Full Interview — David Kline with California Taxpayers Association

[00:00:00] Speaker 1: David Klein with CalTax, thank you so much for making time for us. [00:00:03] Speaker 2: Yes, thank you for having me. [00:00:04] Speaker 1: So essentially these new taxes are on the governor's desk right now. I mean, with you and this whole coalition of businesses, do you all see this as a done deal at this point? [00:00:13] Speaker 2: Yes and no. We wouldn't anticipate that the governor would veto something that was his idea. But there is some time left in the legislative session for things to be changed. And historically, the legislature has kept working on the budget right up to the end of the session. So we're hopeful that we could convince them to undo some of the damage that these taxes would do. [00:00:36] Speaker 1: So sometime between like July and September, essentially, you would hope for some changes possibly. [00:00:41] Speaker 2: As long as the legislature is still in session, anything's possible. [00:00:44] Speaker 1: Okay, so I mean, CalTax is leading this coalition again with business groups, tech groups, I saw Apple, Intuit, Fidelity. Those are just a few of apparently dozens. I mean, with the digital software sales tax, coupled with the limits on research and development tax credits that the state provides, what specifically are the concerns for these groups? [00:01:10] Speaker 2: The biggest concerns are with the tax on software, that it is going to tax layer upon layer upon layer of transactions. So for example, the state of California doesn't tax food in most cases, you know, if you're just buying groceries. But in this case, the grower who's, you know, growing the food is going to be paying on tax on the software. The trucking company that trucks the food to the store is going to be paying a tax on the software it uses. The store is going to be paying the tax, the marketing department, the ads, everyone is going to be paying a tax that could be, you know, it's up to over 10% in some areas of the state. Who pays that? Ultimately, the consumer who buys the product on the shelf at the very end of all that pays for all those taxes. The tax layering or pyramiding, depending on how you want to describe it, that's the biggest problem that, you know, California has an affordability crisis and this tax is going to just add a tax extra cost at every step of the process of every product. You know, if you're manufacturing, you know, widgets, the famous economic item that doesn't exist. It's going to cost every step of the way. And ultimately, the person at the end is holding the bag. [00:02:27] Speaker 1: Lawmakers are saying, lawmakers in support of that tax specifically, they're saying that, well, our tax system right now taxes like the actual disk of software and we need to just update it, you know, because the software is now digital. What's your response to that? [00:02:44] Speaker 2: Well, first, I don't think the state is obligated to tax everything that, you know, we have innovations. That doesn't mean that you have to automatically tax it. But the bigger situation in this case is the pyramiding and the taxing of software as a service. So not just the actual software, but if you're doing a monthly subscription, you're going to be paying that tax for forever, you know, as long as you're using that software. And that is a major change in tax policy. And that is something that, you know, the governor just announced this a month ago. And within a month, it was fast-tracked through the legislature without any real hearings. I mean, opponents had, you know, two minutes of testimony here and there to just say they opposed. And that was sort of it. But if you did an actual vetting of this idea, I think you'd see that it's going to be very, very costly for Californians. [00:03:34] Speaker 1: I mean, how soon do you expect, I mean, you're in like the research space specifically with taxes. How soon do you see this hitting people's pocketbooks? [00:03:43] Speaker 2: It could be very, very fast. Companies are going to have to start paying it right away. And, you know, every product, if you think about all the software that is used in every business now, and I'm sure we're surrounded by it here, you have software for payroll, for security, for cybersecurity, and actual physical cameras and things. Everything we do has software involved. And if you start adding 10% or more to that cost at every step of the way, that is going to add up very quickly for the consumers. [00:04:15] Speaker 1: So, presumably, July 1st it takes effect, and then maybe within weeks, months? [00:04:24] Speaker 2: I mean, I think it would be safe to say weeks. [00:04:26] Speaker 1: Oh, wow. [00:04:27] Speaker 2: I don't think, because this is so new, it was rushed through the legislature with almost no actual vetting. A lot of these are unknown. You know, they didn't do a big analysis of here's what this tax is going to cost, and here's the behavior it's going to change, which is always the main question. You know, if you increase a tax, people are going to change their behavior. It is just a fact of life. So, you want to know that before you just rush into it and sign it into law, ideally. In this case, I don't think they do that. [00:04:58] Speaker 1: The Newsom administration has said that there are several states that already have this kind of tax. What would be your response to that? [00:05:07] Speaker 2: Most of these states that have this kind of tax don't have all the other taxes California has to start out with, and we are a very, very high-tax state for businesses. So, we are already way above most of them in terms of just sheer taxing. And then a lot of them will exempt business-to-business transactions or have some sort of, you know, safeguard, some guardrails to keep it from getting out of hand. California doesn't have those with this proposal, and because it was rushed through so quickly, no one knows what it will really do. We think the revenue is, or the cost to taxpayers, the way we phrase it, is going to be much higher than the state has assumed. [00:05:48] Speaker 1: So, the state assumes like $900 million a year. What is, what's your figure? [00:05:53] Speaker 2: Yeah, their figure has been anywhere from $900 million to, you know, about $2 billion, I think, when fully implemented. We think it could be easily five to six times that amount based on just the sheer amount of software. [00:06:04] Speaker 1: So, $6 to $12 billion potentially. [00:06:07] Speaker 2: Very possible. Very possible. Our members are still crunching numbers, but the feedback that we've heard is that the state does not adequately account for all the software that is used by businesses and how it's going to impact everyone. [00:06:24] Speaker 1: Is there anything else you think we should know about this? [00:06:28] Speaker 2: Well, the software, it's big. It's a change in the sales tax policy big time because now the state will be taxing a service, which it has not really done to any big extent. And that has always been a major concern for taxpayer groups and just the public. You know, if the state decides, oh, we're going to start applying sales tax to services, that adds huge cost to everything. So, it's a step in the wrong direction in that sense. And then, it's not the only tax policy that the state has just, you know, sent to the governor's desk. There's also the limit on research and development tax credits. And that, as a tax credit, it's not a giveaway to a big company. It is a way to keep companies researching and developing new products here in California so that when they go public with a big IPO like, you know, SpaceX or all the tech companies, you want all their executives, all their workers, everyone in California. Because then we reap the rewards of the income tax when they go out and buy a new car with their, you know, new money. We have sales tax. And when they go out to eat, there's sales tax on that too. And people are getting paid and tipped and it just helps the economy. So, we want that to happen in California, not in some other state that just has lower taxes. [00:07:48] Speaker 1: All right. David Klein, we really appreciate your time. [00:07:51] Speaker 2: Thank you. - Thank you.