Last month's mammoth budget deal was widely known to have included a relatively large tax increase to help erase a $40 billion deficit. Not so widely known, though, was that it also included a tax break for some of the nation's biggest businesses.
And depending on which side you talk to, that tax break was either an important stimulus to the California economy... or a big giveaway to the politically powerful.
On this morning's edition of The California Report, we took a look at the provisions in the budget to make major changes to the formula used to calculate corporate taxes.
The audio will be here later this morning.
The traditional formula for assessing the corporate tax took into account a company's property, payroll, and sales... all in equal proportions. But companies with (proportionally) more operations than sales inside California have never liked such a formula, arguing that it makes any expansion of offices and staff inside the Golden State a tax liability.
The general concept of the tax break -- allowing large multistate or multinational companies to peg their California tax bill to only what percentage of their sales happen inside the state -- isn't new; at least some version of the proposal has been introduced as legislation in years past. Other states already offer the so-called "single sales formula" for corporate taxes.
"What we're trying to do is encourage companies to stay in California and expand," says Assemblymember Fiona Ma (D-SF). Ma carried one version of the corporate tax change bill in 2007.
But the February budget included a particularly generous version of the tax break. While it allows companies with more operations in California than sales to pay taxes based on the latter... it also allows companies with just the opposite mix (more California sales than operations) to keep calculating their taxes the old way -- the way that was less tied to sales.
In other words, multistate corporations will be able to use whichever formula lowers their tax bill the most.
Though that's a new twist, Assemblymember Ma says she still believes the tax change will mean more businesses and jobs in California and, thus, a boost to the sagging economy -- even though the new corporate tax law doesn't kick in until 2011.
While a number of other states now have corporate taxes tat are soley based on the location of sales, California's decision to make it optional -- again, companies will get to use whichever formula they like best -- appears to be rather unique. Data from the Federation of Tax Administrators shows only four other states have what's called an "elective" formula.
"The reason it's elective," says Lenny Goldberg of the California Tax Reform Association, "is that there were powerful interests who said, 'Hey, you can't increase our taxes.'"
And they said all of that, according to Goldberg, through well-connected lobbyists who had the ear of influential legislators during the marathon budget negotiations.
Most controversial is the potential impact on California's already shaky tax revenues. While supporters claim that businesses will have incentive to expand operations in the state -- meaning more property taxes, more employees paying income taxes, etc. -- and that will outweigh the cost of the tax break, opponents still think this is largely a big loss in revenues. Estimates have ranged from $700 million to $1.5 billion less corporate tax revenues a year.
And like any reduction in taxes that's not specifically tagged as temporary, the corporate tax break will be much harder to rescind than it was to enact. That's because taxes can be lowered with a majority vote in each house of the Legislature, but reinstating any former tax rate is considered a tax increase -- and that, under the legendary Proposition 13 -- takes a two-thirds vote in each chamber.