Thread by @kaylakitson

OK, I'm a week late here, but in case it's helpful for anyone, providing more context to this wonky issue -the elective pass-through business tax - that's creating additional complications for #cabudget revenue projections. LONG WONKY THREAD

https://twitter.com/schwahoney/status/1517228074919550976

As @schwahoney's thread notes, this stems from the 2017 federal "Trump tax law." Among its many provisions, it created a $10,000 cap on state & local taxes individuals can deduct from their incomes for federal tax purposes.

But the cap doesn't apply to businesses. So many states, CA included, enacted "workarounds" that allow business owners to reduce their federal taxable income, and thus federal taxes...

"Pass-through" businesses, which don't pay the regular corporate tax, but instead pass their income or losses through to their owners/shareholders, can elect to pay a new California tax at the business level...

then their owners/shareholders can get a credit for their share of the business-level tax on their personal income taxes.

It's not projected to result in any revenue losses to the state overall. In fact, it's project to increase state revenue because not all business owners will be able to fully use their tax credits in a given year if their taxes owed are less than their share of the business tax.

For a deeper dive on how this all works, see @LAO_CA's explanation in the 21-2 spending plan writeup: lao.ca.gov/Publications/R…

So the issue now is that a chunk of the corporate tax revenues coming in above expectations is related to payments of that elective tax, but a lot of those revenues will be offset by personal income tax credits claimed by the owners of the business that paid the elective tax.

As @jasonsisney notes, many high-income people (who are more likely to have business income) file extension tax returns in Oct, so it may be a while before we have a full picture of how the elective tax affected 21-22 revenues.

https://twitter.com/jasonsisney/status/1516836210399793152