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Jon Fleischman

Plays by Perez, Steyer For Massive Tax Increases Would Hurt Californians

There are many areas of California law that are complex and difficult for even public policy experts to understand, let alone lay people like me. For example, try to discuss the finer details of Prop. 98 funding with even the most seasoned Capitol staff person, and you might quickly find their eyes, along with your own, glazing over. Another very challenging area of state policy to digest is how multi-state businesses pay taxes in California. Because some of these topic areas are so convoluted and confusing, we often just look to people who sound like experts to summarize them and help guide us through the public policy maze in search of ferreting out good ideas from poor ones.

For several years I have been writing at a cursory level about how multi-state businesses pay their taxes in California — we’ve all seen the broad descriptions “multi-factor apportionment,” “elective single sales factor,” and so forth. In this column I am going to do my best to really explain this issue of how California taxes multi-state businesses, for two reasons. The first, and I will elaborate further, is that up to this point I have been pretty off-the-mark in my understanding of the underlying policy issues, and this has caused me to lay some political blame on the blameless, and visa versa. But this issue is also important because there are two major efforts underway to make a major change in how multi-state companies compute their California tax liability — in the State Legislature with Speaker Perez’s loosely named “Middle Class Scholarship Program” (it should be noted that there are no scholarly standards associated with this program) as well a ballot measure funded bay San Francisco hedge fund billionaire Tom Steyer to fund “clean energy programs and building” — both efforts seek to enact a massive tax increase of what is estimated to be a billion dollars annually, to pay for their pet proposals.

Let me apologize in advance for taking a very quick trip into the quagmire of complex policy, which I will endeavor to make as understandable as possible. But I can’t afford to lose you here — you HAVE to understand this. Your “getting this” is critical to your ability to evaluate for yourself what Perez and Steyer are trying to do, via the legislature and the ballot box respectively.

So going back for a couple of generations, multi-state companies with a presence in California have paid their taxes in this state based on a multi-factor formula that is based on three factors — sales in California, payroll in California, and property in California (until 1993 these factors were all apportioned equally, and from 1993 until last year all of these companies had their tax liability apportioned 50% sales, 25% payroll, 25% property). Like with all tax policy, there are those that are advantaged and disadvantaged based on any formulas. If you are a business that is really heavily invested into employees and property in California, then you would want the formula to shift more to taxes just on sales (these companies no doubt liked the 1993 change in the formula), and if you are a company with more employees and operations outside of the state, but sell products to consumers in the state, then a formula that increases tax liability in physical in-state assets and less-so on sales is to your advantage.

I have written much about the terrible state budget deal of 2009, which was most notorious for not only enacting the largest tax increase in California’s history (a two-year $14 billion dollar annual increase in state sales, income and car taxes, and a cut in the child tax credit) but that deal also spawned two terrible ballot measures: Prop. 1A, that would have extended those taxes two more years had it not been overwhelmingly rejected by voters; and Prop. 14, which passed, royally screwing up our state’s election system. As part of that 2009 budget deal, there was a change made to tax policy concerning multi-state companies. This change, called the “elective single sales factor” created for all of these multi-state companies an option — they could either continue to pay their taxes based on the three-factor system (sales, payroll, and property) or they could now have the choice of just paying based on in-state sales. As I mentioned above, this new option really advantages companies with significant numbers of California employees and/or California properties/facilities.

It made me nauseous to see a bunch of companies endorse the budget deal because it advantaged their individual interests (and balance sheets) — companies such as Disney, Genentech, Cisco, G.E., Time Warner, Viacom and Amgen (just to name a few) really made out well. Predictably the California Chamber of Commerce also weighed in for the 2009 budget deal — they actually seem to relish opportunities over there to advantage their parochial interests to the detriment of anyone else, including taxpayers, whenever possible. Many of the companies that were advantaged through the budget deal and the new elective single sales factor, which kicked into effect last year, were big financial givers to the effort to pass Prop. 1A, the unsuccessful effort to extend the sales, income and car taxes two more years. But they struck a good deal, because even as the broad-based taxes expired in 2011, the massive elective single sales factor tax break was permanent (in 2010 an unsuccessful ballot measure was put forward to repeal the elective single sales factor option, funded largely by unions, that was defeated at the polls with significant funding from those companies which benefit from the new choice).

Hopefully, I still have your attention at this point, so that I can tie all of this three-year-old budget lore into contemporary 2012 politics. I told you that by creating two different options for multi-state companies to pay their California taxes, one group of companies got a big tax advantage starting last year. Well the effort underway now by Perez and Steyer is actually to end companies having a choice between two options, but not by taking away the new option (to pay on California sales as the single factor), but rather to now end the half-century old original method of using multiple factors (the “payroll, property, sales, sales” method). If this option is eliminated, it would raise taxes on those businesses by at least a billion dollars (which is the money that Perez would use to subsidize public higher education for certain students, and Steyer would use to fund clean energy projects). It probably goes without saying, but I will say it anyway, that throwing a billion dollars of new taxes on businesses that sell products to you and me here in California no doubt means that we will be charged more for them.

What kind of companies are in the crosshairs of Perez and Steyer? This would be businesses that operate in multiple states and which may have a physical presence in California in terms of some employees and or property (or may not), but not enough to offset being forced to pay all of their California taxes based on just sales. Some of these companies would be WalMart, Rite Aid, and automobile manufacturers — and also companies the produce a lot of staples like Proctor and Gamble, Kimberly Clark, etc. But the list is as long as your imagination – likely thousands of companies. It is significant to note that great products are manufactured all around the United States (and the world) and that as consumers in the largest state in the nation, we benefit greatly from a wide variety of quality goods. But the idea that, say, shampoo or a car that comes to California from Detroit or Philadelphia should have higher tax placed on them (kind of like import tariffs) is ultimately bad news for the consumer — you. It means less competition in the marketplace, and higher costs that get passed along in the form of higher prices.

This is the part of the column where I make a mea culpa for my own past sin, in which I find I was not alone. Since the 2009 budget deal where the “elective single sales factor” was first brought into my lingo, there was last year an effort by Governor Jerry Brown and then-Republican Assemblyman Nathan Fletcher to do as Perez and Steyer would do this year, end the elective choice for multi-state companies and force everyone into the single sales factor method. I totally misunderstood this play, and thought that what Brown and Fletcher were proposing was to undo the “break” in the 2009 budget deal, and actually end the elective single sales factor all together. Boy did I have that backwards, and regret having been supportive. I make no bones about it, if we could repeal the elective single sales factor and apply those “savings” to broad-based tax cuts (such as perhaps a cut in the state sales tax rate) — I would do that in a minute. Mainly for political reasons to send a message to those companies that were more than happy to benefit from the change while sticking it to the people.

I actually think that the most duplicitous characters in this drama are those large businesses who backed the 2009 deal to get the favorable treatment. Many of them are not merely content to enjoy the fruits of their “deal with the devil” – but are now actually laboring behind the scenes to see that all multi-state companies are forced into using a single sales factor formula. Why? Maybe because they are afraid that as long as there is a choice, that politicians might choose to revert things back to how they were before. Or maybe these companies just see a competitive advantage in forcing other businesses to pay higher taxes. I don’t know, and I don’t care. These are bad actors who should be ashamed of their actions.

There is no doubt that the once-obscure topic of how multi-state companies compute their California tax liability will loom large in the public arena, with the Perez legislation and the Steyer ballot measure looming. For legislators in Sacramento who have the time and presumably the aptitude to understand this issue, it should be a “no brainer” to soundly reject this massive tax increase. I firmly believe that if voters can understand the issues involved, they will reject this tax increase as well. Of course that is a big (and expensive) if — trying to educate the public on this complex issue when they will have to cull through literally a dozen ballot measures. Yet the voters have managed to reject the last eight efforts to raise taxes at the ballot box, and hopefully this will be number eleven.