Federal relief delays tax break for state businesses

California businesses got billions of dollars from the federal government during the coronavirus pandemic, money that helped many survive public health restrictions that hobbled their livelihoods. But now lawmakers worry a new federal law could mean they can’t make that money exempt from taxes.

The U.S. government changed the law so businesses don’t have to pay federal income tax on the money and California lawmakers are eager to do the same at the state level.

But a bill that would do that has been delayed because of a provision in the latest federal coronavirus relief bill that says states can’t use relief money to cut taxes. By making the federal business aid exempt from state taxes, the bill pending before the state Legislature would save money for businesses while costing the state about $2.3 billion in revenue.

Gov. Gavin Newsom’s administration is worried the U.S. Treasury Department would view that as a tax cut. If that happens federal bureaucrats could withhold some of the federal relief money from California as a penalty. California is scheduled to get about $26 billion.

“I think that (Congress members) were trying to solve one problem and perhaps created a different problem for states,” Kristin Shelton, chief of the research and analysis unit at the California Department of Finance, told lawmakers Thursday. “We are working tirelessly to be able to get that clarity and hope to get it in the coming weeks.”

Congress has approved three economic relief packages since the pandemic began last year. Last fall, the California Legislature passed a law making much of the federal aid for businesses exempt from state taxes. But then Congress approved more aid in December, requiring California to pass another law to match it.

But before they could do that, Congress approved even more aid — $1.9 trillion — only this time it banned states from using federal relief dollars to pay for tax cuts.

It’s mostly been an an issue in Republican-led states, where lawmakers are wondering how to handle various tax cut proposals that had been in the works before the relief bill was signed.