In the California budget crisis of 2009, legislators voted to impose the highest-ever tax increase to ostensibly balance the budget and eliminate the $20 billion deficit. This was supposed to be a temporary two-year increase in sales, income, and car taxes. As part of the compromise for the 2009 budget agreement, there were certain corporate tax breaks scheduled to take effect in 2010.
Faced with another more than $20 billion budget deficit after nearly three years of recession and continued mismanagement of state finances, the Democrat majority in the legislature now want to repeal the corporate tax breaks, delay rolling back the income tax surcharge, and increase alcohol taxes, along with a host of other proposed taxes and fee increases.
To help Democrats repeal the corporate tax breaks, the California Tax Reform Association qualified Proposition 24, originally referred to as the “California Corporate Loophole Repeal Initiative” or “The Tax Fairness Act.” The official title is “Repeals Recent Legislation That Would Allow Businesses to Lower Their Tax Liability.” The California Teachers Association is the main sponsor of Proposition 24 and donated $500,000 to kick-off the initiative process and pay for the pay-per-signature petition drive to collect the required signatures to qualify the initiative for the ballot.
The supporters of Proposition 24 tout that it would end $1.3 billion in special tax loopholes for big corporations that don’t require the creation or protection of a single job in California and ensures that big corporations pay their fair share of state taxes at a time when the state is making drastic budget cuts to public schools, health care, and public safety.
The tax breaks to be repealed include:
- The “single-sales factor” that allows multi-state corporations to choose whether they will be taxed on their total sales occurring in California or on a combination of their sales and their operations …including payrolls and property.”
- “Loss carry-backs” that allow corporations that are experiencing losses in California’s current economy to get refunds for taxes paid up to two years previously.
- “Tax credit-sharing” that allows companies with more tax credits that they can use to distribute the tax credits to affiliates.
A study by Charles Swenson, a Marshall School of Business professor at the University of Southern California finds the use of a “single-sales factor” would create nearly 144,000 jobs and increase state tax revenue b $411 million. Swenson concludes it would “stimulate business and industrial growth in the state as measured by increased employment, help attract business into the state, help retain and expand business and industry and create increased job opportunities for all Californians.”
California businesses already find it harder to compete because of the increasingly unfriendly business climate. California ranks 48th in the 2009 Small Business Tax Index by the Small Business & Entrepreneurship Council (SBE Council). This low overall ranking was based on California’s ranking in the following specific taxes rates:
- 4th highest personal income tax rates (10.55)
- Highest state gas and diesel taxes (.0486)
- 3rd highest capital gains tax (10.55)
- 8th highest corporate capital gains tax rates
- 9th highest corporate income tax rates
In December 2008, Governor Schwarzenegger appointed a 14-member bi-partisan Commission on the 21st Century Economy to make recommendations on ways to update and improve California’s out-dated revenue system to make it more reflective of our state’s economy. After ten public hearings held through the state, hundreds of hours of expert and public testimony, and rigorous analysis and debate by the members of the Commission, a final report was released on September 29, 2009. The report contains recommendations that would dramatically overhaul the state’s tax structure. The full report may be viewed at the following website: http://www.cotce.ca.gov./ There is no evidence that anything has been done in the last year by the State legislature to implement any of the reforms in California’s revenue and tax system that were recommended in the report.
The road forward to restored prosperity must include a more business-friendly environment where California businesses can grow and create new jobs. Unemployed people and struggling businesses cannot generate adequate tax revenues to fund schools, transportation, health care, and other government services. Increasing taxes by repealing tax breaks for corporations will hurt businesses already struggling and encourage more companies to relocate to other more hospitable states. With California’s unemployment rate at 12.6 percent and some two million Californians out of a job, the last thing needed is the loss of more jobs.
Remember that California is a state of small business, over 90 percent employing less than 100 people. We aren’t a state of large corporations with “deep pockets.” On July 5, 2010, the Los Angeles Business Journal reported that state tax regulators estimate that about 120,000 businesses would lose these breaks if voters approve Proposition 24. In this same article, Ben Nielsen of Cambridge of California, a furniture manufacturer in Gardena, said, “We’re barely surviving now as it is, with the economy as tough as it is and the foreign competition. Those tax breaks were our hope for the future. If they hadn’t been enacted, I would already have closed my doors. Take them away, and I’ll probably have to shut down and throw 27 people out of work.”
A group called “Stop the Jobs Tax” is opposed to the initiative. More than 500 businesses and associations have joined the coalition to oppose Proposition 24. Some of the more well known organizations are: California Taxpayers Association, California Association of Independent Businesses, California Chamber of Commerce, BIOCOM, CONNECT, California Manufacturers & Technology Association, and the San Diego Regional Chamber of Commerce. A few of the long list of companies includes: Abbott, Biogen Idec, Genentech, Gen-Probe, Hewlett Packard, Intel, Johnson & Johnson, Qualcomm, The Walt Disney Company, and Time Warner. If you would like to join the opposition group to Proposition 24, sign up at www.StopProp24.com.
Rather than repealing a couple of tax breaks for corporations, we desperately need sound tax and regulatory reform to improve California’s business climate and help pull California out of the recession to put people back to work.