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Capitol Journal: GOP expected to balk at good-news tax bill

Republicans probably won't support legislation that would increase jobs in California and raise revenue for state.

June 27, 2011|George Skelton | Capitol Journal
  • Sen. Kevin De Leon (D-Los Angeles) is sponsoring a bill to base a firm's tax liability solely on how much it sold in this state  not on how many Californians it hired or structures it owned here.
Sen. Kevin De Leon (D-Los Angeles) is sponsoring a bill to base a firm's… (Nick Ut / Associated Press )

From Sacramento — Republican legislators and a major business lobby preach job creation. But they support a corporate tax break that rewards companies for not creating jobs in California.

It's counterintuitive and a bit hypocritical.

Closing the tax loophole not only would remove a disincentive for business expansion in California, it ultimately would generate $1 billion annually for the state's starving treasury.

This issue is highly complicated and illustrative of the kind of reckless decision-making that can occur in legislative chambers during all-nighters. Lawmakers are sleep-deprived and desperate for a deal, any deal.

That's what happened in 2009. To secure three Republican votes in each house for a tax increase — the temporary tax hikes Gov. Jerry Brown has been trying to extend — Democrats traded the corporate tax break.

Basically, this is the background:

Before this year, corporate taxes were calculated on a formula that considered three factors: a company's sales, workforce and property in California.

Companies long had complained that this penalized job creation and facility building in California because expanding here would lead to higher taxes. So two years ago, the Legislature adopted a "single sales factor." Taxes, beginning this year, could be based strictly on a company's sales in California.

But the Legislature didn't want to create corporate tax "losers." So it inexplicably offered companies the option of using either the new or the old tax formula. An out-of-state company, for example, still could use the old formula that taxed payroll and property and benefit big time if it had little payroll or property in California.

Similarly, a California company could use the old formula and be rewarded for expanding out of state, rather than locally.

Legislators shouldn't be allowed to pass such a complex bill during the wee hours between bar closing and rooster crowing. The measure needs clear-minded thought and public scrutiny.

But, admittedly, nothing is all darkness or light. Also part of that squirrely budget-tax deal was the legislators' reluctant passage of an open primary system, which voters later approved. It will take effect next year and, let's hope, result in more legislative accountability and moderation.

Back to the tax giveaway.

Sen. Kevin De Leon (D-Los Angeles) is sponsoring a bill (SB 116), backed by Brown, to make the "single sales factor" mandatory. A firm's tax liability would be based solely on how much it sold in this state — not on how many Californians it hired or structures it owned here.

"If it's good enough for Republican Chris Christie in New Jersey, then it's good enough for California," De Leon says. "If it's good enough for Rick Perry in Texas, then it's good enough for California."

Gov. Christie recently signed a bill similar to De Leon's. Texas — a model business-friendly state, if you listen to California Republicans — also has a mandatory sales-based corporation tax.

In all, 23 states have the single sales factor. Only three others — Missouri, Florida and Kentucky — allow options.

"We're subsidizing job creation outside of California and putting California businesses at a competitive disadvantage," De Leon complains. "It's mind-boggling beyond belief. This is insane. It's crazy.

"It should be California first, California jobs first, California taxpayers first."

Nonpartisan Legislative Analyst Mac Taylor estimates that by closing the loophole, the state general fund would gain $250 million in the budget year beginning July 1, $850 million in the next year and $1 billion in 2013.

He calls the current law "counterproductive."

De Leon's bill is much different than a ballot measure, Proposition 24, that voters soundly rejected last year. Sponsored by the California Teachers Assn., Prop. 24 would have completely eliminated the single-sales factor and returned to the three-factor formula, netting the state $1.3 billion annually.

The California Chamber of Commerce led a business coalition in strong opposition.

The chamber also opposes De Leon's bill, but its objection has been relatively mild. The business lobby hasn't even placed the bill on its list of dreaded "job killers" — a logical exclusion, since the tax break itself is a California job killer.

Chamber President Allan Zaremberg apparently is trying to retain some flexibility so he can potentially support closing the loophole as part of a tax-budget deal.

His basic problem with eliminating the tax break, he says, is that politicians "make decisions and they should stand by them. You can't keep changing these things and expect people to make investment decisions.

"Above all, certainty and predictability are key factors that create investment opportunities."

Problem is, California's misguided new tax law creates the opportunities in other states.

For the Legislature to change it, however, would require a two-thirds majority vote — meaning support from at least two Republicans in each house. The GOP is knee-jerk against anything that's a tax increase, even if it would eliminate a barrier to California job creation.

"Privately, Republicans say it's bad policy," De Leon says. "But now that we've let the genie out of the bottle, they can't support it because it's a tax hike.

"It's not a tax hike on businesses in California. General Motors is not in California. It's in Detroit, Mich."

GM sells lots of cars in California, but no longer makes any here. So it can still use the old formula and beat the taxman.

De Leon may bring his bill to a vote this week.

California's unemployment rate is about 12%. The state is scratching for every buck, whacking public schools and the infirm.

Here's a no-brainer opportunity to encourage job-creation and collect a pile of money.

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