CA closes corporate tax ‘loophole,’ but doesn’t get expected bonanza

CA closes corporate tax ‘loophole,’ but doesn’t get expected bonanza

ignorance.econThe argument that raising taxes cuts revenue because it deters taxable economic activity leads to a tired fight in which obvious facts are ignored by both sides. This claim is sometimes true and sometimes not true. It depends on what type of tax is being discussed. It’s not a one-size-fits-all thing.

It is easily demonstrated that in some cases, no, revenue wasn’t depressed by a tax hike. Marginal increases in state sales taxes aren’t generally driving revenue decreases.

But it is also easily demonstrated with some other higher taxes that individuals and businesses do in fact respond with changes in behavior that decrease economic activity.

Incentives drive behavior

It appears a ballyhooed 2012 ballot measure closing a supposed corporate tax ‘loophole’ falls in the latter category. This is from Cabinet Report:

“Proposition 39 or the California Clean Energy Jobs Act changed a corporate tax law to require multi-state or out-of-state businesses to source their sales of services and intangibles to the state where they were sold, rather than the state where the majority of work to produce them was performed. As a result, supporters of the plan expected that California – the nation’s biggest consumer – would see a big uptick in revenues. …

“Anti-tax advocates have long argued that imposing new taxes on businesses and higher wage earners hurts California in the long run because those targeted adjust their practices or relocate to avoid paying more. … It is an issue that the Brown administration is reportedly keeping a close eye on because of the income tax hike another November measure – Proposition 30 – imposed on the state’s top earners.

“Proposition 39 was aimed at corporate taxes, but some of the same issues are at work.

“Based on 2010 income tax data, the Brown administration estimated that Proposition 39 would bring in $928 million in 2013-14 and nearly $1 billion annually the next four years. But 2011 data showing a drop in those revenues forced the governor to revise Prop. 39 figures downward to $675 million in the current year and $726 million in 2014-15 budget.”

Runner is right

Cabinet Report puts this in perspective by talking to former state Sen. George Runner, who’s now on the Board of Equalization:

“We do a terrible job in all of our estimating of doing any kind of dynamic analysis that takes into consideration what the behavior of a taxpayer’s going to be. … One of the issues I always keep telling people is that tax policy changes behavior, and as a result of that, often times you’ll find government over estimates what it is that revenues are going to be because they forgot to or they can’t, sometimes, take into consideration the behavior of the taxpayer.”

Or maybe it’s that they refuse to “take into consideration the behavior of the taxpayer.”



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  1. John Seiler
    John Seiler 27 January, 2014, 16:11

    Chris, that just means they need to double this tax increase to make up for the lost revenue!

    Reply this comment
  2. Hondo
    Hondo 27 January, 2014, 21:12

    Prop 30 did bring in more tax revenue, in the short run. But the unemployment rate in Kali is still among the nations highest. And Kali has more economic assets than anyplace on earth. All the taxes combined are keeping Kali from a revenue explosion such as which got me a great education(that I have mostly wasted) in the 50’s and the 60’s and early 70’s. You can’t just look at the small increase in revenue, compared to what the revenues would be in a much better business climate. You can only imagine the revenues if Kali had the same employment numbers as the rest of the nation, on average. With fracking and a better business climate, Kali could be paying down its unfunded pension debt along with the national debt too.
    Prop 39 was a targeted increase which was felt more by a much smaller group of people and the effects are more concentrated. It is much easier for investors to move their investments to better business climates.

    Reply this comment
  3. Rex the Wonder Dog!
    Rex the Wonder Dog! 30 January, 2014, 10:08

    Prop 30 did bring in more tax revenue, in the short run.

    We will NOT pull out of this 7 year depression UNTIL housing returns, which it has not.

    Housing will NOT return until jobs, real jobs in the private sector not the Fantasyland of public employment, are created.

    Taxes will NOT go up on a regular and consistent basis until we have that private sector job creation. And if we do have a more severe downturn we will have real problems, as there are hundreds of CA muni’s sitting on the fiscal cliff right now, and even a mild downturn ill send them over.

    Reply this comment

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