Proposition 30 from 2012 raised taxes on small businesses by up to 23% but had a significant counterproductive impact on California tax revenues and business activity, according to figures produced by the California Franchise Tax Board (FTB).
Prop. 30 raised income taxes on small businesses in 2012, but the impacts of the tax effect did not occur until 2013 because Prop. 30 was not passed until November 2012.
Prop. 30 implemented a 23% tax increase on most sole proprietors which was retroactive to January 1, 2012. The impact of the tax increase was realized in 2013 when the State of California realized a 9.8% drop in total taxes paid by sole proprietors at a time when the economy was in recovery.
Thus, the tax increase actually stifled economic growth during a time when small businesses were the most vulnerable.
The average taxes paid by sole proprietors jumped by 37.6% in 2012, but declined by 11.2% in 2013 due to the decline in business activity and tax revenues cause by Prop. 30.
Sole proprietors are the economic engine of the California economy. Sole proprietors represent 1.4 million small business owners or 64% of all business filers and $12.4 billion in annual tax revenue for the State of California, according to FTB figures for 2013 the most recent year for which figures are available.
Sole proprietors contribute twice what California big corporations or "C Corporations" contribute to California's tax coffers. California C corporations compose 14% of the business filers but only $52 billion or 16% of the total net business income for the State of California.
Sole proprietorships recorded $218.7 billion in net income in 2013 or 69% of all the business income in the state--by far the largest business filing category in terms of filers and business activity.
In 2013, California "C Corporations" paid $6.3 billion in state taxes, compared to the $12.4 billion paid by sole proprietor filers. In terms of total corporate tax liability, sole proprietors contribute 63% of all tax revenues, while C Corporations contribute only 32%. S Corporations contribute the remaining 5%.
Sole proprietors, the small business community and other job creators are bracing for another major tax increase on the November 2016 ballot--which is double the size of Prop 30.
Prop. 55 seeks to extend the Prop. 30 tax increases for 12 more years, but has double the negative economic impact according to revenue estimates by the California Legislative Analyst's Office (LAO). The LAO pegs the Prop. 55 tax bite at $8-$11 billion, compared to the $6 billion in annual income tax revenues raised by Prop. 30.
Prop. 55 targets sole proprietors and the small business community for a tax increase because it represents the greatest amount of potential tax revenue, but the least amount of political opposition when compared to big corporations who would organize a big budget opposition campaign to fight a major tax increase.
Prop. 55 also targets a total 254,160 "S Corporations" which are also small businesses that have difficulty organizing a big budget opposition campaign, despite the magnitude of the Prop. 55 tax increase.
Small business owners question the need for the Prop. 55 tax increases, due to record revenues collected by the State of California in recent years, a 50% boost in school funding since 2012, and declining school enrollment projected through at least 2023-24.
Prop. 55 also continues the state's uncompetitive practice of taxing small businesses at more than three times the effective corporate tax rate.
Under Prop. 55, California small businesses will continue to pay a 13.3% top marginal tax rate, compared to the effective 4% corporate rate for most big corporate taxpayers, due to significant tax credits and loopholes in the state's corporation tax.
Prop. 55 is opposed by the California business community, but the deep pocketed corporate donors have stayed on the sidelines thus far.
Prop. 55 is supported by the California Democrat leadership including Assembly Speaker Anthony Rendon (D) and Senate Pro Tem Kevin De Leon (D), and the who's who of the California Democratic Party.
Republican lawmakers were the only state lawmakers to raise concerns about negative impact of Prop. 55 on small businesses and the California economy at a legislative hearing held last month. Most, if not all Democrat lawmakers, said they were eager to raise taxes because they believed it was for a good cause.
This analysis was completed by David Kersten, president of the Kersten Institute, who has a master's degree in public policy from Georgetown University. Kersten also teaches a master's course on public budgeting at the University of San Francisco.