California is about to join other states in modifying, if not abolishing, a bookkeeping procedure for taxing multinational companies that operate in the state.
Under the unitary method, corporations are taxed according to the percentage of their worldwide sales, property and payrolls that are in California. If that adds up to half of a corporation's business activity, a tax is imposed on half of the corporation's worldwide profits. The unitary method was adopted originally to prevent motion picture companies from shifting profits earned here to states where taxes were lower; it was later applied to multinationals.
The economic argument against the unitary method--that it discouraged investment in California--never added up. In the past decade California led the nation in attracting foreign investment, particularly from the Far East. State taxes are at best secondary factors in investment decisions. The primary factors are California's favorable business environment, huge markets, infrastructure and skilled and educated work force.
What tipped the scale in Sacramento, along with a massive industry lobbying campaign, was a political argument. Important trading partners--notably Japan and Great Britain--were unhappy with the tax, and their unhappiness complicated Washington's trade negotiations.