Newsom Said He Wouldn’t Raise Taxes To Fix California’s Deficit. His Budget Proposal Includes $18 Billion in Tax Hikes for Businesses.

Gov. Gavin Newsom (Justin Sullivan/Getty Images)
May 20, 2024

California governor Gavin Newsom (D.) told reporters earlier this month he wouldn’t raise taxes to fix the state’s $73 billion budget hole, but buried in his latest budget proposal are $18 billion in temporary tax hikes for businesses.

Earlier this month, the governor repeatedly pledged he would not raise taxes to solve the budget crisis—which comes just two years after he boasted a nearly $100 billion surplus—telling reporters that "the answer is no," should Democratic lawmakers bring him tax hike proposals, and that "there’s only so many times I can say no to the tax question."

"I don’t see there’s real evidence and need right now to increase general taxes … in this state and put more burden on working folks and our competitive posture," he told one reporter who asked him if tax hikes were an "absolute nonstarter" for him.

Newsom unveiled his budget proposal on May 10, and the tax policy details the following week. The proposal would, for the next three years, bar businesses earning $1 million or more from deducting operating losses from their taxes while also limiting business tax credits. The provisions are projected to cost California businesses about $18 billion through 2027, although they wouldn’t take effect if tax collections beat expectations. Such a scenario appears unlikely, however, given that California’s tax revenues are massively down thanks to a stagnating economy and exodus of both high-earning residents and businesses.

State finance department spokesman H.D. Palmer said the proposals are "designed to protect small businesses" and said the administration projects they will hit a small percentage of corporations, and the tax credit limits especially will primarily affect research and development. He also disputed the framing of the policies as temporary tax increases, saying they are "fundamentally different in structure."

Yet critics are blasting the move as tax increases, regardless of the governor’s framing. David Kline, vice president of communications and research for the California Taxpayers Association, said adding these taxes will only make California’s already beleaguered economy worse.

"California's unemployment rate is the highest in the nation, our cost of living has skyrocketed, and the gas tax already is scheduled to increase on July 1, so this would be the worst possible time to impose $18 billion in additional business taxes that would trigger job losses and higher costs for consumers," he said.

Jon Coupal, president of the California tax watchdog group Howard Jarvis Taxpayers Association, said Newsom is "creating a climate of economic uncertainty" and "playing a risky game with people’s jobs"—a criticism that comes after nearly half a million residents lost their jobs in the first part of this year, according to federal figures.

"The suspension of established tax credits and net operating loss deductions sends a message to businesses that California may yank the rug out from under them any time the budget is under stress, even when that stress is caused by reckless government overspending," Coupal said.

Newsom’s proposed budget of $288 billion is considerably higher than what it was when he took office in 2019. His predecessor’s last budget was just over $201 billion for 2018-19, when California had at least 300,000 more residents.