Examining the Effects of the Corporate Federal Tax on the Californian Economy


Posted October 12th. 2017 - More Information

California regularly ranks in the top ten states with the highest taxes. California's overall tax burden per USA Today's rankings hovers around 10% each year, double that of the least burdensome states like Delaware and Alaska at closer to 5%. Let's review how California's tax structure is set up and how potential changes to the corporate federal tax and tax law would have on Californians and their economy.

The State of California's Taxes

California has the highest state-level sales tax rate as of 2017 at 7.25%. Local sales tax rates may be on top of that, such as San Jose with an 8.75% rate in 2016 that rose to 9.25% in 2017. California has an effective real estate tax rate of 2.65% according to Wallet Hub's rankings in 2016. Its effective vehicle property tax rate is low, but that's more than offset by other taxes. For example, its effective income tax rate is 1.4% per that same Wallethub study. Calculations like that are explained when you earn an online master finance degree.

However, if you're in the top 10% of income earners, the state's high excise taxes and progressive income tax (top marginal rate of 13.3%) mean you pay a fortune compared to the average American in the same income tier. Many corporations pay an 8.84% state income tax, while others are hit by a franchise tax. Depending on your business model, many small business owners are hit by both this high state income tax on business income and high personal income tax rates since California is one of the few states that impose both personal AND business taxes to those with LLCs and S-corporations. If you aren't hit by those taxes, you may be hit by the 6.65% AMT.

Federal Rate Changes

The federal corporate income tax rate is graduated, just as the personal income tax is. Right now, the highest corporate income tax rates hit 35%, the highest corporate tax rate in the world. This is why many multinational corporations are investing profits in expansion overseas instead of bringing the money back to the United States or, in some cases, getting bought out by foreign entities on purpose so they pay lower foreign tax rates instead. This is why this administration wants to lower the federal corporate income tax rate to 15%.

The Impact on Personal Businesses

S-corporations and pass-through businesses like limited liability corporations would see their 35% corporate tax rate fall to 15% these proposals, dramatically reducing the financial impact of the double taxation that would still be in effect by the state of California. Another impact would be the increased deductions that could significantly reduce their tax burden even further, though again, that's only at the federal level.

The Cost of Compliance

According to the IRS, filing taxes cost an average of eight hours of your life and $120 for the average person. For the average small business, the IRS says it takes 23 hours and several hundred dollars. That doesn't include the actual work of calculating what you owe or paying someone with an online master of science in finance from Northeastern University to figure it out for you. The current administration has proposed to slash the number of tax regulations, which would, in turn, reduce the cost of complying with the tax code.

What is the Future for California Businesses?

California's high tax rates for businesses of all sizes have spelled exodus for many businesses and forced them to relocate to states like Nevada, Texas, and Florida. This administration's proposal to reduce the corporate income tax rates hopes to provide relief to California business owners, especially LLC and C-corp owners double taxed by the state. The proposed tax simplification could indirectly help businesses and the economy as a whole, but it remains to be seen whether it happens.