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PD Editorial: Yes on 39: Close costly tax loophole

  • Vicki Mills signs in to drop off her absentee ballot at the Analy High School polling location on Tuesday, June 3, 2008.

Imagine a state adopting tax policies that reward businesses for moving elsewhere.

Yes, we're talking about California.

But today's subject isn't income tax rates, it's a perverse incentive that often rewards multi-state corporations for creating jobs somewhere else and, at times, punishes them for expanding here.

California, meanwhile, is losing out on about $1 billion a year in tax revenue for schools, parks and other vital public services.

Does that make sense?

Of course not. But state legislators created this mess, and they haven't managed to clean it up. Fortunately, California voters can fix this mistake by passing Proposition 39 on the Nov. 6 ballot.

The underlying issue is how multi-state corporations calculate their state incomes taxes.

Traditionally, most states have used a formula that considers a company's sales as well as its property and employees in that state. Under what's known as the three-factor method, a company's state tax liability increases along with its sales, its property holdings and the size of its workforce.

Some states switched to another method — the single-sales factor — that bases tax liability only on a company's sales within the state. In those states, taxes don't increase when a company hires more people, expands or builds a new facility. That's an incentive to shift operations out of states that use the three-factor method.

California was moving toward the single-sales method. But under a budget deal cobbled together in 2009 by state legislators and then-Gov. Arnold Schwarzenegger, corporations headquartered outside of California get to choose between the methods to obtain the lowest tax liability. Moreover, it's not a one-time choice. They can change back and forth whenever it benefits them.

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