‘Read My Lips: I Lied’

Confronting the nation’s largest-ever state budget deficit, California’s Democratic governor, Gavin Newsom, has been throwing overboard almost every government program not tied to a legal mandate. Despite progressive demands, he’s sounding for once like a fiscal conservative: There’ll be no new taxes.

“When considering [California’s] 8.84 percent corporate tax — which is the highest, arguably, depending on how you analyze it, in the country — no, I’m not prepared to increase taxes,” Newsom told a May 10 press gaggle. “We have among the highest tax rates in the United States of America for high-wage earners, we have among the highest tax rates, as I noted, for corporate taxes. . . . I feel strongly that we have to live within our means.”

But Newsom was already lying. By defaulting on $20 billion in federal Covid-era unemployment-insurance loans, Newsom triggered an automatic hike in federal payroll taxes paid by California employers.

The repayment program, laid out in the Federal Unemployment Tax Act, or FUTA, is squeezing already straitened California businesses. What’s especially painful to business owners is that the payroll tax hike is raining down upon the just and the unjust.

“The increase comes notwithstanding the claims experience of the employer,” says Douglas J. Holmes, president of the National Foundation for Unemployment Compensation and Workers’ Compensation. “Employers who never lay off employees suffer significant percentage increases over their otherwise low rates.”

And then there’s this terror: the tax rise every year that “California fails to repay the federal loan,” Holmes notes — from an additional $21 per employee this year to $42 next year and so on, until the state’s businesses have fully paid for Newsom’s folly.

That’s going to mean tough times for California business owners.

Denise Duncan, who owns AT Industrial, a Pomona-based manufacturer, doesn’t remember when she received her IRS notice that her federal withholding would go up, but she remembers vividly her reaction: “I wanted to throw up. . . . Most people who don’t actually run a business, their attitude about this sort of tax stuff is, ‘It’s just a little bit. What are you worried about?’ But it’s not just this.”

She runs through the outrages, a long train of abuses and usurpations, including government-fee increases (city trash collection recently soared from $88.91 per month to $370), inflation, and regulations eating out her substance.

“Every time we adjust, we get smacked around for something else,” she says. “And now there’s” — she pauses, seeming to search for something she can say in front of small kids and old people — “there’s this.”

Mark Bucher, who owns Service First, a Santa Ana-based property-services company, is clearer about when he got his IRS notification (December 2023) and equally clear on the penalty he’ll pay for Newsom’s blunder ($5,640). When I suggest that some might say that’s not much, he growls: “It’s a lot of money if it’s being stolen from you.”

Bucher (who also helped found CPC) ticks off the list of things for which he might have otherwise used that money — “bonuses, salary increases, a new piece of equipment.”

Each of the eleven California business owners I spoke with is familiar with the FUTA tax. And each of them blames Governor Gavin Newsom. A few of them understand the debacle at such a granular level that they add another name: Newsom’s former secretary of labor, Julie Su.

The Background

Ignoring years of warnings from state auditors that California’s Employment Development Division was uniquely vulnerable to hackers, Julie Su was unprepared for the flood of unemployment claims generated during Covid. Fearing that more rigorous identity checks on unemployment claims would disproportionately harm minorities, Su swung open the door to all claims — and paid out a remarkable $30 billion to fraudsters, prisoners, scammers, and known international organized-crime rings, while at the same time collecting up to $20 billion in emergency unemployment-insurance trust-fund loans from the federal government. That’s when Su’s team slammed the door, freezing out hundreds of thousands of legitimate claimants.

Within months, literal fortune struck for Newsom and his supermajority governing party, including Su: A series of unprecedented Silicon Valley IPOs generated one-time tax revenue so magnificent that few remembered Su’s gaffe. Tax payments from Airbnb, DoorDash, Coinbase, and others lifted Sacramento’s financial ark above the flood of bad news emanating from Su’s department.

Twenty other states paid off their federal loans, and none of them had Newsom’s luck with Silicon Valley. Newsom could have used some of that unprecedented income to pay off the federal loan, too. Instead, facing a recall over his feckless handling of the Covid lockdown, he ignored the PAYMENT DUE notice on that $20 billion from the federal government and did something so remarkable that it ought to end — forever — any talk of a President Gavin Newsom.

First, he rushed to advertise his expertise as a public-finance expert in producing 2022’s $100 billion surplus, the largest in U.S. history. Finding himself on third base because of those Silicon Valley IPOs, Newsom pumped his fists and slapped his own chest as if he’d hit a triple. Then, because he was three months away from the September recall, he spent almost all of it — including a one-time payment to 23 million Californians of up to $1,050 for a total of $9.5 billion.

“He could absolutely have used the surplus to pay off the federal loan,” said a former state auditor who spoke on condition of anonymity. “Instead, he ignored it. I don’t know, maybe he hoped it would become someone else’s problem.”

That “someone else” is anyone who employs Californians.
 

... Keep reading this National Review article by CPC president Will Swaim.