Prop 24: Fairness or Penalty?

SEPT. 30, 2010

By KATY GRIMES

It’s not so unusual to hear people making disparaging comments about one another at the Capitol. However, it was shocking to hear the executive director of the California Budget Project call the research of Professor Charles Swenson, PhD, the “most error ridden, sloppy piece of research I’ve ever seen in my life,” when she referred to his analysis of Proposition 24.

Jean Ross testified in favor of passing Proposition 24 the initiative that seeks to stop several business tax breaks slated to go into effect in 2010 and 2012. The three tax policies Proposition 24 would reverse were passed last year by the legislature.

Joining Ross in the YES on Prop 24 campaign, Peter Fisher, an economist and professor of Urban and Regional Planning with the University of Iowa, gave a overview of the effect of corporate taxes on the state budget. “Corporate taxes are only about one-sixth of all state taxes,” said Fisher, explaining that the tax breaks “couldn’t have that much effect” for businesses.

Ross criticized Swenson for not looking at employment trends, and said his study “was not a peer reviewed study.”

Ross referred to a CBP budget brief titled “Proposition 24: Should the state reverse recent business tax breaks to move the budget toward balance?” The title of the document explains the content: Ross believes that the recent tax breaks need to be reversed in order to shore up the state budget deficit.

Ross’ argument for reversing the business tax breaks is that California would be the only state allowing them, and “It’s not the norm across the nation.” Ross said that few companies would actually benefit; mostly large corporations would receive any break.

Ross said, “Nine companies would receive a $20 million tax break; six companies would get more than $10 million, and $240 million would go to just 14 companies. Most of the money would go to very large corporations.”

The final panelist for the YES campaign was Eric Heins, a fourth-grade teacher and California Teachers Association board member. He ran for vice president of the CTA, and his bio on the CTA Web site lists widespread CTA activism.

Heins was critical of the “tax loophole” that would cause “$17 billion in cuts for education” if passed.  Heins said that if the tax cuts were reversed, 25,000 public sector jobs would be saved. Everybody should be paying their fair share.”

Sen. Elaine Alquist, D-Santa Clara told the panelists that in her district (Silicon Valley), “people in the high-tech industry say they have to leave the state or grow business out of state. These companies pay the taxes that support education, and social services.”

Assemblyman Mike Gatto, D-Burbank asked, “Do we suffer from a perception problem?”

Ross said that in her world travels, the farther away she gets from California, the state’s perception gets better.

Gatto asked, “What does this do as a message to business? Does this send the message that during this time that California is taking a step that’s hostile to business?”

Heins said, “It’s a matter of basic fairness. It really says we are allowing corporations unfair breaks. Somebody’s got to pick up the slack.”

Fisher said, “The market will eventually sort things out.”

The second panel representing the NO on Prop 25 campaign, included Swenson, Tim Valderrama, the executive director of TechNet and William Carter, a small business owner of the same name, and chairman of the board of the National Association of the Remodeling Industry.

Swenson explained, “The three tax policies Proposition 24 would reverse, are sound policies that are in place and working in other states. I have a PhD in accounting and economics. I’ve been with USC for 24 years and was on the Cal Tech faculty prior.” He commented on Ross’ disparaging comments and said, “In 27 years I’ve never been the subject of such a personal attack before.” Swenson said that his work was reviewed by colleagues, corroborated by the Rose Institute at Claremont McKenna College, and that he was asked by the opponents of Prop 24 to do the study.

“Taxes are important. State and local taxes are about 15 percent of a firm’s total tax bill. 1 percent is corporate income tax,” Swenson said. “Taxes really do matter.”

“When firms relocate here, they spend money and hire people,” said Swenson. “I like to work in facts. The Rose Institute corroborated my findings in the single sales factor apportionment. 10 of the largest states competitive with California have credit sharing or Net Operating Loss carry back. We stand to lose 300,000 jobs and $1 billion in revenue if these tax breaks are reversed.”

Valderrama told the panel that if Prop 24 passes, “It would make us the only state without tax benefits.” He told the committee how Genentech recently expanded business, but in Oregon solely because of the single sales factor apportionment.

William Carter shared with the committee that he has suffered a 70 percent drop in his business this year, and insisted that Prop 24 would hurt small businesses as well. “Prop 24 would increase income taxes on businesses trying to expand here. It is my desperate hope that Prop 24 is defeated.”

Andrea Jackson with Genentech testified briefly that her company expanded in Oregon because of the single sales tax. Jackson said that Genentech saved so much money by choosing to expand in Oregon, the tax liability went down in California so substantially, it paid for the expansion. Jackson said Genentech wants to expand in South San Francisco, “but we needs 10-year plan they can rely on.”

The NO on Prop 24 campaign states, “At a time when two million Californians are out of work, Prop. 24 taxes new job creation, hits California employers and small businesses with higher taxes and stifles job growth in our most promising industries. It would lead to fewer jobs and fewer tax revenues. 

It’s a giant step backward on California’s road to recovery.”

The YES on Prop 24 says, “Join this important effort to repeal special tax breaks for big corporations that don’t create or save a single job in California. A Yes vote on Proposition 24 prevents $1.3 billion in budget cuts to schools and public safety, and saves thousands of much needed jobs.”

The joint informational hearing about the initiative was held by the Senate and Assembly committees on Revenue and Taxation, and is mandatory before the November election.