In summary
California’s corporate tax revenue this summer was nearly $2 billion higher than expected, including $800 million in July. Tax changes aimed at easing budget deficits helped fuel the rise.
As soon as Gov. Gavin Newsom cut billions of dollars in spending to eliminate the budget deficit in June, California was hit with an unexpected tax inventory, and those in the Capitol faced an avalanche. Guess where the money came from.
More corporate taxes than expected poured into the state treasury this summer, and cash receipts since April were nearly $2 billion more than expected. A particularly large spike occurred in July, and state officials and accounting experts believe the additional revenue came from a small number of companies — likely one or more Silicon Valley tech companies. , and artificial intelligence chip maker Nvidia is a strong candidate.
The influx is a combination of California’s tendency to further regulate tech companies (the governor has signed six bills regulating the use of artificial intelligence so far this year) and its reliance on tech companies for tax revenue. This highlights the growing tensions between them.
On a single day, July 16, the state received more than $800 million in corporate tax payments that exceeded expectations, marking the first July in at least 40 years and “the largest single day of collections ever.” ”, Deputy State Legislative Analyst Brian Wooler told CalMatters. . (2020 was excluded because the tax deadline was delayed due to the pandemic.)
In July, the Treasury Department announced it had collected about $1.4 billion in corporate taxes, nearly three times the agency’s estimate of $500 million. June corporate taxes were $263 million higher than expected, and May’s corporate taxes were $752 million higher than expected. “July’s excess is likely due to large payments by a small number of companies and may not necessarily be indicative of overall corporate tax revenue trends,” the ministry said in its monthly report.
July’s excess is likely due to large payments by a small number of companies.
California Department of Treasury
Tax records are confidential, and representatives from the Treasury Department and the Franchise Tax Board emphasized that no one in the state is allowed to discuss specific tax returns or tax details or information.
But state and accounting experts who spoke to CalMatters said the jump in corporate tax payments in July was likely related to changes in state tax rules adopted in June. The tax reform, aimed at eliminating deficits, includes an end to a deduction that companies can claim to offset profits, called the net operating loss deduction, and a $5 million limit on the amount companies can claim for research and development. Included. Tax deduction.
Accounting experts say companies that had expected huge profits may have realized they would have to pay more taxes soon after the law took effect, and realized they would have to pay large estimated taxes. It is said that there is a sex. Businesses that expect to pay taxes must make quarterly estimated tax payments, and late payments can result in penalties. As state analysts said when the changes were proposed, the new tax would be unfairly taken from “companies in higher-risk or more innovative industries, such as the technology, film, and transportation sectors.” I think there is a possibility that
California is home to some hot tech companies that fit the bill: huge profits and high-risk innovation. That’s Nvidia, which is raising record amounts of money due to the artificial intelligence boom.
As other companies scramble to get ahead in the AI race, they’re buying Nvidia’s chips and pushing the company to new heights. On August 28, NVIDIA reported second-quarter net income of $16.6 billion. That’s more than double the profit from the same period last year and about the same amount spent by all state and federal campaigns in the last election.
California is home to some hot tech companies that fit the bill: huge profits and high-risk innovation. That’s Nvidia, which is raising record amounts of money due to the artificial intelligence boom.
Nvidia’s 2023 annual financial report revealed $1.5 billion in unused California tax credits for research and development. Between the cap on tax credits and the suspension of loss deductions that companies could claim on increased profits, Nvidia likely knew it would be billed more taxes, accounting experts told CalMatters. Ta. Therefore, it may have been that company or one of its companies that paid a large amount of estimated tax to the state.
Nvidia’s latest quarterly report provides additional clues. The company paid a total of $7.21 billion in income taxes in the second quarter. This was a 31x increase from the $227 million tax paid in the same period last year. In the first six months of fiscal 2024, NVIDIA paid $7.45 billion in income taxes, compared to $328 million in the first half of 2023. These totals include federal and state taxes. California’s corporate tax rate is a flat rate of 8.84% of a company’s net income, while the federal tax rate is a flat rate of 21%.
Francine McKenna, an independent financial journalist who writes the Dig newsletter and teaches financial accounting at financial institutions, said that if Nvidia were primarily responsible for the July tax windfall from estimated tax payments, If so, the company is likely expecting a lot of taxable income this year, he said. University of Pennsylvania Wharton School of Business. McKenna said if that were the case, and because there are limits on how much the company can claim in terms of other tax credits, NVIDIA would likely make a larger estimated tax payment in the third quarter.
An Nvidia spokesperson declined to comment. So did Gov. Gavin Newsom’s press secretary.
“I would expect to potentially see payments from other companies as well,” said Brett Whitaker, a former tax executive at Ernst & Young, Nike and Mattel who now teaches corporate tax accounting at Indiana University. “I’m doing it,” he said. “Stopping these credits could result in tax consequences for many people, as they often rely on these credits to avoid paying taxes.”
Whittaker said most companies are trying to take advantage of the research and development tax credit, and “the Big Four (accounting) firms have entire teams dedicated solely to this effort.” But he added that the credit is particularly well used by technology companies and companies whose businesses rely on innovation.
Treasury spokesperson HD Palmer said it was difficult to know exactly when these other estimated tax payments would be paid and how significant they would be.
Estimated tax payments will be made in April, June, September and January, but these payments will not necessarily be made on time and may be paid at any time, according to the Franchise Tax Board. .
A CalMatters review of financial reports filed with the Federal Securities and Exchange Commission by Silicon Valley’s biggest tech companies suggests that some companies may also be affected by the tax changes. That means businesses could potentially pay an estimated tax payment similar to what the state received in July.
Companies such as Apple Inc., Google parent company Alphabet Inc., and Facebook parent company Meta Inc. are among those whose financial returns show they have past losses or unused state R&D tax credits that would normally be deductible. That’s one.
As of December 31 of last year, Alphabet had $18.6 billion in old losses in California. The tech giant also had $6.3 billion in research and development credits. As of that date, Meta had historical losses in the state of $2.78 billion and also had unspecified state tax credits of $4.08 billion from prior periods. And as of September 30, 2023, Apple had $3 billion in research and development credits. All of these companies are highly profitable, and the deductions and credits they had planned to take advantage of are now on hold or limited.
California’s suspension of deductions and tax credit limits could increase state revenue by $5.95 billion this fiscal year, $5.5 billion next year, and $3.4 billion the year after, according to an analysis of budget proposals that include tax reform. be.
When the governor proposed tax changes in his budget earlier this year, they divided state lawmakers largely along partisan lines. Democrats characterized the changes as necessary, while Republicans denounced them as a burden on businesses.
Democratic state Sen. Scott Wiener of San Francisco, who supports the change, said in an emailed statement to CalMatters: Strengthens the state’s fiscal health going forward while protecting core programs and benefiting the entire economy. ”
Learn more about the legislators mentioned in this article.
Sen. Roger Niello, R-Roseville, an opponent of the amendment and a former comptroller, told CalMatters that he checked with the Treasurer and the Legislative Analysis Service about the higher-than-expected corporate tax payment in July. “It’s reasonable to think that this is due to tax changes, but we don’t know for sure. It certainly appears to be due to large deposits from several companies,” he said.
Niello said the state did not allow business loss deductions in nearly half of the years from 2008 to 2027, citing findings by the Legislative Analysis Service in a report released in May. The deduction is thought to help roughly equalize taxes for companies that earn similar gross profits over multiple years.
Suspending the deduction “appears to be the state’s go-to measure to make up for revenue shortfalls,” Niello said. “Companies cannot rely on this now.”
In addition to tax reform, California tech companies have weathered a variety of legal battles and new regulations this year. The biggest fight was over a bill that would force potential testing of powerful artificial intelligence models that could enable cyber attacks, the creation of weapons of mass destruction and other threats to infrastructure. Several major tech companies opposed the bill, saying it would stifle innovation, but prominent whistleblowers argued it would help moderate the reckless pursuit of tech profits. The bill from Weiner passed the Legislature but was vetoed by Gov. Gavin Newsom over the weekend. The governor also signed legislation that protects voters from deepfakes and allows privacy victims to sue attackers in civil court.
