Proposition 39

ANALYSIS BY THE LEGISLATIVE ANALYST

BACKGROUND

State Corporate Income Taxes. The amount of money a business owes the state in corporate income taxes each year is based on the business’ taxable income. For a business that operates both in California and in other states or countries (a multistate business), the state taxes only the part of its income that was associated with California. While only a small portion of corporations are multistate in nature, multistate corporations pay the vast majority of the state’s corporate income taxes. This tax is the state’s third largest General Fund revenue source, raising $9.6 billion in 2010–11.

Multistate Businesses Choose How Their Taxable Income Is Determined. Currently, state law allows most multistate businesses to pick one of two methods to determine the amount of their income associated with California and taxable by the state:

• “Three-Factor Method” of Determining Taxable Income. One method uses the location of the company’s sales, property, and employees. When using this method, the more sales, property, or employees the multistate business has in California, the more of the business’ income is subject to state tax.
• “Single Sales Factor Method” of Determining Taxable Income. The other method uses only the location of the company’s sales. When using this method, the more sales the multistate business has in California, the more of the business’ income is taxed. (For example, if one-fourth of a company’s product was sold in California and the remainder in other states, one-fourth of the company’s total profits would be subject to California taxation.)

Multistate businesses generally are allowed to choose the method that is most advantageous to them for tax purposes.

Energy Efficiency Programs. There are currently numerous state programs established to reduce energy consumption. These efforts are intended to reduce the need to build new energy infrastructure (such as power plants and transmission lines) and help meet environmental quality standards. For example, the California Public Utilities Commission (CPUC) oversees various types of energy efficiency upgrade and appliance rebate programs that are funded by monies collected from utility ratepayers. In addition, the California Energy Commission (CEC) develops building and appliance standards that are intended to reduce energy consumption in the state.

School Funding Formula. Proposition 98, passed by voters in 1988 and modified in 1990, requires a minimum level of state and local funding each year for public schools and community colleges (hereafter referred to as schools). This funding level is commonly known as the Proposition 98 minimum guarantee. Though the Legislature can suspend the guarantee and fund at a lower level, it typically decides to provide funding equal to or greater than the guarantee. The Proposition 98 guarantee can grow with increases in state General Fund revenues (including those collected from state corporate income taxes). Accordingly, a measure—such as this one—that results in higher revenues also can result in a higher school funding guarantee. Proposition 98 expenditures are the largest category of spending in the state’s budget—totaling roughly 40 percent of state General Fund expenditures.

PROPOSAL

Eliminates Ability of Multistate Businesses to Choose How Taxable Income Is Determined. Under this measure, starting in 2013, multistate businesses would no longer be allowed to choose the method for determining their state taxable income that is most advantageous for them. Instead, most multistate businesses would have to determine their California taxable income using the single sales factor method. Businesses that operate only in California would be unaffected by this measure.

This measure also includes rules regarding how all multistate businesses calculate the portion of some sales that are allocated to California for state tax purposes. These include a set of specific rules for certain large cable companies.

Provides Funding for Energy Efficiency and Alternative Energy Projects. This measure establishes a new state fund, the Clean Energy Job Creation Fund, to support projects intended to improve energy efficiency and expand the use of alternative energy. The measure states that the fund could be used to support: (1) energy efficiency retrofits and alternative energy projects in public schools, colleges, universities, and other public facilities; (2) financial and technical assistance for energy retrofits; and (3) job training and workforce development programs related to energy efficiency and alternative energy. The Legislature would determine spending from the fund and be required to use the monies for cost-effective projects run by agencies with expertise in managing energy projects. The measure also (1) specifies that all funded projects must be coordinated with CEC and CPUC and (2) creates a new nine-member oversight board to annually review and evaluate spending from the fund.

The Clean Energy Job Creation Fund would be supported by some of the new revenue raised by moving to a mandatory single sales factor. Specifically, half of the revenues so raised—up to a maximum of $550 million—would be transferred annually to the Clean Energy Job Creation Fund. These transfers would occur for only five fiscal years—2013–14 through 2017–18.

FISCAL EFFECTS

Increase in State Revenues. As shown in the top line in Figure 1, this measure would increase state revenues by around $1 billion annually starting in 2013–14. (There would be a roughly half-year impact in 2012–13.) The increased revenues would come from some multistate businesses paying more taxes. The amounts generated by this measure would tend to grow over time.

Figure 1

Estimated Effects of Proposition 39 on State Revenues and Spending

2012–13 2013–14 Through 2017–18 2018–19 And Beyond

Annual Revenues $500 million $1 billion, growing over period Over $1 billion

Annual Spending

Amount dedicated to energy projects None $500 million to $550 million None

Increase in school funding guarantee $200 million to $500 million $200 million to $500 million, growing over period $500 million to over $1 billion

Some Revenues Used for Energy Projects. For a five-year period (2013–14 through 2017–18), about half of the additional revenues—$500 million to $550 million annually—would be transferred to the Clean Energy Job Creation Fund to support energy efficiency and alternative energy projects.

School Funding Likely to Rise Due to Additional Revenues. Generally, the revenue raised by the measure would be considered in calculating the state’s annual Proposition 98 minimum guarantee. The funds transferred to the Clean Energy Job Creation Fund, however, would not be used in this calculation. As shown in the bottom part of Figure 1, the higher revenues likely would increase the minimum guarantee by at least $200 million for the 2012–13 through 2017–18 period. In some years during this period, however, the minimum guarantee could be significantly higher. For 2018–19 and beyond, the guarantee likely would be higher by at least $500 million. As during the initial period, the guarantee in some years could be significantly higher. The exact portion of the revenue raised that would go to schools in any particular year would depend upon various factors, including the overall growth in state revenues and the size of outstanding school funding obligations.

IN 2009, A POLITICAL DEAL CREATED A BILLION DOLLAR TAX LOOPHOLE FOR OUT-OF-STATE CORPORATIONS . . .

At the end of the 2009 budget negotiations in Sacramento, in the middle of the night, legislators and lobbyists for out-of-state corporations made a deal—with no public hearings and no debate. They put a loophole into state law that allows out-of-state corporations to manipulate our tax system every single year, and avoid paying their fair share to California.

The cost of this loophole: $1 billion per year in lost revenues for California.

YES on 39 ELIMINATES THE OUT-OF-STATE TAX LOOPHOLE

Prop. 39 simply closes this loophole. It ends this manipulation of our tax system—and requires that all corporations doing business in California pay taxes determined by their sales here, no matter where they are based.

Prop. 39 LEVELS THE PLAYING FIELD , ensuring that multistate companies play by the same rules as California employers.

YES on 39—ELIMINATING THE LOOPHOLE IS GOOD FOR CALIFORNIA’S JOB MARKET

The current tax loophole lets corporations pay less tax to California if they have FEWER employees here—giving companies a reason to send jobs out of state.

In fact, the state’s nonpartisan, independent Legislative Analyst has cited studies showing that the tax policy in Prop. 39 will bring California as many as 40,000 jobs. That’s why the independent Legislative Analyst has called for eliminating the present loophole.

YES on 39 BENEFITS CALIFORNIA TAXPAYERS

Multistate corporations that provide few jobs here are using the loophole to avoid paying their fair share to California, costing the state $1 billion per year in lost revenues. Prop. 39 will close that loophole and keep these funds in California to provide vitally-needed revenues for public services. Because almost half of all new revenue is legally required to go to education, hundreds of millions of dollars per year will be dedicated to schools.

Additionally, Prop. 39 will create savings for taxpayers. 39 will use a portion of the revenues from closing the loophole to fund energy efficiency projects at schools and other public buildings. Using proven energy efficiency measures like improving insulation, replacing leaky windows and roofs and adding small-scale solar panel installations will reduce state energy costs—freeing up dollars for essential services like education, police, and fire.

“By increasing energy efficiency, Prop. 39 will reduce air pollution that causes asthma and lung disease. In the process of upgrading school buildings, Prop. 39 will also remove lead, asbestos, mold, and other toxic substances from schools.” —Jane Warner, President, American Lung Association in California

YES on 39—STRICT ACCOUNTABILITY

Prop. 39 contains tough financial accountability provisions—including INDEPENDENT ANNUAL AUDITS, ongoing review and evaluation by a CITIZENS OVERSIGHT BOARD, a COMPLETE ACCOUNTING of all funds and expenditures, and FULL PUBLIC DISCLOSURE.

YES on 39—IT’S COMMON SENSE: CLOSE the OUT-OF-STATE TAX LOOPHOLE. BRING $1 BILLION per YEAR BACK TO CALIFORNIA.

http://www.cleanenergyjobsact.com/

JANE WARNER, President American Lung Association in California TOM STEYER, Chairman Californians for Clean Energy and Jobs MARY LESLIE, President Los Angeles Business Council

When you read Prop. 39’s campaign promises, remember that Tom Steyer—whom CNN called “California’s Hedge Fund King”—is bankrolling $20 million on slick poll-tested buzzwords like “loophole,” and promising “clean jobs.”

California is already losing businesses at a record rate. Ask yourself how raising taxes on companies employing tens of thousands of Californians makes things better?

It won’t!

CALIFORNIA IS ALREADY BILLIONS IN DEBT BUT PROP. 39 MAKES THINGS WORSE!

California is the worst state for business for eight consecutive years, and has the worst credit rating in America. Millions are unemployed.

Loophole? No. Prop. 39 repeals a tax law that’s been in effect for decades generating billions in state revenue. The nonpartisan Legislative Analyst and the Department of Finance agree: 39 IS A $1 BILLION TAX INCREASE.

Here’s the truth. A $1 billion tax increase gives California employers another reason not to invest or hire. Fewer jobs mean lower revenue and more cuts to schools and law enforcement.

Is that good for California?

Prop. 39 is ballot box budgeting at its worst. It raids $2.5 billion from the state budget—money that could go to schools, roads, infrastructure, or public safety.

PROP. 39 ALSO ADDS NEW BUREAUCRACY—MILLIONS IN SALARIES AND PENSIONS FOR POLITICAL CRONIES. No accountability, and no taxpayer protection against corruption.

Higher taxes, fewer jobs, more bureaucracy and waste . . . ZERO accountability and no taxpayer protections against conflicts of interest. That’s the story on Prop. 39.

Democrats, Independents, and Republicans agree—vote NO!

MIKE SPENCE, President California Taxpayer Protection Committee ROBERT MING, Chairman Friends for Saving California Jobs JACK STEWART, President California Manufacturers & Technology Association

PROPOSITION 39 IS A MASSIVE $1 BILLION TAX INCREASE ON CALIFORNIA JOB CREATORS THAT WILL RESULT IN THE LOSS OF THOUSANDS OF MIDDLE CLASS JOBS. California’s unemployment rate is already third worst in the country at nearly 11%. Prop. 39 makes our problems worse.

PROPOSITION 39 IS A RECIPE FOR WASTE AND CORRUPTION. It spends up to $22 million on a new bureaucracy and special interest commission. It gives Sacramento politicians a blank check to spend billions without real accountability or taxpayer protections against conflicts of interest.

Here are the facts: a billionaire who CNN called “California’s Hedge Fund King” is bankrolling 39, spending $20 million to influence your vote and buy the election. His political consultants use terms like “closing a loophole” but don’t believe them.

PROP. 39 IS POLITICS AT ITS WORST. CALIFORNIA NEEDS REFORM, NOT MORE TAXES AND WASTEFUL SPENDING. WE MUST VOTE NO.

$2.5 billion that could go to schools, health and welfare, environmental protection or public safety is instead diverted to a new government commission with fat salaries and little accountability. Our state budget deficit today is nearly $16 billion and Prop. 39 makes things worse by wasting money on a new unnecessary bureaucracy.

California needs teachers and police officers, not more bureaucrats!

PROPOSITION 39 ATTACKS BUSINESSES THAT PROVIDE MIDDLE CLASS CALIFORNIA JOBS. Manufacturing jobs that provide for families are vanishing. Almost two million hard-working Californians are struggling to find any kind of work. The $1 billion Prop. 39 tax increase changes tax laws that have been in effect for more than 40 years and will cost more union and non-union workers their jobs.

PROPOSITION 39 GROWS GOVERNMENT AND BUREAUCRACY. You’ve heard it before. Sacramento has a plan to create jobs. We give them money to create a commission of political appointees with an appealing name like Citizens Oversight Board. They get a blank check to spend (or waste) tax dollars.

Under Prop. 39, money is spent to give contracts to so-called “Green Energy” programs. Who is likely to get those contracts? Big campaign contributors, that’s who. 39 IS SO POORLY WRITTEN THAT IT DOESN’T EVEN PROHIBIT CONTRACTORS FROM GIVING CAMPAIGN MONEY TO SACRAMENTO POLITICIANS THAT AWARD THE CONTRACTS!

California needs reform, not tax increases that eliminate middle class jobs. Prop. 39 raises taxes by $1 billion on California job creators to help fund more government bureaucracy and more bloated pensions. It doesn’t protect against ongoing state budget deficits, high unemployment and continued economic recession.

Remember, a billionaire with an agenda is bankrolling 39. It’s up to voters to protect California taxpayers. By voting NO on Prop. 39, you will stop a job-killing $1 billion tax increase on California job creators. You will support middle class California jobs that provide for families and sustain our economy. And you’ll tell Sacramento politicians no more blank checks for more special interest spending on bloated government and pensions.

SAY NO TO HIGHER TAXES, WASTEFUL SPENDING AND POLITICS AS USUAL. DEMAND GOVERNMENT ACCOUNTABILITY. VOTE NO ON 39.

JACK STEWART, President California Manufacturers & Technology Association LEW UHLER, President National Tax Limitation Committee PAT FONG KUSHIDA, President California Asian Pacific Chamber of Commerce

FACT: YES ON PROP. 39 CLOSES A TAX LOOPHOLE FOR OUT-OF-STATE CORPORATIONS

The opposition argument is shamefully deceptive. Prop. 39 does NOT increase taxes on California families by even a penny. It simply closes a loophole that gives out-of-state corporations an unfair tax break, but costs the rest of us.

That’s why out-of-state corporations—including those that dominate the “manufacturing group” that signed the above argument—are leading the deceptive campaign against 39: to keep their loophole.

LEGISLATORS AND LOBBYISTS CREATED THE LOOPHOLE IN A BACKROOM DEAL IN 2009

The San Jose Mercury News said that corporate lobbyists “pulled a fast one on California,” and that “it was the kind of shenanigan that gives corporations a bad name and makes a mockery of government openness.”

Yes on 39 closes the loophole, cleaning up the mess the Legislature created.

FACT: 39 CREATES CALIFORNIA JOBS

The opponents’ argument about taxing employers is a farce. The loophole benefits corporations that keep jobs out of state. Proposition 39 will eliminate a barrier to creating jobs in California. Plus, Proposition 39 creates thousands of clean energy jobs.

FACT: REQUIRES STRICT ACCOUNTABILITY

The phony opposition arguments about bureaucracy are nonsense. Prop. 39 creates a Citizens Oversight Board to ensure funds dedicated to job creation and energy efficiency are properly spent, including yearly INDEPENDENT AUDITS. Schools will receive hundreds of millions in dedicated funding from closing the loophole.

YES on 39. CLOSE the LOOPHOLE—KEEP DOLLARS and JOBS IN CALIFORNIA.

ALAN JOSEPH BANKMAN, Professor of Tax Law Stanford Law School RUBEN GUERRA, CEO Latin Business Association JANE SKEETER California Small Business Owner

Arguments printed on this page are the opinions of the authors and have not been checked for accuracy by any official agency.