Orange County Register: The cost of doing business in California: New Year, New Taxes
By Sara Catalan
When I first started researching legislation taking effect in 2024, I was primarily focused on new taxes that will come into existence January 1. If you know anything about California, you know that the broadly defined term ‘taxes’ is only a portion of the story.
The untold cost of business in the golden state is the rising cost of literally everything related to performing a service or selling a product, from the rising cost of raw materials to the ever-increasing payroll costs per employee.
In addition to Sales and Use Tax (SUT) increase proposals across the state, employers in California will also see an increase in their Federal Unemployment Tax Act (FUTA) rate. As we have seen reported in countless stories since the pandemic, the state unemployment system was an absolute disaster, resulting in more than $32 billion in fraudulent payments. During the pandemic, twenty-two states borrowed from the federal government so they could keep paying unemployment benefits, and those states must pay that money back, plus interest.
Most states have already done this. But California is one of five states that hasn’t repaid those funds and California now owes $18.9 billion in federal unemployment debt. California featured a projected $97.5 billion budget surplus in FY 2022-2023 and many businesses were calling on the governor to use some of that surplus to pay down California’s federal unemployment debt.
The governor agreed to a $1 billion payment towards the debt, but now Gov. Newsom wants to cancel that spending to help cover the state’s budget shortfall.
As a result of California’s nonpayment on its unemployment debt, the state will see an increase in their FUTA rate making the payments .6% in total, the big kicker here is that this rate adjustment is retroactive and will apply to payroll from 2023. As you might expect, small business owners are not thrilled to be paying off a debt due, in part, to the state’s inability to efficiently cover even the most basic operations of government.
In addition to the FUTA increase, many wage earners will see an increase in their state disability payroll taxes. California has historically funded the state’s disability insurance program through a payroll tax of 1.1% on wages up to $153,164. Starting in 2024, this wage ceiling will be lifted, subjecting all wage income to the payroll tax. This means that the state’s top marginal individual income tax rate on wage income (not all income) will become 14.4 percent.
As the national non-profit the Tax Foundation notes, 34 states will begin the new year with notable tax changes, including 15 states cutting individual or corporate tax rates. These states stand in stark contrast to California, who will be raising state payroll tax 1.1% as well as lifting the wage ceiling and implementing the FUTA tax increase.
In 2022, Senate Bill 951 (introduced by Maria Elena Durazo of Los Angeles) repealed the wage ceiling for contributions into the SDI fund, thereby making all wages subject to the SDI contribution rate.
Other major changes taking place for employers in the Golden State include:
Fast food workers will get a minimum wage increase to $20 per hour on April 1.
Health care workers are scheduled to see the first increases in their minimum wage on June 1.
Workers in California will receive a minimum of five days of sick leave annually, instead of three, which they will accrue once they have been employed for 200 days.
Businesses looking to purchase EV’s will see a 50% reduction, or in some cases the elimination, of the federal tax credit for select EV models.
Increase in payroll taxes including SDI and FUTA tax rates.
Sara Catalán is president of the Orange County Taxpayers Association