California Advances a Fix for Pass-Through Interest Deductions and a Tighter Executive Pay Limit; New York Writes Construction Leave Rules

The bottom line today

$550 million. That is what the Assembly Appropriations Committee says SB 1435 will cost California’s general fund in 2026-27, and every dollar of it was already counted when the Legislature passed last year’s conformity bill [3]. The money stays with owners of partnerships, LLCs and other pass-through firms who were caught by a federal interest deduction cap the state never meant to adopt [3]. The same afternoon, a Senate committee advanced AB 2222, which goes the other way for the largest employers: it narrows what they can deduct for executive pay and spends the proceeds on a credit for newsrooms [2, 5]. The first bill is overdue. The second is a business tax increase dressed as conformity.

August 13 was suspense day. By this release’s count, the Assembly committee held 80 of the roughly 290 Senate bills on its list, and the Senate committee held about 150 Assembly bills [1, 2]. One casualty was a bill industrial power users wanted. In New York, the Workers’ Compensation Board published its rules for paid family leave in union construction [7].

CA California SB 1435: the business interest cap comes off the personal income tax

What it does. SB 1435, carried by the Senate Committee on Revenue and Taxation, provides that for taxable years beginning on or after January 1, 2025, the federal limit on deducting business interest does not apply under California’s personal income tax [3]. It also stops California from following the federal withholding rule for sales of partnership interests by foreign partners, clarifies how excess business losses are figured for noncorporate taxpayers and removes obsolete code references [3]. It would take effect immediately as a tax levy [3].

How we got here. Last year’s conformity law, SB 711, moved California’s tie to the Internal Revenue Code up to January 1, 2025 [3]. It decoupled the corporation tax from the business interest cap but left the personal income tax conformed, and the Assembly analysis says plainly that “an inadvertent drafting error was identified” after both houses had passed it [3]. The author filed a letter in the Senate Journal on September 12, 2025, stating the intent [3]. Tax practitioners separately told the committee the partnership withholding rule was ambiguous and hard to comply with [3].

Where it stands. Assembly Appropriations sent it to the floor on August 13 [1]. The recorded vote was 15-0, after 7-0 in Assembly Revenue and Taxation and 33-0 on the Senate floor in May [3].

Pratt’s read. Credit where due. Pass-through owners report business income on the personal income tax, so a cap built for leveraged corporations landed on equipment dealers, contractors, farms and real estate partnerships that borrow to operate. The revenue loss runs about $240 million in 2025-26, then $360 million and $370 million in the two years after 2026-27 [3]. That sounds large until the next line of the analysis: the loss was already assumed when SB 711’s revenue gains were estimated [3]. The state is not giving anything up; it is collecting what it said it would. The California Taxpayers Association supports the bill, and no opposition is on file [3]. The one practical cost falls on the Franchise Tax Board, which will process amended returns and calls that absorbable [3].

CA California AB 2222: a tighter executive pay deduction pays for a newsroom credit

What it does. AB 2222, by Assemblymember Ward, does two things [4, 5]. It creates a refundable credit for tax years 2027 through 2031 for local news organizations: $20,000 for each of the first five full-time qualifying journalists, $15,000 for each one after that, an extra $15,000 for a new journalism position and $7,500 for a part-time journalist [5]. And it conforms California to two federal changes to IRC Section 162(m), which caps a public company’s deduction for a covered employee’s pay at $1 million [4]. The American Rescue Plan Act widened covered employees to include the next five highest paid, and the 2025 federal law adds up pay across a controlled group and splits the deduction among its members [4].

Where it stands. Senate Appropriations sent it to the floor 5-2 on August 13 [2]. The Assembly passed it 63-10 in May [4].

Pratt’s read. Follow the money in the committee’s own staff comments. The credit costs about $19 million in 2026-27, $43 million in 2027-28 and $42 million in 2028-29 [5]. The executive pay change raises $29 million, $58 million and $65 million over the same years [5]. Net, the bill is a revenue increase of $9.9 million, $15 million and $23 million [5]. Employers outside the news business pay for a subsidy inside it, and pay more than the subsidy costs.

The case for conformity is real: tracking federal rules makes returns simpler, and the 162(m) changes are already federal law [3, 4]. The author argues the credit gives “targeted relief to local news organizations” tied to jobs, at a time when newspaper employment has fallen sharply [4]. Fair enough as a goal. But the Senate’s own tax committee staff raised the problem a business reader sees first: if the state pays a payroll credit for journalists, why not nurses or child care workers, a path its analysis said “may lead to a slippery slope” of industry-specific payroll credits [4]. California picks its federal changes one at a time, weighing each for its fiscal effect [3]. Picking 162(m) because it raises money is that method at work. Employers are entitled to notice which way it runs.

CA California SB 943: a cheaper rate for electric process heat is held

What it does. SB 943, by Sen. Becker, would let the Public Utilities Commission cap volumetric surcharges, such as nonbypassable charges, on separately metered new load, added on or after January 1, 2027, that large commercial and industrial customers use for industrial heat, at a surcharge ratio of 25% or another level the commission sets [6]. It also directs the commission to ask the grid operator to revisit how high-voltage transmission charges are allocated [6].

Where it stands. Held in Assembly Appropriations on August 13 [1].

Pratt’s read. This one is a loss for manufacturers, food processors and anyone weighing an electric boiler against a gas one. The author argued that “off-peak electricity can be cheap enough to help industry switch to clean energy,” and that new load pays toward fixed grid costs [6]. Industrial energy users backed it and no opposition was registered [6]. The committee’s own fiscal note was small: about $224,000 a year for three years for one analyst, plus $300,000 over those three years for consultants, from utility reimbursement funds [6]. The risk the commission would have studied, a shift of costs onto other customers, was a reason to write a cap carefully [6]. It was not much of a reason to stop.

NY New York A9466/S8795 rules: paid family leave for union construction workers

What it does. The Workers’ Compensation Board proposed amendments to its paid family leave regulations to carry out A9466/S8795, signed in February 2026 and effective January 1, 2027 [7]. A construction employee, defined as someone who performs construction, demolition, renovation or repair work for multiple employers under a collective bargaining agreement, becomes eligible by working the employer’s normal work week for at least 26 of the last 39 weeks; the rule defines that week as 20 or more hours [7]. The waiver rules change to match, so a construction worker who will not reach 26 of 39 weeks can waive coverage [7]. The rule also drops references to named claim forms, since the Board will issue new ones [7].

Where it stands. Published as a proposal on August 19, with comments open for 60 days [7]. The Board expects the rule to take effect with the law [7].

Pratt’s read. Fair, and mostly paperwork. Under the standard rule, an employee needs 26 consecutive weeks with one employer, which a union carpenter moving from job to job may never log [7]. The Board says the change adds no new qualifying event and reaches no new pool of employers, because the employers involved are already covered and signatory to a bargaining agreement; it calls the cost impact modest [7]. Carriers that brand their own forms will have to reprogram them [7]. What the proposal does not spell out is how a carrier will confirm 26 weeks worked across several contractors; that is left to request forms the Board has yet to issue [7]. The Board’s own alternatives section warns that leaving the rules silent would bring “an increase in denials and arbitration requests” [7]. Contractors will want the new forms to answer that question before January.

On the calendar

SB 1435 goes to the Assembly floor, then back to the Senate to concur in the June Assembly amendments [1, 3]. AB 2222 goes to the Senate floor [2]. SB 943 stays in committee [1]. Comments on New York’s construction leave rule are due October 18, by this release’s count, and the eligibility standard starts January 1, 2027 [7]. AB 2222’s credit would first apply to the 2027 tax year [5].