Alexander Saunders

It is that time again. Very soon, the well informed, the barely informed, and the clueless will head into voting booths and pick our representatives as well as pass important laws in the form of propositions.

One thing all the talking heads are discussing this year is taxes. In fact, they misinform or purposefully deceive about the consequence of income-tax changes.

Specifically, and I am trying to be non-partisan, some campaigns have set great store by the assertion that any increase in individual income taxes, even one limited to those making over $250,000 per year, would hurt job growth, especially with regard to small business.

Some have taken this argument to extremes by implying that any increase in income taxes will result in no new job creation at all, and even more job losses. This is not true.

It is not true because salary paid to employees is a deductible expense paid out of operating income. Any increase to individual taxes affects net, not gross, income. This means income taxes do not affect a company’s ability to make payroll. That is a very important point. If a company is going to lay someone off, it is not because personal income taxes have increased. If a small business owner is in a position to hire a new employee, an increase on net income over $250,000 is not going to deter.

This is not to say that I think income tax should be increased. There are good arguments for raising taxes, such as reducing the deficit; and good reasons against, such as too much is spent on programs we do not want. I argue only that if there is going to be debate and discourse, it should be honest and truthful. Debate will occur. Congress recently decided to punt the issue over until after the elections making it a live topic for November’s candidates.

Personally, I cannot support a candidate, party, or position, which feels the need to invent dire consequences when there are perfectly legitimate reasons to be against a tax increase.

Something that actually will deter hiring this year is the “Tax Fairness Act,” Prop 24. With a name like that it must be good, right? Few have heard of Prop 24 because it changes laws most people do not understand. Proponents claim it will close “special tax loopholes for big corporations.” To be fair, these are not loopholes, as the rules are used in their intended manner and provide the expected results.

If it passes, Prop 24 would change law governing three things: tax-credit assignments, sales-factor apportionment, and net-operating-loss carrybacks. In an effort to spare the reader the gory details, such as the use of in-state payroll as a numerator and total payroll as a denominator to arrive at a fraction which makes up one-third of weighted average used to calculate the proper apportionment of multistate businesses income tax liability, I will simplify the explanations, but in general:

Credit assignment rules currently allow one corporation to give a deduction they have earned, but choose not to take this year, to another corporation, as long as the two businesses are controlled by the same corporation. This is not going to affect many small businesses and should not reduce hiring.

Similarly, sales-factor apportionment rules will not apply to many small businesses because these rules address the equitable apportionment of tax liability of multistate taxpayers with significant multistate activity. These two changes will have an impact on corporate bottom-lines, but probably not significant enough to affect hiring in any but the largest corporations.

There are reasons to dislike the proposed new rules in the first two categories, but even if one is for the apportionment and assignment changes, Prop 24 is flawed because it also changes net operating loss carryback rules.

The proposed new carryback rule gives the state a loan—but not extra revenue. The proposed rule will require some businesses which spend money this year to take a refund/deduction next year; while the current rule allows the same business to spend this year and take their refund this year. The business will get the refund in either case, it is just a question of when.

Current carryback rules will allow businesses that have a loss one year, but made money and paid taxes in the prior two years, to forgo a future tax refund and take it now. This rule does influence business spending because companies losing money this year have no other incentive to continue spending and hiring. Instead, they will wait until they have net income to offset. Do not believe that these rules are strange and arbitrary: In allowing for net-operating-loss carrybacks, California conforms to the majority of states and the federal government.

Taking a look around Santa Barbara, one sees a fair amount of vacant retail and office space. Encouraging business to use that space now, instead of later, is good for Santa Barbara. Net operating loss carrybacks provide tax incentives which encourage new businesses to start and existing businesses to expand, without additinoal cost to taxpayers. I believe, given the need for economic growth, that laws should encourage a business to spend and grow now instead of later.

Even if one were to argue that overall, the loan the state would be getting from carrybacks is primarily from large corporations, and that the impact on small businesses is relatively minimal, the fact remains that there is an impact on small businesses. To reach the same goal without impacting smaller businesses, the proposed rule should have limited the amount of carrybacks to a set dollar amount instead of abolishing them altogether.

I am not trying to link the proposed laws with any dire economic effects. Whether or not the proposition passes Although eliminating net-operating-loss carrybacks in the state of California will slow the growth of local businesses and deter new endeavors, some business will continue to expand regardless of the net-operating-loss rules. On the other hand, the only upside to eliminating net-operating-loss carrybacks is a short term loan from California businesses to the state.


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