California's cavernous corporate loopholes

As voters prepare to ratify or reject the complex budget deals represented in the six propositions -- 1A through F -- on the May 19 ballot, there is one part of the budget deal they don't get to decide on: huge new corporate loopholes. The last two budget agreements worked out by the Legislature and signed by the governor include provisions that permanently cut billions in revenue from the corporation tax -- with the state getting next to nothing in return.

Corporate tax attorneys are chuckling over the absurd deal in the last agreement that lets multistate and multinational taxpayers decide, each year, how much income they want to report to California. Because this was negotiated in private, with no hearings and no independent expertise brought to bear, the result is a giveaway and a national embarrassment, in a state that had prided itself on a fair, successful corporation tax.

Here's how it works. Each state typically figures out what percentage of a large company's business is done in the state, and then taxes that percentage of income. Historically, if 10% of a multistate company's payroll, property and sales are located in the state, then 10% of its nationwide or worldwide income is subject to tax. In the budget deal, California changed the formula to allow companies to choose to make that percentage based only on sales in California.

Other states have used this so-called single-sales factor, so that out-of-state companies selling into the state could pay more in tax and in-state companies with lots of payroll and property but that sell around the world would pay less. The claim -- never proved to be true in any state -- is that such a formula helps economic development.

Companies that pushed heavily for this tax break -- e.g., NBC Universal -- will now be able to base their California income not on their total economic activity in California but only on the percentage of their sales done in California, which is a far smaller fraction of their income. This is "money for nothing" -- companies do not have to provide a single new job to receive a huge tax cut, which benefits their worldwide shareholders.

But here's the worst part of the secret budget deal: The state provides multistate and multinational companies with a choice yearly of which formula they want to use when they file their taxes. So, depending on whether companies have losses or gains in a given year, they can choose to either attribute more losses or fewer profits to California, to minimize their taxes. The Legislative Analyst's Office said this tax change will potentially cost billions per year, despite the lower projections given when it was enacted.