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A new report exposes Newsom’s plan for indirect tax increases under the revised California budget

The influx of migrants at the southern border at the beginning of the year in California seemed like a huge problem, but it turned into only one of many challenges that California Gov. Gavin Newsom and the Democratic state leadership had to face in the coming period. The exodus of insurance companies, the minimum wage hike for some businesses, and handling the massive budget deficit have put a lot of pressure on the state leadership, which might have long-lasting consequences for the political landscape in the Golden State.

The house insurance meltdown

Since the start of the year, at least two insurance companies have decided to reduce their activities in the state or completely cease operations. Citing profitability concerns, American National from Texas informed the California Department of Insurance that the company is going to stop selling home insurance by autumn and will let their customers know they won’t renew their policies starting in August. A few weeks after this announcement, State Farm General, based in Illinois, announced through a press release that it’s not going to renew the insurance for 30,000 houses and about 42,000 business properties in California.

Things only worsened earlier this month when Newsom proposed the latest budget plan, which included confirmation that the state leadership is already working on a new policy that would result in new, higher house insurance prices, at a time when Californians already pay among the most expensive house insurance rates nationwide. “We need to stabilize this market,” Newsom said at a press conference about his revised budget proposal. “We need to send the right signals, we need to move.” Supporters of the bill argue that despite higher prices for house insurance, such a move would make home insurance more accessible, as more house insurance options could help residents avoid relying on California’s “FAIR Plan,” the state’s “insurer of last resort.”

Budget deficit and spending cuts

The situation became critical for Newsom when he and his team faced the challenge of addressing a significant budget shortfall. Initially projected in January to exceed $70 billion, the deficit was later revised down to $27.6 billion, as Newsom declared earlier this month. This reduction was achieved by extensive cuts in spending, the cancellation of grants and programs, and the shelving of many policies that Newsom had long advocated for. Despite these challenges, Newsom assured Californians that managing the state’s substantial budget gap would not involve increasing taxes on workers or businesses. However, a new report suggests that this might not be the case.

Newsom’s hidden plan “under the hood”

A recent study by the California Taxpayers Association (CalTax), a nonpartisan and nonprofit tax research group, indicates that Newsom’s updated budget plan may include hidden tax hikes on businesses totaling around $18 billion over the next four years. Newsom has proposed that companies making more than $1 million annually should not be able to deduct their net operating losses. He also wants to cap the amount of business tax credits that can be used at $5 million for the tax years 2025, 2026, and 2027. CalTax calculates that this particular measure could raise corporate tax revenues by $15.9 billion in the coming four years.

A recent study by the CalTax indicates that Newsom's updated budget plan may include hidden tax hikes on businesses in California
Gov. Gavin Newsom, Courtesy of California Governor’s Office

Repatriated income

The plan also suggests overturning a recent decision by the Office of Tax Appeals (OTA) concerning how repatriated income is handled. In a notable case, OTA sided with Microsoft against the Franchise Tax Board (FTB) regarding the treatment of Microsoft’s overseas earnings, resulting in a $94 million refund for Microsoft. This decision was considered significant by tax experts because it could potentially save millions for other companies operating in California. The FTB estimated this ruling might lead to around $1.3 billion in immediate refunds and more in future years.

However, Newsom’s proposal aims to counter this by asserting that the FTB had interpreted the law correctly all along. His plan would affect tax years retroactively and moving forward, covering periods “beginning before, on, or after the effective date of this bill.”

“As the OTA correctly ruled, the refunds are required by law. The only ‘risk’ is to companies that were forced to overpay their corporate taxes and then fight for refunds, and now face the additional hurdle of an after-the-fact legislative change designed to allow the state to keep the money,” CalTax wrote in the report.

The proposal emerges as Newsom tackles one of the largest budget deficits California has ever seen. Alongside the indirect taxes on businesses, Newsom has also proposed significant reductions in spending that would impact immigration, education, and childcare support for low-income parents.

The recent combo of unfavorable developments for Newsom in California could impact his popularity among voters as he is widely expected to run for president in 2028.



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