Slashdot Mirror
How Entrepreneurs Overturned California's Retroactive Tax On Startup Founders
waderoush writes "Startup founders in California can breathe a little easier today — they won't be getting bills from the state for up to $120 million in back taxes. On Friday California Governor Jerry Brown signed a bill prohibiting the state from levying retroactive taxes on founders and other small-business investors who took advantage of a tax break invalidated last year by a state appeals court. California Business Defense, a coalition of entrepreneurs, spent most of 2013 trying to reverse the California Franchise Tax Board's interpretation of the court ruling, under which it planned to hit Californians with new tax bills on the sale of small-business stock going back to 2008 (a story that Slashdot picked up in January). Two bills on the matter reached Governor Brown's desk in September, one fully restoring the investment incentive through 2016, the other partially restoring it. Brown signed AB1412, the bill granting full relief. 'For a bunch of political greenhorns operating in an environment where political partisanship is at an all-time high, we did all right,' writes Brian Overstreet, one of the co-founders of California Business Defense. 'But it should never have been this hard.'"
The concept of "Ex Post Facto" is not a loophole, it's a foundational principle of justice. This same "loophole" prevents the government from declaring whatever you did yesterday a crime and throwing you in the slammer for it.
BTW, Governor Brown knows this, and understands the difference between rhetoric fed to you for your vote, and the poitical calamity of losing billions in taxes as industries flee the state.
Heh heh heh I said brown knows.
(-1: Post disagrees with my already-settled worldview) is not a valid mod option.
But in an ostensibly capitalist country it needs to be ok to be a capitalist, otherwise the people with the capital flee the country.
Don't forget to pay the exit tax on the way out!
No - courts close loophole, loophole can't be used anymore.
Laws that take away freedoms (e.g. making something a crime) or property (e.g. taxes) must not be retroactive. This includes loopholes - if use of the loophole was determined to be legal under the law as it was at the time anything gained from it cannot be taken away.
I dislike people using loopholes to advance themselves as much as anyone, but not setting precedents of making retroactive legislation is more important.
Exactly - you wouldn't want something like the earned income tax credit or mortgage interest deduction to be invalidated and suddenly make you liable for thousands in back taxes.
As we always clamor: streamline the tax code and get rid of this myriad of deductions and loopholes
+1 Disagree
Sure. you buy a house for $50,000 in 1973, then 40 years later sell it for $250,000, an inflation calculator will indicate an almost imperceptible change in "value" (in 2013 dollars), but you'll be taxed on the inflation (on not, if you live there as a homestead, and meet other rules).
Capital gains is a tax on the inflation. They don't calculate the capital gains on the "real" gain, but the dollar gain.
You are obviously the person that doesn't understand it. If I don't understand it, explain how I'm wrong. Go ahead. I'll be waiting.
Learn to love Alaska
Almost correct.
Rich people lobby for loophole and get legislation creating it. After some time, court invalidates it. Rich people ask for and get amnesty for period between creation of loophole and its final invalidation.
In theory, they could play this game forever. Simply pass the 'same' legislation again with some minor differences making previous court decision not applicable. Case goes back to court, invalidating new loophole. But amnesty is granted for the period between law enactment and court finding. Again. For all intents and purposes, business would get its loophole. And if they are smart, they can time the events to which these transient loopholes apply, avoiding tax altogether.
Have gnu, will travel.
capital gains does NOT at all hinder the economy
Good to know. Perhaps we should eliminate the capital gains exemption for real estate sales of primary residences. I wonder if a $10,000 tax liability on $50k of profit would "hinder" John Q. Low Information voter when he sells his house.
He might be a little less willing to indulge "progressive" hate mongering about the "rich," at least. Anyhow, you let me know when we elect someone ready to repeal that little tax break because it doesn't "hinder" the economy.
I'll be right here, not holding my breath.
Maw! Fire up the karma burner!
Good point. What people don't realize is that capital gains taxes hit the individual harder than the corporation.
Individuals can't shuffle their asset ownership around like corporations can. Either by moving ownership structures offshore (most progressive countries have little or no cap gains taxes) or by resetting their tax basis by mergers and acquisitions.
The primary residence tax break was instated to keep the John Q Public voters largely unaffected and therefor unaware of the true impact of capital gains taxation. And since most voters' only other major wealth holding is a pension (managed by others), it remains largely hidden from them. If they ever sat down and figured out how much money the government has robbed from their retirement, there would be blood on the streets of Washington DC.
Have gnu, will travel.
To clarify. My post is about the principle of retroactive legislation and tax loop holes; not about this current case, which seems rather special in that the businesses followed state accepted (and encouraged rules) for tax management created to stimulate startups. That these rules later turned out to be unconstitutional is not the fault of the businesses, but the fault of the state government creating a poor state law.
The businesses have thus broken the law, but in this specific case the right thing to do is to give them amnesty because it was done unwittingly, they had no criminal intent and acted in good faith, based on a law which could not be legally upheld.
It is imporant not to treat this as a general rule though. The case was very specific. If you search for unintended loop holes and exploit these for your own benefit, you must take the risk that you are wrong about the legality of the loop hole.