California Governor Gavin Newsom Signs New Budget Creating Nation’s First Tax Credit For Union Dues

In the most populous state in the U.S., California, leading politicians often talk about equity, equality, and their efforts to achieve both. Yet a tax break included in the new California state budget signed by Governor Gavin Newsom (D) on June 27 will exacerbate existing inequality in state taxation, critics contend.

California is one of only a handful of states where union dues are tax deductible for state income tax purposes. As part of the new state budget recently signed by Newsom, California lawmakers have made that targeted tax break even more valuable.

The new budget passed by lawmakers in mid-June and signed by Governor Newsom two weeks later will take California’s existing tax deduction for union dues payments and turn it into a tax credit capped at 33% of dues paid. Changing the deduction to a credit makes the union tax break more generous and benefits those who don’t itemize or have a tax liability.

“While union dues are currently tax deductible, union workers are more likely to not itemize their deductions and therefore do not get the same tax benefit for their dues that higher paid professions are more likely to get for their professional association dues,” notes the budget floor report. The creation of this new tax credit was praised by union leaders. In a statement released shortly after Governor Newsom signed the new budget, Amber Baur, executive director for The United Food and Commercial Workers (UFCW) Western States Council, thanked Newsom and state legislators for “allowing workers to level the playing field that tries to keep them at the bottom.”

This enhanced tax break for union members in the new California budget was dubbed the “Workers Tax Fairness Credit.” But critics claim fairness is an ironic word to use since the credit is not available to the vast majority of workers.

“In California, it’s ‘government of the unions, by the unions, for the unions,’” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. The union dues tax credit in the new budget boosts a tax break most workers can’t utilize because only 15.9% of the state’s workforce is unionized, according to the Bureau of Labor Statistics.

The enactment of the nation’s first state tax credit for union dues payments comes a few months after Democrats in Congress attempted to enact an above-the-line federal tax deduction for union dues payments that would be available even to taxpayers who do not itemize. Critics of that proposal, which was included in the Build Back Better spending package passed by the House of Representatives in 2021, point out it was targeted to benefit a small minority of workers who disproportionately donate to Democratic campaigns, as is the case for California’s new union dues tax credit.

“In effect, they’ve forced the 90% of workers in America who aren’t in a union to subsidize the dues of those who are,” said Representative Kevin Brady (R-Texas), House Ways and Means Committee ranking member, of the union dues deduction that congressional Democrats proposed but have thus far been unable to enact.

“By making union dues tax deductible, Democrats are essentially making it more financially viable for people to contribute to organizations that help elect Democrats,” wrote Dominic Pino, a National Review Institute fellow, about the federal union dues deduction. The same argument could apply to the union dues tax credit in the new California budget. Pino and others who make this assertion can point to political spending data from Open Secrets, which shows 90% of union donations to federal campaigns during the 2020 election cycle were directed to Democrats.

Others, however, contend that changing the union dues deduction to a credit will make the tax benefit more progressive and apply more broadly than is currently the case.

“In general the move from a deduction to a credit will generally make the tax policy more progressive as the value of the tax expenditure will no longer be dependent on the tax rate faced,” said Kim Rueben, the Sol Price Fellow and director of the State & Local Finance Initiative at the Urban-Brookings Tax Policy Center. “In a state like California this in general will be especially true given the progressive nature of its state income tax and who owes income tax. This is especially the case in making it a refundable credit and not requiring the tax-payer to itemize. So the change would make the benefit available to a broader set of Californians and more equitable across different union workers within the state.”

While California lawmakers are strengthening a union tax break from which most Californians won’t benefit, there is an ongoing effort to use government union pension funds for political purposes. Senate Bill 1173, introduced by Senator Lena Gonzalez (D-Long Beach), would “prohibit the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) from investing in fossil fuel companies, and require that they divest any current investments by 2027.”

A 2015 study by University of Chicago Law Professor Daniel Fischel underscores the financial hit California pensioners and taxpayers would take were state lawmakers to pass SB 1173. Fischel’s report, which looked at 11 of the top pension funds, quantified the financial harm caused by pension divestment from fossil fuels. According to Professor Fischel’s research, funds narrowly divested from fossil fuels see an annual shortfall of 0.15%, while funds broadly divested face an annual shortfall of 0.2%. Though that may not sound like a significant impact to many, it makes a tremendous difference to pension funds, translating into billions of dollars in forgone gains.

California’s government worker pension systems already face combined unfunded liabilities projected to total approximately $1 trillion. California taxpayers, who already toil under one of the nation’s heftiest tax burdens, are on the hook for this shortfall. By reducing investment returns, divesting state pension funds from fossil fuels would cause these large unfunded liabilities to grow further, which is bad news for both union pensioners and all California taxpayers.

Though SB 1173 passed out of the Senate, it was pulled on June 21 by Assemblyman Jim Cooper (D-Elk Grove), who chairs the Assembly Committee on Public Employment and Retirement. Critics of SB 1173 argued, effectively it appears given the bill’s death, that union retirees and all California taxpayers would be harmed if state pension funds divested from fossil fuels. Similar fossil fuel pension divestment proposals have been rejected in other blue states for the same reason.

The first half of 2022 was a mixed bag for California taxpayers who don’t want the state to inflict more costs upon households and the economy. Pensioners and the taxpayers who are on the hook for unfunded government pension liabilities don’t have to worry about pension returns being diminished by fossil fuel divestment, at least for the time being. Many Californians, however, are unlikely to appreciate the fact that Governor Newsom and state legislators created a new tax credit that is unavailable to 84% of Golden State workers. For all the talk about equity & equality coming from the state’s most powerful politicians, California’s new budget takes the state tax code’s already unequal treatment of workers and worsens it.