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California

Troy Senik
The Tax That Dare Not Speak Its Name
California’s Proposition 39 takes aim at out-of-state businesses.
25 October 2012

Taxes remain on most voters’ minds as Election Day approaches in California. Over the past year, the Left and far Left have fought a protracted public battle over the best way to extract more revenue from the state’s taxpayers. The more moderate approach, relatively speaking, is Governor Jerry Brown’s Proposition 30, which would make “temporary” increases to the state sales tax and to income-tax rates for high earners (the “temporary tax” being the jackalope of American politics), splitting the resulting revenues between education and the state’s general fund. Competing with Brown’s proposal is Proposition 38, the brainchild of wealthy liberal activist Molly Munger, which relies on across-the-board income-tax increases (also supposedly temporary) for all but California’s very poorest and pledges to send the overwhelming majority of the money directly to schools.

But while Brown’s and Munger’s proposals battle it out, a more low-key initiative near the bottom of California’s crowded ballot, cloaked in nearly incomprehensible language, has largely escaped public scrutiny. Proposition 39 would do nothing more than close a loophole in California’s tax code, effortlessly producing $1 billion a year in the process—or so its proponents say. At issue is the method by which businesses calculate their tax liability to the state. Under current law, multistate companies may choose between two different formulas for tallying their tax obligations. Businesses can either pay a rate based on a weighted combination of in-state sales, employees, and property, or they can pay one on the basis of sales alone (often referred to as the “single-sales factor”). Companies are free to choose whichever approach minimizes the total amount they owe Sacramento. Under Prop. 39, that freedom would be abolished, and all companies would be forced to pay the single-sales factor, resulting in a tax increase on many companies headquartered outside of California.

To hear Prop. 39’s sponsors tell it, the current flexibility is the result of “a last-minute, middle-of-the-night-deal” struck by “corporate lobbyists” in 2009. Not exactly. In truth, the sales-employees-property formula that Prop. 39 would abolish has been in effect since 1966. The legislature made the single-sales factor agreement in 2009, but the option didn’t become available until 2011. Under the terms of the deal, businesses could choose between the two methods of calculating tax liability so as not to create a huge tax increase on out-of-state companies of the kind that Prop. 39 would introduce.

The measure’s advocates claim that the current system creates a perverse incentive for businesses to avoid purchasing property or hiring employees within California, lest their taxes increase as a result. The policy artificially tamps down the number of jobs businesses create in the state, they argue. Their logic is precisely backward. If it’s in a business’s interest to hire workers or purchase property in California, then it already has the choice of using the single-sales factor to avoid having those decisions affect its overall tax liability. Prop. 39 thus amounts to a plan to attract business to California by imposing a de facto tax on doing business out of state.

The tax hike, however, isn’t the whole story. While the first line of the proposal’s ballot title is “tax treatment for multistate business,” the second is “clean energy and energy efficiency funding.” Visit the Yes on 39 website, in fact, and you’ll find that it’s referred to there as the “Clean Jobs and Energy Act.” This is an impressive bit of campaign prestidigitation. If Prop. 39 passes, it turns out, half of the revenues from the first five years of its implementation won’t flow to California’s beleaguered general fund, but rather to yet another special fund: the Clean Energy Job Creation Fund, which proponents claim will create 20,000 to 30,000 construction jobs.

If that seems like a bit of a left turn in a ballot initiative that’s nominally about esoteric tax policy, then the initiative’s funding—as is so often the case in California politics—explains the disjuncture. Prop. 39 has been funded to the tune of nearly $21 million by Tom Steyer, the billionaire founder of the San Francisco hedge fund Farallon Capital Management, a major investor in green energy, and a man the San Jose Mercury News has called “the Bay Area’s version of George Soros.” The only other major financier is a group called Californians for Clean Energy & Jobs, the co-chair of which is . . . Tom Steyer.

Needless to say, passage of the initiative would represent a painful blow to out-of-state companies that would see their tax rates increase. But the Yes on 39 campaign has been ruthless in crushing opposition. A coalition of five major corporations—Chrysler, General Motors, International Paper, Kimberly Clark, and Procter & Gamble—had planned on forming an alliance to combat Prop. 39; they dropped those plans after Steyer ran a full-page ad in the Sacramento Bee featuring “mug shots” of four of the companies’ CEOs (Procter & Gamble’s not included) and labeling them “The Big Four Tax Dodgers,” promising more attacks if the companies didn’t cease their public opposition.

As to the initiative’s policy goals, promoting green energy is all well and good. But a man of Steyer’s investment savvy should know that publicly directed financing would only impede the technology’s eventual maturation by insulating it from the pressures of price competition and technical feasibility that exist only in the free market. More important, someone with Steyer’s business acumen should understand that a state that has the highest corporate income-tax rate in the western U.S.; that the Tax Foundation ranks as 48th in the nation for its business tax climate; that the American Tort Reform Foundation ranks second from the top in its list of “judicial hellholes”; and that CEO Magazine has named for eight years running the worst state in the nation in which to do business, doesn’t owe its employment problems to a lack of sufficiently high taxes. Whether California voters understand this will be revealed on November 6.

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