Tax and Minimum Wage Increases

minimum wageRecently California Governor Jerry Brown signed a bill to raise the California minimum wage to $10 per hour by January 1, 2016.  This bill will take the current minimum wage from $8 per hour to $9 per hour effective July  1 of next year.  This piggybacks Governor Brown’s August proposal to raise payroll taxes in order to retire a $10 billion loan from the federal government.  The August proposal would wipe out the debt from unemployment insurance benefits that were paid to jobless Californians during the recession, and create an $11 billion surplus by 2021.

While these changes are intended to help the economy and provide benefits to California workers, the impact that the changes will have on business owners – particularly small business owners – has some owners reeling.  Labor costs can easily make up a majority of a business’s overhead, so any increase in those costs can have an immediate impact on the ability to stay in the black.  Many small businesses struggled to stay afloat during the recession, and now that we are seeing small improvements in the economy, stresses are being relieved for the first time in years.  With these new changes, some of these businesses will be forced to close their doors for good.  Others fear they will have to shorten hours or lay off employees in order to survive the increases.

Governor Brown’s August proposal would increase the taxable portion of wages from $7,000 to $12,000 over two years and increase the top rate from 5.4 percent to 7.1 percent.  Employers currently pay a maximum of $434 per employee in payroll taxes. Officials from the Employment Development Department have said that California’s $7,000 taxable portion of wages is the federal minimum, and lawmakers haven’t updated the tax since 1984.

The September 25 bill that increases minimum wage by 25% by 2016 will be the first increase in California minimum wage since 2008.  Once the increase takes place, California will have the highest minimum wage in the United States.  Proponents of the bill say that the increase will help employees deal with some of the highest housing and gas costs in the country.  Opponents are concerned that, together with the highest sales and income taxes in the country, business owners will have a difficult time making ends meet and will be slow to hire.  Future business owners will have to weigh the costs of starting their businesses in California or moving them to states with fewer costs, like Texas.

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