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Jerry Brown seeks to eliminate firms' ability to choose between California tax formulas

The choice, which just took effect, gives companies an incentive to create new jobs outside California, a state analyst says. Eliminating the provision would bring in $1 billion annually, a report says.

January 14, 2011|By Evan Halper, Los Angeles Times

Reporting from Sacramento — One of the hottest debates over Gov. Jerry Brown's $84.6-billion budget involves a $1-billion corporate tax break that businesses promise will spur job growth but that independent analysts say actually gives California companies an incentive to expand out of state.

The tax provision took effect only last week. Now, Brown would like to repeal it.

The provision is part of a law that allows companies to hire workers and build facilities in California without increasing their income tax liability. But the law also includes a clause that gives firms an even bigger incentive to create new jobs out of state, according to a recent report from the nonpartisan state Legislative Analyst's Office, which Democratic and Republican lawmakers look to for advice on financial matters. That clause is what Brown opposes.

"It's a perverse incentive for homegrown California companies to create new jobs outside of California," said state Sen. Kevin De Leon (D- Los Angeles), who asked the analyst's office to conduct the study. "We have rigged our tax system for California companies to hire in other states."

Business lobbyists defend the measure, which was a major achievement for them. "Businesses have made investment decisions based on the current formula, and we should all be concerned about the economic uncertainty" that repeal would create, Allan Zaremberg, head of the California Chamber of Commerce, said in a statement.

Beyond the politics of taxation, the argument illustrates one of the recurring problems of lawmaking in California in recent years: bills passed with scant public scrutiny that turn out to have unintended, or at least unadvertised, side effects. The tax break in question was passed in 2009 during a middle-of-the-night budget session with little debate and almost no public notice.

The state's corporate tax for many years was based on a formula that considered the size of a firm's California workforce, the amount of property owned here and total California sales. Companies that are based here but that do a lot of their business elsewhere in the country argued that the formula was wrong-headed: If a firm expanded its California workforce, its state taxes would rise. They argued that a formula that based state taxes solely on a company's sales in California would lead to job growth in the state.

Switching to that new formula promised to cut taxes for some firms but raise them for others. Microsoft, Comcast and other companies that ring up huge sales in California but have the bulk of their workforces elsewhere liked the old formula, which kept their California taxes low.

So, when the Legislature acted, it did something that only one other state allows — it adopted the new formula based on sales inside the state, but also kept the old one. Companies are allowed to jump back and forth from year to year on which formula they use to calculate their taxes.

As a result, California companies can continue to choose the old formula for a tax break when they expand elsewhere. Companies headquartered out of state, meanwhile, have little incentive to move jobs here, because they can continue paying under the old system too.

The legislative analyst's report said the tax law "appears to be counterproductive" in at least some cases and advised the Legislature to do what Brown is urging: make the sales-only tax formula mandatory, as other states have done. Brown's budget plan says "there is no reason — from an economic development perspective — to allow businesses to choose" the formula on which their taxes are based.

Adopting Brown's plan would bring in an additional $1 billion a year in revenue, the analyst's report said, while retaining the changes that some economists say encourage businesses to locate their operations here — and possibly help create tens of thousands of jobs in California.

Democrats are eager to modify the tax break. Many resent the way the law was passed: GOP lawmakers refused to cast needed votes for temporary tax increases that Democrats said would balance the budget unless retention of the existing tax benefits was part of the deal.

"It was a hostage situation," said Lenny Goldberg, executive director of the union-backed California Tax Reform Assn..

Changing the law requires a two-thirds vote of the Legislature, meaning Republican votes would be needed again.

A spokeswoman for the Senate Republican caucus, which took the lead in pushing for the new law, said no caucus members were available to comment on the issue.

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