Legislators in the State of California have introduced a new bill aimed at generating increased tax revenue, but unfortunately this short-sighted effort would sacrifice the state's long-term economic health for short-term, destabilizing gains.
The proposed law, California Assembly Bill 2640, would essentially eliminate a company's ability to use 1031 like-kind exchanges (LKEs). However, Section 1031 of the tax code exists to promote healthy business activity, and is an especially powerful tool for small and medium-sized companies. LKEs have been a part of the tax code since 1921 and the provisions have been strengthened and expanded on multiple occasions. As such, they have been acknowledged and validated as a fair and productive practice by both major political parties and have been used to promote stronger business activity during both boom and bust cycles.
One of the primary reasons that 1031 exchanges have been so unanimously agreed-upon is that they're constructed to promote reinvestment. The only way a company can employ LKEs is if they are plowing sales proceeds back into their businesses, a process that boosts employment and thereby strengthens the tax base.
We fear that this bill, if passed, will signal the death of many California businesses. This would mean lost jobs, lost tax revenues and an increase in the demand for costly state services (such as unemployment expenditures).
At Accruit, we've been fortunate to work closely with a number of California companies and have seen first-hand the ways in which 1031 exchanges have boosted the state's economic vitality. After much study, it's our belief that California Assembly Bill 2640 would inflict significant long-term damage to the state's economy and the well-being of many of its workers. It's also not clear that this new law would even accomplish its intended goals in the near-term, as defunct businesses and out-of-work citizens don't pay taxes.
We strongly encourage California's legislators to reject this ill-conceived measure. It's rare for a tax law to remain on the books for 89 years, and when it does, it's probably because it's a very good idea.