Give a Leg-Up to the Risk-Takers in Business

They say you can’t squeeze blood from a turnip. But leave it to government to try.

In the case of California, the turnip is small, start-up businesses, and the attempt to draw blood is something called the “minimum franchise tax.”

Any new business incorporating in California--or one incorporated elsewhere that wants to do business here--must pony up $800 to the Franchise Tax Board just for the privilege of doing so. Mind you, this is before the business has even earned its first dollar, let alone turned a profit.

The $800 is not the prepayment on any taxes owed in subsequent years, nor can it be claimed as an estimated tax payment. It is applied to the corporation’s tax liability only if the corporation dissolves or goes bankrupt.

Plus, in its first year of operation, a new business must shell out an additional $800 as a minimum tax, even if it made no money. That’s a total tab of $1,600 just for setting up shop.

While this business start-up tax may not be a hindrance to large companies, for someone just starting a small business, it can be prohibitive.

And make no mistake, small business is driving California’s economic comeback. Small businesses make up 90% of all the state’s businesses and generate two-thirds of all jobs in the private sector. And small businesses are projected to fuel our economy well into the next century.

The start-up tax--which is really little more than a gift to the state treasury--adds up to an unfair burden on new businesses. By definition, these are fledgling enterprises that also must scrape up enough money to pay for supplies, inventories, payroll, equipment and leases, not to mention license and other fees.

Much is made of recent attempts to make California more competitive and business-friendly. The Legislature and governor this year did lower the corporate tax rate from 9.3% to 8.84%, a long overdue move. But that did nothing to lower the start-up tax. In fact, the Legislature has increased this levy from $200 in 1986 to the current $800.

Most other Western states’ start-up taxes are far less: Oregon, $10; Idaho, $20 (plus an additional $10 for companies with gross income); Arizona, $50 and Utah, $100. Even Rhode Island--the state with the second highest start-up tax--charges $250. In most other states, you can start a business for a song; California charges you for a whole symphony.

If we are to seriously encourage entrepreneurship and the creation of new jobs, we must deal with this disincentive. In Sacramento this year, Republicans and Democrats sponsored at least five measures to address the start-up tax, ranging from outright repeal to instituting staggered rates. Unfortunately, politics-as-usual contributed to all five measures languishing without resolution.

We should be doing everything we can to encourage new businesses in California, not extracting blood money from the risk-takers who start them.