Two Tax Bills in Sacramento Pose Significant Threat to the Life Sciences Industry
May 19, 2018
By Brett Johnson
Despite California’s significant budget surplus, legislators are continuing to propose burdensome taxes affecting the life sciences industry, among many others. The two tax bills most recently raising alarms among CLSA staff and membership are Senate Bill 993 (Hertzberg) and Assembly Bill 2731 (Gipson).
First, introduced by Senator Bob Hertzberg, SB 993 would impose a tax on all services purchased by businesses in California, scaling up to a 3 percent tax in 2022. While Senator Hertzberg presented on the bill in the Senate Committee on Governance and Finance, no vote has yet been taken, but the committee did commit to holding future hearings on the potential for such a service tax.
The opposition to SB 993 has been comprehensive. CLSA joined a sizable coalition led by the California Taxpayers Association, the California Chamber of Commerce, and numerous organizations in opposition, citing competitive disadvantages for California employers, massive tax increases, a price increase of everyday goods, among numerous other concerns.
Second, AB 2731 aims to close the perceived “carried interest loophole,” which proponents of the bill argue “allows hedge fund or private equity fund managers to pay a lower tax rate than most other working professionals.” To this end, AB 2731 would impose a 17 percent tax upon taxable income derived from an “investment management services interest,” which would be immediately effective for taxable years beginning on or after January 1, 2018.
“Investment management services interest” is broadly defined as an interest in a business which is held by any individual if that individual provides, directly or indirectly, in the active conduct of a trade or business, a substantial quantity of any of the following services to the business: advising in the investing in, purchasing, or selling any specified asset; managing, acquiring, or disposing of any specified asset; arranging financing with respect to acquiring specified assets; or any activity in support of the aforementioned services. The last category appears to broaden the targeted conduct significantly.
AB 2731 is currently in the Assembly Committee on Appropriations’ suspense file. It remains unclear as to the likelihood of the bill moving on to the Assembly floor. CLSA has joined a coalition opposing the legislation and will continue to work with our trade partners to defeat the legislation.
CLSA remains optimistic that both bills will fail given the current absence of a two-thirds Democratic majority in the California Legislature. This year’s elections, however, could lead to such a supermajority, making the defeat of tax legislation potentially more difficult going forward.
CLSA will continue working with our partner stakeholders to ensure the defeat of all tax legislation adversely affecting the life sciences industry in California. We do, however, request input from any CLSA members on how such legislation will impact their respective companies. Any CLSA members who would like to provide input or would like further information on any of the legislation discussed herein are asked to reach out to Oliver Rocroi, CLSA’s Senior Director, State Government Affairs (firstname.lastname@example.org) or Brett Johnson, CLSA’s Senior Director, Policy & Regulatory Affairs (email@example.com).