End-run around education tax aimed at businesses - SanTan Sun News SanTan Sun News

End-run around education tax aimed at businesses

March 12th, 2021 SanTan Sun News
End-run around education tax aimed at businesses

By Howard Fischer
Capitol Media Services

Chandler Sen. J.D. Mesnard is proposing an end-run around the new income tax surcharge for wealthy earners that would allow some business owners to avoid paying it.

SB 1783 would create an entirely new alternate tax category for small businesses, generally those organized in a way so their income passes through to the owners. That means the owners compute what they owe the state on their personal income tax forms after deducting all business expenses.

What makes that significant is that Proposition 208 imposes a 3.5 percent surcharge on adjusted personal income of more than $250,000 for individuals and $500,000 for married couples filing jointly. That is on top of the current 4.5 percent rate that applies for income above those figures.

Mesnard’s bill would give business owners the option of paying a 4.5 percent tax on their adjusted business income.

The surcharge in Proposition 208 would not apply because this new tax category did not exist at the time voters approved the measure.

So, business owners could compute their tax liability using both the existing formula or the new one and then choose the one that costs them less.

During his reelection campaign last year, Mesnard expressed concern about the surcharge’s impact on businesses during the Clean Elections Commission debate.

He told Capitol Media Services that creating this new category makes sense because will allow lawmakers to craft special tax provisions targeted at helping small businesses.

He acknowledged, though, that a prime reason was to help business owners escape paying that new voter-approved surcharge.

Mesnard said that’s justified.

“We heard time and time again this will not or is not meant to impact small businesses,’’ he said. “And so, what this is doing is ensuring that’s the case.’’

But David Lujan, who helped organize the Prop 208 fight, said the initiative does not target small business.

Lujan pointed out that what’s subject to the tax is not the gross proceeds of any business. It’s what’s left after an owner pays all expenses, from employee salaries to equipment purchases. It’s also what remains after any other deductions, like money a business owner puts into a 401(k) retirement account.

What that leaves, he said, is the net income in the owner’s pockets. And Prop 208 kicks in only on any net earnings above $500,000 for a married couple.

Lujan also pointed out that SB 1783, which awaits a vote of the full Senate, doesn’t just set a new optional tax category for small business. It also creates this same 4.5 percent tax rate for income from estates and trusts.

Attorney Roopali Desai who represents the Invest in Ed committee that put Prop 208 on the ballot, acknowledged that lawmakers have the power to alter the state tax code and create new categories.

“The question is whether the Legislature is able to pass legislation that directly or indirectly changes the voter-protected law that was put in place through Prop 208,’’ she said.

The Voter Protection Act bars lawmakers from repealing or making changes in anything approved at the ballot. The only exception is for amendments that “further the purpose’’ of the original law, and then only with a three-fourths vote.

Desai said courts have concluded that legislation runs afoul of the Voter Protection Act even if it doesn’t directly repeal the measure approved at the ballot.

“You can do something more surreptitious and more malicious by going to make other changes elsewhere (in the statutes) that would have the same effect, which is to undermine the ultimate will of the voters,’’ she said.

What isn’t known is how much would be lost from the anticipated income for education if lawmakers approve the measure.

Estimates of what the initiative, as originally crafted, would raise have ranged from $827 million to $940 million a year. So far, legislative budget analysts have not produced a fiscal impact statement of SB 1783, which was approved earlier this month by the Senate Finance Committee on a party-line vote.

Lujan said SB 1783 is likely to affect a “significant portion’’ of the anticipated revenues.

No date has been set for Senate debate on the measure.