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California Bill Proposes $275 Head Tax on Large Employers

Posted on May 29, 2020

A recently amended California bill would impose a temporary employee head tax on large employers to help fund schools and local governments in the wake of the COVID-19 pandemic.

A.B. 398 was gutted and amended by its author, Assembly member Kansen Chu (D), on May 27. New language inserted into the bill would levy a $275-per-California-employee tax on large businesses with more than 500 employees working in the state, beginning January 1, 2021, through the end of 2025. The tax would go to the COVID-19 Local Government and School Recovery and Relief Fund, which would allocate the revenue to counties, cities, and K–12 schools.

According to the bill, “the economic disruption from the pandemic is expected to result in a recession and have significant negative effects on state revenues,” including a roughly $7 billion shortfall in city revenues over the next two fiscal years. “According to the League of California Cities, 90 percent of cities projected that these shortfalls will impact core city services, including police, fire service, emergency management and planning and housing,” the bill states.

Chu’s office didn’t return a request for comment by press time.

The proposal drew criticism from Jared Walczak of the Tax Foundation.

“California has legitimate revenue needs right now, but a literal tax on jobs would only make matters worse,” Walczak told Tax Notes in an May 28 email, arguing that the state should look to promote economic recovery from the lockdowns and the pandemic as a means of bolstering its finances. He noted that in recent years Seattle and Chicago enacted head taxes and then repealed them over concerns that they threatened job creation.

Notably, Chu proposed a similar bill, A.B. 2843, earlier this year. That bill would require local governments to collect a fee on local business license applicants with 50 employees or more. Employers with 200 to 999 employees would be charged $75 per employee, and employers with over 999 employees would be charged $150 per employee. The proceeds would go to a local fund to support affordable housing. However, it appears that the legislation — which hasn't been scheduled for a hearing — won’t advance out of the Assembly in time to beat the June 5 deadline for fiscal policy committees to hear and approve Assembly bills, in part because of the coronavirus outbreak, which forced the State Legislature to shut down in March until it reconvened in early May.

A.B. 398, introduced in 2019, originally contained provisions related to the reporting of enrollment and completion data for visual and performing arts courses in schools. It passed the Assembly in May 2019, making it eligible to be considered in the current 2020 session, now that legislative activity has resumed, according to David Wolfe of the Howard Jarvis Taxpayers Association. He suggested that's likely why the bill was chosen to become the vehicle for the new language.

“The only way for this to have life this year is for [Chu] to gut and amend this in the other house,” Wolfe told Tax Notes May 28.

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