increase proposals. Future updates likely.
Almost every California state budget includes tax or fee changes.
Below is a listing of tax and fee increase proposals from Governor Newsom’s January 10, 2024 budget package. (If you know of others, feel free to contact me so that I can consider if they should be added to this summary.) Other tax or fee rate or other changes occur under existing law; these, therefore, are not listed here as part of the Governor’s proposed 2024-25 budget package. New tax credits or reductions also are not listed here.
The Legislative Analyst’s Office’s analysis of the Governor’s key tax proposals in his January budget plan is online here. The LAO’s analysis of the Governor’s key May Revision corporation tax proposals is online here.
These proposals generally are heard in budget (and sometimes other legislative) committees during the spring. To comment, contact the Governor or legislators or the relevant budget subcommittees.
Some links below may change as documents are updated. I will do my best to update the links on the web version of this note.
Business Taxes: Temporary Net Operating Losses (NOL) Suspension and Credit Limitation
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1074
Discussion in May Revision Summary: see pages 19-20 here.
Excerpts from administration fact sheet:
This proposal “temporarily suspends net operating losses (NOL) use for medium and large businesses and limits business credit use to $5 million per year for tax years 2025, 2026, and 2027. Businesses with less than $1 million in taxable income will be exempt from the NOL suspension and all businesses will be able to use their credits up to $5 million per year. The solution is subject to a trigger whereby if cumulative cash receipts for the Big 3 taxes exceed the 2024 Budget Act forecast by three percent or more from May 2024 to April 2025, it will not take effect. If it takes effect in May 2025, this NOL suspension and credit limitation would exactly mirror the criteria and parameters of the 2020 and 2021 NOL suspension and credit limitation.”
“A NOL is generated when a business entity’s deductions exceed its taxable income during a taxable year. NOLs can then be applied in a subsequent year for which the business has taxable income. Current California law allows businesses to use NOLs to cover up to 100 percent of their taxable income and allows carryforwards of up to 20 years, whereas federal law limits newer NOLs (NOLs generated in 2018 and later) to 80 percent of a business’s taxable income, with unlimited carryforwards.”
“Current federal and state law allows businesses to utilize tax credits to offset their tax liability on a dollar-for-dollar basis. Business tax credits are generally intended to incentivize a particular type of behavior. Examples of the state’s business tax credits include the research and development, California Competes, motion picture and television, and Low-Income Housing tax credits.”
“This proposal suspends NOL deduction use in tax years 2025, 2026, and 2027 for businesses with over $1 million in taxable income. In tax year 2022, less than 3 percent of corporations had taxable income above $1 million, so it is expected that the vast majority of businesses, and particularly small- and medium-sized businesses, will continue to be able to fully utilize their NOL deductions. In addition, the 20-year carryover period for the NOL deduction will be extended for the number of years that it is limited. As such, it is expected that most of the NOL deductions limited under this proposal will eventually be used.”
“This proposal limits credit usage to $5 million per year for tax years 2025, 2026, and 2027. Structured as a dollar limit, however, it would provide definite protection to small firms, for whom $5 million in credits would be more than they could use in any one year. In general, a corporation would need to have income over $57 million to be affected by this limitation and a personal income taxpayer would need to have income over $38 million to be affected. In addition, this limitation only impacts business incentive credits, and it additionally excludes the Low-Income Housing Tax Credit. Some personal income taxpayers would be affected to the extent that they have pass-through income from a business that is impacted by the credit limitation. As such, it would not limit a taxpayer’s ability to use other personal income tax credits such as the Earned Income Tax Credit, the renter’s credit, or the pass-through entity elective tax credit. Finally, to the extent that any credit affected by this provision has a limited carryover period, this proposal allows the carryover period for that credit to be extended for the number of years that the credit is limited. As such, it is expected that most of the credits limited under this proposal will eventually be used.”
Fiscal Effect: The proposal is projected to increase General Fund revenues by $900 million in 2024-25, $5.5 billion in 2025-26, $5.9 billion in 2026-27, and $3.6 billion in 2027-28. General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
Business Taxes: Apportionment Factor Changes
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1075
Discussion in May Revision Summary: see pages 41 here.
Excerpts from administration fact sheet:
“This proposal clarifies existing law that when a corporation receives income that is excluded from taxable business income, then it must exclude this income from its apportionment factor formula.”
“Multi-state and multi-national corporations pay taxes in California by computing how much of their taxable income is allocated to California using an apportionment factor, which represents the share of business activity a firm conducts in a state divided by its total business activity in the U.S. or in the world. A lower California apportionment factor will, all else equal, lead to lower California tax liability.”
“The Franchise Tax Board (FTB) has issued longstanding and consistent guidance to taxpayers that activities that are not subjected to taxation if they were to generate income, are required to be excluded from the apportionment formula. This rule is explained in FTB’s Legal Ruling 2006-01. Specifically, 2006-01 explains that items of income which are deducted from income, such as foreign dividends and exempt income, are therefore excluded from inclusion in the apportionment factor. In July 2023, the Office of Tax Appeals (OTA) issued a decision in Microsoft vs Franchise Tax Board (FTB) which allowed Microsoft to reduce its apportionment factor in its 2017 taxable year by including 100 percent of its repatriated dividends (dividends earned overseas and transferred back to the U.S.) in the denominator of the apportionment factor formula. However, 75 percent of these dividends were already deductible from Microsoft’s California income. The OTA decision went against the FTB’s prior legal interpretation, which held that the share of repatriated dividends that are deductible should not be used in the denominator of the apportionment factor formula because they are not included in the numerator. The FTB filed a petition for rehearing in August 2023 for the OTA to reconsider their decision, however, the OTA denied the request in February 2024. This resulted in Microsoft receiving a $91 million refund. The Microsoft case was initially not made precedential, although following a public comment period, the OTA is expected to re-evaluate this summer.”
“The proposal is declaratory of existing law and expressly states that when a corporation receives income that is excluded from taxable business income, it must exclude this income from its apportionment factor.”
Fiscal Effect:
“The FTB estimates that, without action, around $1.3 billion in refunds are at risk based on similar tax filings from prior years, and there are additional annual prospective refunds of around $200 million due to lower apportionment factors for multi-state and multi-national firms. Of the estimated $1.3 billion in claims for refund filed by taxpayers with open statutes, the average annual refund is expected to be approximately $300,000 with around 800 firms impacted. However, about 80 percent of the $1.3 billion refunds would be paid to just 30 taxpayers, which are estimated to be large multi-national corporations with net income for state purposes greater than $1 billion.”
“The May Revision revenue forecast includes the $91 million in refunds paid to Microsoft. Outside of the Microsoft refunds and assuming the decision remaining non-precedential, the Department of Finance estimates this proposal will prevent the state from experiencing additional and ongoing revenue losses, including $660 million in prevented losses through 2027-28: $100 million in 2023-24, $116 million in 2024-25, $132 million in 2025-26, $148 million in 2026-27, and $164 million in 2027-28.”
“If the Microsoft decision is changed to be deemed precedential, revenue losses would be accelerated and significantly higher through 2027-28.”
General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
May Revision: Managed Care Organization (MCO) Tax Amendment
Discussion in May Revision summary: see page 9 and page 14 here.
Excerpt from May Revision summary: proposal to “increase the MCO tax to achieve additional net state benefit of $689.9 million in 2024-25, $950 million in 2025-26, and $1.3 billion in 2026-27 by including health plan Medicare revenue in the total revenue limit calculation, which increases the allowable size of the tax.”
Charitable Conservation Easements Federal Conformity
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1037
Discussion in Governor’s Budget Summary: see page 146 in this section
Excerpt from Governor’s Budget Summary: “Under current federal law, property owners who elect to give up rights to develop certain land are allowed a deduction equal to the property development’s value. However, this deduction has proven easy to abuse as the IRS has found that property investors often inflate the value of their property in order to get a larger deduction. As a result, the federal Consolidated Appropriations Act (CAA) of 2023 limited the deduction for owners of pass-through entities to two and a half times the value of taxpayers’ investment; and disallowed the deductions for participants who had previously engaged in fraud. For example, a partial owner who invested $100 dollars is now limited to claiming a deduction of up to $250. California law conforms with federal law in allowing deductions for charitable conservation easements; however, the state has not conformed to the 2023 changes listed above. The budget proposes to conform with federal law with respect to California's treatment of the charitable conservation easements deduction by adopting the changes made in the CAA beginning in tax year 2024.”
Fiscal Effect: “This proposal is projected to increase General Fund revenues by $55 million in 2024-25 and 2025-26 and by $25 million per year thereafter,” the Governor’s Budget Summary states (page 146 in this section). General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
Changes to Oil and Gas Tax Expenditures
Fiscal Effect: Including the three proposals below, “eliminating these tax expenditures is projected to increase General Fund revenues by $22 million in 2024-25 and by $17 million per year thereafter,” the Governor’s Budget Summary states (page 147 in this section). General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
Eliminate Accelerated Intangible Drilling Cost Expensing
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1039
Discussion in Governor’s Budget Summary: see page 147 in this section
Excerpt from Governor’s Budget Summary: “Under current California law and in conformity with federal law since 1987, 70 percent of intangible oil and gas drilling costs, such as survey work, ground clearing, drainage, and repairs, can immediately be deducted by corporations as a business expense, with the remainder spread over five years. For independent oil producers, 100 percent of intangible drilling costs can be deducted immediately. Normal tax law generally requires that expenses can be deducted only once their benefit is realized.”
Percentage Depletion Rules for Fossil Fuels
Discussion in Governor’s Budget Summary: see page 147 in this section
Excerpt from Governor’s Budget Summary: “Under current California law and in conformity with federal law since 1993, businesses may deduct a fixed percentage of gross income that is higher than the normal cost-depletion method when it comes to resource depletion of mineral and other natural resources.”
Enhanced Oil Recovery Costs Credit
Discussion in Governor’s Budget Summary: see page 147 in this section
Except from Governor’s Budget Summary: “Under current California law, certain independent oil producers are allowed a nonrefundable credit equal to 5 percent of the qualified enhanced oil recovery costs for projects located in the state if the reference price of domestic crude oil falls above a specified threshold for the preceding year. Taxpayers who are retailers of oil or natural gas and those who are refiners of crude oil whose daily output exceeds 50,000 barrels are not eligible for the credit.”
Eliminate Sales Tax Deduction/Refund for Bad Debt
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1045
Discussion in Governor’s Budget Summary: see page 146 in this section
Excerpt from Governor’s Budget Summary: “Since 2000, current California law allows retailers, lenders, and retailers’ affiliates to deduct or claim a refund for sales and use tax paid on accounts used to purchase taxable goods on credit that are found worthless or charged off (subsequently referred to as “bad debt"). Typically, loans to purchase goods are offered by retailer-affiliate lenders such as banks, credit unions, and other financial companies who price in default risks through interest rates and late payment fees. Lenders can claim the deduction or refund even if a profit was made on the bad debt through interest and penalties paid. The budget proposes to eliminate the bad debt deduction and refund, effective in January 2025, joining the majority of states in disallowing deductions for non-retailer lenders for sales tax paid on bad debts.”
Fiscal Effect: “This proposal is projected to increase General Fund revenues by $23.5 million in 2024-25 and about $50.6 million per year thereafter,” the Governor’s Budget Summary states (page 146 in this section). General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
Department of Pesticide Regulation (DPR): Mill Assessment
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/987
Related budget change proposal (BCP): https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG3930_BCP7224.pdf
Fiscal Effect: The administration proposes trailer bill to increase the statutory mill assessment, a fee paid by pesticide retailers, manufacturers, or wholesalers when a pesticide is first sold into or within California. The increase would address the structural imbalance of the DPR Fund. Per the BCP, the proposal would increase the mill assessment “on a flat-rate basis, over a three- to five-year phase-in period, from $0.021 for every dollar in sales to $0.0339 per dollar in sales.” Increases above $0.0286 would require a specified public workshop process. The BCP states the mill would cover $14.3 million in additional expenditures in 2024-25, with ongoing costs growing to $24.8 million per year after 2026-27.
More information on DPR: https://www.cdpr.ca.gov/
Energy Commission: Energy Resources Program Account (ERPA)
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1036
Related BCP: https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG3360_BCP7364.pdf
Fiscal Effect: Per the BCP, “ERPA is the main fund supporting the California Energy Commission (CEC). Its revenues are linked to the sale of metered electricity. As building and appliance energy efficiency and the increase of behind-the-meter solar produce customer savings and flatten statewide electricity consumption, ERPA revenues have decreased, and the costs have been borne by fewer and fewer customers. To distribute the costs more equitably among ratepayers and provide a solution to ERPA’s structural deficit, the CEC proposes to raise the statutory cap on the ERPA surcharge, tie the statutory cap to the Consumer Price Index, and extend the surcharge to behind-the-meter (BTM) electricity consumption…Extending the surcharge to BTM electricity at the same rate as retail electricity sales would provide approximately $9.8 million in new revenue annually.” The BCP also notes, “This approach will result in setting the ERPA surcharge cap at an inflation-adjusted $0.000666 per kWh. This cap will allow the CEC to incrementally adjust the surcharge as needed to maintain solvency in ERPA. Tying the surcharge cap to the Consumer Price Index will help future-proof revenues and avoid the need for future legislative authorizations. The CEC does not anticipate increasing the surcharge from the current rate of $0.0003 per kWh in 2024-25.”
More information on CEC: https://www.energy.ca.gov/
Controlled Substance Utilization Review and Evaluation System (CURES) Fee
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1034
Fiscal Effect: “To address a shortfall in the CURES Fund, the Budget proposes to increase the CURES fee from $9 to $15 beginning April 1, 2025, to cover DOJ’s actual costs to administer the CURES program,” the Governor’s Budget Summary states (page 83 in this section). Prior to July 2023, the annual fee had been raised to $11.
More information on CURES: https://oag.ca.gov/cures and https://www.dca.ca.gov/licensees/cures_update.shtml
Department of Real Estate (DRE) Fee Increases
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1035
Related BCP: https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG2320_BCP7281.pdf
Fiscal Effect: DRE “is funded by fees charged for real estate exams and licenses, subdivision public reports, and various other permits issued,” the BCP states. The last major statutory change to fees occurred in 1997 pursuant to 1996 legislation. “Without a change in fees, current projections estimate the Real Estate Fund will have a negative fund balance of $15,946,000 in 2025-26, growing to $35,445,000 in 2026-27. DRE’s current fees are set at their statutory maximum, therefore, fees need to be increased through legislation.” The Governor’s proposal lists the proposed increases in DRE fees.
More information on DRE: http://dre.ca.gov/
Public Safety Radio Modernization: Increase to 9-1-1 Surcharge
BCP: https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG0690_BCP7269.pdf
Excerpts from BCP: “The Office of Emergency Services (Cal OES) is requesting $6,366,000 in State Emergency Telephone Number Account (SETNA) Fund authority, to be funded by the estimated increase of 5 cents to the 9-1-1 surcharge, to provide four years of funding for 13 limited term positions and add 12 new positions to support state and local 9-1-1 public safety agencies by incorporating new technologies, establishing more efficient backhaul deployment, increasing California Radio Interoperable System coverage (CRIS), and implementing traffic management solutions. The administration is also considering a proposal in the spring to include additional SETNA Fund authority for CRIS equipment costs as an update to this proposal. This additional authority would be covered by the estimated increase to the 9-1-1 surcharge…
“The estimated increase to the 9-1-1 surcharge will be 5 cents based on the current number of access lines. The current SETNA surcharge model was updated by the Legislature in 2019 and established a range of 0 to 80 cents per access line that can be used to request 911 services. The current SETNA 911 surcharge of 30 cents has remained unchanged since the model was updated in 2019. Each year Cal OES receives an authorized budget for 911 services and determines the surcharge based on the approved budget. Even if this BCP is approved, a surcharge of 35 cents will still be one of the lowest in the nation.”
Discussion in Governor’s Budget Summary: see page 84 in this section.
Higher Collections for California Advanced Services Fund (CASF) Program
BCP: https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG8660_BCP7288.pdf
The California Public Utilities Commission (CPUC) CASF Program encourages deployment of high-quality broadband. Pursuant to state law, the goal of CASF is, no later than 2032, to approve funding for projects to provide broadband access to no less than 98% of California households. In the BCP, CPUC requests to increase budget authority for the CASF Program to $136 million for fiscal year 2024-25 and future years. Additionally, the proposal requests budget bill language (BBL) to make expenditure authority contingent on the CPUC collecting sufficient revenue.
Excerpts from BCP: “Pub. Util. Code section 281, codified by Assembly Bill 14 (Stats. 2021, Ch. 685, Sec. 2, effective October 8, 2021) and Senate Bill 4 (Stats. 2021, Ch. 671, Sec. 2, effective October 8, 2021) authorized an increase in the amount to be collected per year by the CPUC to support the CASF program, from a maximum of sixty-six million dollars ($66,000,000) to one hundred fifty million dollars ($150,000,000). The prior surcharge mechanism was structurally deficient to allow the CPUC to collect the full $150,000,000. However, recent structural changes to the surcharge mechanism are forecasted to lead to higher collected amounts for the CASF program to collect the full $150,000,000. As the CPUC is now able to collect the full amount, additional requisite budget authority is necessary to fund more CASF projects which could not be previously funded.”
More information on CASF Program: https://www.cpuc.ca.gov/industries-and-topics/internet-and-phone/california-advanced-services-fund
Health Care Facility Application Fee Revisions
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1058
Related BCP: https://esd.dof.ca.gov/Documents/bcp/2425/FY2425_ORG4265_BCP7337.pdf
Excerpts from California Department of Public Health (CDPH) fact sheet: CDPH “proposes statutory changes to: (1) set and adjust fees for applications and written notifications for licensure changes submitted by health care facilities, (2) assess penalties for untimely payment, and (3) harmonize notification requirements for all licensees.” “CDPH recently partnered with the Department of Finance’s Research and Analysis Unit to review this workload and has developed an updated fee schedule that better aligns fee revenues with workload costs. To allow the depatment to implement this updated fee schedule, the proposed amendments authorize CDPH to charge a fee for all types of licensure changes and adjust them through the fee report process that is used to update annual health facility license fees.”
Increasing Managed Care Organization (MCO) Tax (adopted April 2024)
The administration states that this is a proposal for “early action” by the Legislature: that is, at some point before the June 2024 enactment of the state budget package. As the Legislative Analyst’s Office (LAO) noted last year, the 2023-24 state budget renewed “a state tax on enrollment in health insurance plans known as the MCO tax.” “The tax is designed to draw down additional federal Medicaid funding while imposing a relatively small cost to the health insurance industry,” contingent on federal approval, the LAO said.
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1044
Discussion in Governor’s Budget Summary: see page 55 in this section.
Excerpt from Governor’s Budget Summary: “In December 2023, the federal government approved California’s managed care organization provider tax (MCO tax), effective April 1, 2023, through December 31, 2026. Given the projected $37.9 billion budget shortfall, the administration is seeking early action by the Legislature to request the federal government approve an amendment to increase the tax to achieve $20.9 billion in total funding to the state, an increase of $1.5 billion compared to the approved MCO tax. The budget proposes $12.9 billion to support the Medi-Cal program and maintain a balanced budget, and $8 billion for targeted rate increases and investments from this MCO tax. As proposed, the MCO tax helps maintain existing services in the Medi-Cal program and minimizes the need for reductions in the program. The Budget proposes $2.8 billion ($1.2 billion Medi-Cal Provider Payment Reserve Fund) in 2024-25 and approximately $6.5 billion ($2.7 billion Medi-Cal Provider Payment Reserve Fund) in 2025-26 for targeted rate increases and investments consistent with the 2023 Budget Act, of which $727 million ($291 million Medi-Cal Provider Payment Reserve Fund) annually is for Medi-Cal provider rate increases effective January 1, 2024.”
Health Care Facility Application Fee Revisions
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1064
Excerpts from California Department of Health Care Services (DHCS) fact sheet:
DHCS “proposes statutory changes to authorize a third-party administrator (TPA) to provide support services to eligible schoolsites and payers to adopt the statewide multi-payer school-linked behavioral health fee schedule as part of the Children and Youth Behavioral Initiative.”
“Existing law requires DHCS to develop and maintain a fee schedule and provider network for the delivery of school-linked behavioral health services at schoolsites..The fee schedule applies to health care service plans, insurers, and the Medi-Cal program… Without a TPA, schoolsites would be forced to manage claims administration, payment remittance, and provider network oversight and management processes… As such, the establishment of both a fee schedule and provider network will require new infrastructure, additional capacity, and operational changes for both schoolsites and payers.”
“This proposal authorizes DHCS to contract with a TPA(s) to provide statewide support services to eligible schoolsites and payers, as part of the provider network, to adopt the fee schedule… Furthermore, because the TPA will provide support services for health care service plans, insurers, and Medi-Cal managed care plans (MCPs), the proposal would authorize DHCS to establish and charge a fee to health care service plans, insurers, and MCPs to fund the TPA.”
Withdrawn Proposals
Business Taxes: Net Operation Loss (NOL) Limitation to 80% of Income
Link to Governor’s proposal: https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1007
Discussion in Governor’s Budget Summary: see page 145 in this section.
Excerpt from Governor’s Budget Summary: “Under current federal law, as part of the Tax Cuts and Jobs Act, the use of NOLs carried forward from prior years is limited to 80 percent of subsequent year's net income and carrybacks are disallowed. Carrybacks allow businesses to apply losses to preceding years to receive a refund. California conformed in 2019 to also disallow carrybacks; however, the state did not conform to the 80-percent limitation. The budget proposes to conform state law to federal law by limiting NOLs that are carried forward from prior years to 80 percent of any subsequent year's net income, joining the majority of states in restricting NOL usage to 80 percent or less of taxable income.”
Fiscal Effect: “The change is proposed for tax years beginning on or after 2024 and is projected to lead to revenue gains of $300 million in 2024-25, followed by ongoing annual gains of $200 million thereafter,” the Governor’s Budget Summary states (page 145 in this section). General Fund revenue increases also tend to increase the Proposition 98 minimum funding guarantee for schools by about 40 cents for every dollar of revenue increase.
May Revision Update: This proposal is withdrawn. Per the Governor’s May Revision summary (p. 19), the newly proposed suspension of NOL deductions and limitation of credits “replaces the Governor’s Budget proposal to limit NOLs to 80 percent of taxable income.”