PD Editorial: Yes on 39: Close costly tax loophole

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.

The result, according to the nonpartisan legislative analyst, has been a $1 billion hit on the state treasury at a time when California is struggling to balance its budget.

California-based companies get no such choice — unless they move to another state.

You won't find this crazy system elsewhere, and Democratic legislators have tried to overturn it here. Unfortunately, they keep running up against Republicans who pledge to oppose tax increases — even when they level the playing field for California businesses.

Proposition 39 would base state corporate income taxes on the single-sales factor. One set of rules would apply to both California-based businesses and businesses headquartered elsewhere, and the tax incentive to expand in other states would be eliminated.

Closing this loophole would raise an estimated $1 billion a year, with the total growing over time. For the first five years, half of the revenue would be dedicated to energy efficiency projects for schools and other public buildings. The rest would go to the state general fund, about half of which is spent on K-12, community colleges and universities.

Proposition 39 isn't a perfect measure. One of the problems afflicting state finances is ballot-box budgeting, and this fits the description, though the earmark expires after five years.

But in this case, perfect shouldn't be the enemy of good. The Press Democrat recommends a yes vote on Proposition 39.