California Propositions: Prop 39 – Hiking taxes on multistate businesses

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Most of us have no qualms about weighing in on school funding, the death penalty or any number of other issues, but when it comes to deciding what formula the state should use for calculating corporate taxes, well, a lot of folks are hopelessly at sea. There’s no getting around it. Proposition 39 is one of those measures that makes people furl their brows and stare helplessly at their voter guide.

But it’s also important. If it passes, the corporate tax reform initiative would bring in about $1 billion a year to the cash-strapped state.

Hedge fund manager Tom Steyer has donated more than 90 percent of the roughly $30 million raised by the Yes on 39 campaign. He says the initiative is all about leveling the corporate playing field. “In closing this loophole for out-of-state corporations, we get back something which is fairer,” Steyer said.

A “Yes” vote on 39 is a vote to end a policy that allows some out-of-state companies to choose how their taxes are calculated. Steyer says the law has allowed large corporations to save money by keeping jobs out of California. But Opponents call Prop. 39 a tax hike plain and simple. And they say it could lead to layoffs and higher prices on products ranging from shampoo to cars.

L.A. Times reporter Evan Halper said that, at its heart, Prop. 39 is a way to recoup a billion dollars the state gave up as part of a back-room deal three years ago. That deal allowed firms to choose between two competing tax formulas. One system – known as the singles sales factor – calculates tax bills based on sales alone. The other uses a formula based on sales as well as payroll and property in the state. As it turned out, firms opted for the latter system, which meant lower taxes. Prop. 39 would require all companies to use the single sales factor.

But Halper said the businesses that actually won the tax advantage three years ago won’t bear the brunt of Prop. 39 because they’re located in California, the companies that got to keep using this formula, will be forced into the new formula, said Halper, “and they’ll have to cover the billion-dollar tax break that was given largely to Silicon Valley and Hollywood studios.”

Dorothy Rothrock with the California Manufacturers and Technology Association said that’s unfair. “Companies that would be hurt by single sales factor in California include many manufacturers who have payroll and property here,” she said. “But they just have so much sales in the state because we’re so huge, that taxing them on the basis of their sales makes their taxes go sky high.”

For the first five years, half the money raised by Prop. 39 would go to the state’s general fund. The other half would go to a green energy program that funds infrastructure projects and provides loans for clean-energy ventures. That raises another issue, said Halper. “Steyer says he’s invested in some green energy technologies, none of them, according to him, would be positioned to get any of this money,” he said.

A mostly Democratic group of lawmakers pushed legislation this year that was similar to Prop. 39, but it failed.